Expanding Latino Access to Capital

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The New America Alliance’s Pension Fund Initiative takes a financial approach to strengthening Latino empowerment.

There is no question that the Latino population in the United States is growing significantly, as is its economic and political influence. But in one sector of the economy, where decisions are made to invest billions of dollars in business ventures, there still are relatively few American Latino faces making those choices or garnering the dollars.

Enter the Pension Fund Initiative, an effort sponsored by the New America Alliance, a nearly-decade-old organization of Latino entrepreneurs and professionals that aims to strengthen the Latino community’s empowerment by expanding its economic, political and philanthropic resources.

The initiative aims to zero in on an aspect of the economy where progress has been made but much more needs to be done: diversifying both the cadre of managers who steer the investing of huge sums of public and private pension fund monies, and the businesses that ultimately gain a portion of those dollars.

In Los Angeles County alone, institutional investors manage public employee pension funds totaling some $80 billion, says Fidel Vargas, a recently elected co-chair of the initiative and partner at Centinela Capital Partners.

“What we saw and what we know is that the number of Latino investment management firms participating in this was minuscule, if not non-existent in many cases.” The Pension Fund Initiative (PFI) is not the first effort of its kind. For nearly three decades, Charles “Chuck” P. Valdes, a member of the board that oversees the California Public Employees Retirement System (CalPERS), has pushed that agency to include firms owned by African Americans, American Latinos, women and the disabled among its investment managers.

“It worked out very well,” says Valdes, who recently left the chairmanship of the board’s investment committee after 20 years because of medical problems. “In fact, (the minority- and women-owned investors) outperformed our regular managers.” “Many times,” he added, “all you have to do is put a focus on hiring [diverse investment managers]. And most reasonable people agree that yeah, we need to have a focus on it. The concern was they wouldn’t do well, but that hasn’t been the case.”

Scattered Progress

In recent years, the trend toward more diversity in investment management has gathered speed in scattered areas around the country, usually those where Latinos enjoy political influence. Public pension systems in Illinois, New York State and New York City have made great strides diversifying their portfolios of investment managers, PFI officials say.

For example, there are public hearings in Illinois every six months on the extent of minority participation in public pension fund investment management, says Martin Cabrera Jr., a PFI co-chair and chief executive officer of Cabrera Capital Markets LLC in Chicago. That helps keep a focus on the issue and is partly responsible for a recent spike in the hiring of Latino investment managers from zero to 5.7 percent, he adds.

Two years ago, public retirement systems in Maryland, New York City and Ohio took steps to increase the participation of minority investment advisors, actions that were in part due to state legislation that pushed the systems to diversify. This fall, Altura capital is scheduled to unveil a database of emerging investment managers, including firms owned by minorities and woman, according to Pensions and Investments newspaper. The effort, sponsored by CalPERS, is meant to give emerging market firms greater visibility.

But in other ways, progress has been lackluster. For example, among all public pension funds in California a year or two ago, Latino investment managers won only 2/10ths of 1 percent of the fees paid out to money managers, Cabrera says. Latinos compose almost 35 percent of the state’s population, according to 2006 figures from the state’s department of finance.

Many other public pension funds are slumbering to the opportunities diversified investment management offers. That may have more to do with the traditions of the investment community than with outright prejudice, says Victor L. Maruri, a managing principal of Hispania Capital Partners, board member of the New America Alliance and a former co-chair of the PFI.

“Minority communities are put in a vicious cycle,” he adds. Investment advisors for pension funds usually “recommend firms that have a track record,” Maruri says. “In order to have a track record, you have to get money to develop a track record….There is a lot of African American and Hispanic talent out there, but we don’t have the money.”

Only one minority-owned firm, SYNCOM Venture Partners, has been around long enough to boast a lengthy and successful track record, Maruri says. Many others, including Hispania, have relatively short histories. “So this pool of African American and Hispanic talent, if you are judging them on records that go back 10 to 20 years, it doesn’t exist,” he says.

This dynamic also exists among the businesses into which investment managers pump pension fund monies.

“Clearly, there is less capital flowing to Latino-, women-, African American- and Asian-owned businesses,” says Betsy Zeidman, director of the Center for Emerging Domestic Markets at the Milken Institute, a Santa Monica, California-based think tank. “Every bit of research on this shows, particularly on the equity side, that that has to do with lack of relationships … .

