Money + Meaning — Expanding the Capital Continuum for All Businesses

Welcome to Money and Meaning, a podcast where we connect with people around the world who are working to unlock the power of markets for impact. I'm Nicole Sasso, executive director of content and community of SOUP Global. This podcast series is hosted by SOUP Global and the Sorenson Impact Institute. SOUP Global convenes the largest and most diverse community impact through live and digital experiences that educate, spur conversation, and inspire investment in positive impact. We work under the leadership of the Sorenson Impact Institute which helps organizations achieve their impact vision. The institute is proudly housed at the University of Utah's David Akal School of Business. Each episode of Money and Meaning features stories of amazing people who are leveraging the power of capital markets for the betterment of people and planet in a just and sustainable way. Recorded at SOUP 25, this episode of Money and Meaning explores why so many unfunded investment ready businesses are excluded from capital markets. Hear from JP Morgan Chase and leading asset allocators and fund managers who are committed to increasing access for overlooked low middle market businesses. This insightful conversation offers perspectives on how to build a robust capital continuum that offers the right capital for every company. Enjoy the conversation. >> First of all, um I wanted to just thank everyone for joining in this conversation. Um, as Mark pointed out, um, there is a pretty significant gap in terms of availability of capital for a broad stream of businesses. I imagine that's why all of you are in this conversation today. You know, just seeing a few of you, I recognize that many of you are working on some really dynamic capital solutions that can better serve a broader set of entrepreneurs and business owners. And so, one, for those of you who are doing that work, thank you. Right. um it's it's work that is really necessary. Um I think the way that marks have kicked things off in terms of the sort of predominance of a certain form of capital, venture capital in terms of like our own mind share. Um venture capital is a great tool. Um but it's really useful for maybe 0.001% of companies, right? And so really want to have a conversation today with some really amazing practitioners in the space from a variety of different vantage points which are really important as it pertains to this ecosystem. And so do a quick introduction of all our panelists. Right next to me we have Diana Kohler Leech from JP Morgan Chase. We have next to her Hope Mag from HCAP Partners. We have Eron Erin Lopez from Momentous Capital. And finally, we have Michael Sullivan from Charles Swab. So, we're going to actually start the conversation um with Diana. One, because she's right next to me, so it makes it easy. Um but also because we want to really have a conversation about what it is it mean by the capital continuum when we're talking about expanding the capital continuum for all businesses. What does it mean? like what is that like defining capital continum for folks and what are some of the tools that we see that are really useful in this moment? >> Okay. Oh, that worked right away. Here we go. Um, so the capital continuum refers to the spectrum of financing options available for businesses as they grow. So that's everything from informal sources of capital like personal savings to loans from CDFIS to more sophisticated innovative um financial products like revenuebased financing, mezzanine debt or even equity ownership stakes. Um each of these financial products has different levels of risk, flexibility, and support. And they're designed to meet the needs of entrepreneurs at different stages of their growth journey. And I think what we really want to hone in on today is making sure that businesses, particularly those from low to moderate income communities, are aware of, understand, and can access the right capital at the right time. >> Thank you. um you you shared a few things and maybe for I know there's a pretty broad uh audience in the room and can can you explain a little bit about like what mezzanine debt is and some of these terms that you you communicated just to make sure folks are keeping track? >> Yeah, and we we're going to talk about mezzanine debt and some some of these um terms that fall into inclusive private credit. So before we get into that, I'll talk a bit more about kind of what the problem is. So the problem is that a lot of these businesses aren't able to access the flexible timely capital that they need to grow. Um this problem's particularly acute for businesses in the missing middle. So those that have outgrown early stage um financing support but aren't quite large enough for institutional capital. Um these are the businesses that as they grow they transform from sources of income for and wealth for the entrepreneur and their family to really engines of growth and opportunity for employees and local communities. Um so something that we want to talk about today is inclusive private credit. What is that? Um so that really and private credit refers to any lending from any non-bank financial institution and the inclusive re lens really refers to trying to br close that capital gap for businesses in that missing middle that I just talked about. So those in low to moderate income communities and having allowing them to have access to the right capital at the right time and also meet a get access to the advisory support that they need as they grow whether that's creating quality jobs which hope we'll talk about a bit more with HCAP or just building more resilient communities. We'll speak a bit more uh I sit within global philanthropy at JP Morgan. Um and I'll kind of double click. I said we weren't going to use jargon, but I'm going to double click on some of the the uh grants that we've done recently from global philanthropy to help uh test innovations and crowd in capital and scale this asset class. And also I'll talk a bit more about some of the investments, the LP investments we've done from our uh impact finance team within GP. Um so on the grant side um