Frankly, for a very long time, you didn’t have people of color represented in the investment community.” The Pension Fund Initiative is intended to change that dynamic. Its genesis was in 2003, after Cabrera studied the rate of participation by Latino investment advisors in Illinois public pension funds — which, Cabrera recalls, turned out to be “pretty much zero.” The same year, his study was heavily discussed at a philanthropic conference held in Chicago by the New America Alliance — a group of 100 prominent Latinos that was started in 1999 by Henry Cisneros, a former Clinton Administration cabinet member, and Raul Yzaguerre, a former head of the National Council of La Raza.

Alliance officials subsequently decided to create the PFI, which coincided neatly with NAA’s overarching goal of increasing Latino political and economic influence.

The PFI hosts an annual forum — this year’s gathering in mid-August was held near Albuquerque, N.M. — where Latinoowned investment managers can socialize with representatives of public and private pension funds and financial powerhouses and discuss how to improve diversity in the investment community.

The logic behind the initiative is uncomplicated: The Latino community is growing rapidly but its entrepreneur base remains undercapitalized. Anglo investment managers frequently lack contacts in or expertise about that sector, and thus are missing out on moneymaking opportunities. PFI asks: Latino investment managers have the expertise and contacts, so why not hire them to find those opportunities?

“Diversification is a critical aspect to successful portfolio strategy,” Vargas says. “Not only do we see a need for institutional investors to be aware of the qualified and experienced Latino-owned firms, but we also see this, frankly, as a benefit to the funds.” He added that the initiative has been “very successful” in making institutional investors aware of the need for diversified money management, and introducing them primarily to Latino investment management firms, but also those owned by other minorities and women.

Yet, Maruri stressed that what PFI leaders “did not want to do is create in essence, an affirmative action program.” Pension fund officials have a fiduciary responsibility, and thus they must allocate assets among the best-qualified investment managers, regardless of ethnicity, he adds.

But what they also should recognize is that a logical investment thesis should result in the distribution of some of the pension fund monies among emerging investment managers, he added.

Banking on the Research Empirical evidence shows that emerging investment management firms perform better than their larger counterparts. A 2006 study by Northern Trust Corp., found that firms managing less than $2 billion outperformed much larger companies sporting household names.

“Not only do we see a need for institutional investors to be aware of the qualified and experienced Latino-owned firms, but we also see this, frankly, as a benefit to the funds.” — Fidel Vargas, partner, Centinela Capital Partners

“Small firms delivered dramatically better performance in down markets, making suspect the idea that plan sponsors are protecting themselves by not investing with them,” wrote Ted Krum, vice president of portfolio management with Northern Trust Global Advisors.

A 2003 Kauffman Foundation study determined that minority-owned venture capital firms, which obtain the bulk of their monies from public pension funds, prove very profitable.

“Some profit-oriented funding sources may shy away from minority VC funds today because of the mistaken assumption that such ventures are inevitably low-return ‘social investing’ propositions,” says the study’s authors, Timothy Bates and William Bradford, professors at Wayne State University and the University of Washington, respectively. “As knowledge of the high returns generated by successful minority venture capital spreads, this illinformed aversion should lessen, thereby increasing the flow of funds to minority business enterprises.” In many aspects, the PFI is following a path traveled by African Americans, who have long advocated for increased diversity among investment managers through groups such as the National Association of Investment Companies.

“There’s an increasing sophistication in the Latino community about economic advancement,” says Harry Pachón, a professor of public policy at the University of Southern California and president of the Tomas Rivera Institute, a national think tank dedicated to the study of Latinos. “Before, it was simply looking at an employer and asking what percentage of employees are Latino….But as college-trained Latinos come into position of responsibility … we will see a more nuanced view of what can promote economic development in the Latino community.” Cabrera warns that PFI “isn’t a social program.

This is about making money.” But he nonetheless stressed that increasing diversity in the investment community leads to improvement in the overall economic condition of Latino neighborhoods.

“It comes back full circle to our community,” he says, contending that successful investments in Latino businesses mean higher rates of employment, stronger property values, more local philanthropy and the like. “It’s something that benefits the whole community, not just the money managers that are managing the assets.”

“Some people have referred to this as the financial civil rights movement,” he adds. Improvements in Latino communities may not be visible “in five years, but they may in 10 or 20.”


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