again the goal is to really of our grants team to pilot innovations that can help this asset class to scale and attract more additional capital. So last year we provided a $600,000 grant to missiondriven finance and impact charitable um to test pilot u lines of credit for emerging fund managers that were focused on impact private credit. Uh so this allowed these fund managers to access capital quickly, be nimble, and make investments and ultimately scale and grow. Um building on the success of that, uh this year I'm super excited to announce that we've um we've allocated an additional million um $1 million um to further support that work, expand financial products available to these fund managers, and also expand back office support such as legal and operations. um as again helping to pilot innovations that can help the asset class scale and attract more capital. Um and then the last thing I'll say is on our impact finance team which I sit on, we invest the bank's balance sheet in impact aligned capital intermediaries. Uh so with the small business focus, we lend to community development finance institutions focused on small businesses and we also invest as limited partners into private credit funds that are SBIC's or small business investment companies like HCAP right next to me um that are really focused on advancing kind of solving this capital access gap for those in the in the missing middle and helping to crowd in additional capital. So yeah, >> thank you. I mean there there's a lot there >> a lot. Sorry guys. >> No no no in a great way because I think you know one of the things that you you share that Diana in terms of like the broad array of tools and sort of the sophistication complexity that is required to execute a number of these investments leveraging your grants making side being able to bring in a range of different investment types to move something forward. And just as a sort of uh a check with the audience, I mean just by a show of hands, how many of you are actively um working with private credit or exploring private credit as an asset either for deployment or something to leverage your business? All right, great. Got a number of folks. It's good to know. Um so given that I want to segue to uh an actual manager. So, um, Hope, can you actually just share a little bit about, uh, HCAP and and some of the opportunities that you've been investing in and sort of like your your general thesis? >> Well, thanks a lot, Rodney, and uh, good afternoon, everybody. Um, thank you for having me. Um so with regards to sort of private credit um as Diana was saying there is a continuum in terms of the types of funds that are in the market where they play the types of capital they can provide and how they can interact or the amount of capital they can provide to each each company and how flexible they can be in terms of dollar amount in terms of um structure. structure in terms of what covenants they provide. So I'll I'll take a step back and first of all explain what an SBIC is because I'm sure that's a new term for a lot of you. But back in 1958, the Small Business Administration was tasked with providing a a tool that allowed small business owners to be able to access capital um that they were not able to access from traditional sources of capital. that is banks or uh hedge funds or other sources of capital that were primarily focused on larger companies with strong cash flow. Um typically what you found was companies that were in the earlier stages of growth were overlooked uh by uh traditional sources of capital. And so that limited their ability to continue to scale the business or take the business to the next phase of growth. And so what happened was they became an opportunity for private lenders to step in and provide that capital source and fill in the gap. Um today given sort of the tightening of credit in the markets um the high interest rates you have seen sort of that cycle come back again. And so most middle market banks or regional banks because of tightening balance sheets are not lending to small businesses again. So what you find is there is a big opportunity for private lenders like an HCAP or like other firms that are either small business administration companies or business development companies to stop to to step in and provide an alternative source of capital. Now the unique thing about private debt funders is we don't work in a plain vanilla box. We're going to sit down with an entrepreneur. We're going to understand what your business plan is. We're going to try and understand what your market opportunity is, where you want to take your business, what are the resources required, and then what is the type of capital you need to help you execute on that growth story. So, it's unlike a bank where you walk in and they just say, "We only provide a working capital line and that's it." We're going to sit down and say in the in this case your balance sheet can support x amount of debt. We may put x amount of equity and that will fill the gap in terms of what you need in terms to execute on your growth story. In other cases because we are the first institutional capital we are also going to come and provide resources to help you execute on your growth plan. So again, as most of you who are firsttime entrepreneurs know, you are wearing many different hats, right? You are the CEO, you're probably the marketing person, you're the IT person, um you're probably doing all the customer visits, um you're also involved in client calls. So how do we surround you with the talent and the right people to so you can execute and focus on what you do best? And so we're not operators. We're not coming to take over your business. We're minority investors, not majority investors. And then the goal is for us to build a partnership so we can help you where there are issues or where there are opportunities to go into new markets, develop new products, um scale your existing business, um develop deeper relationships with existing clients. and we will have those conversations with you and help you execute on those. So that's where we step in. We look at ourselves as a partner. We're not just looking at ourselves as a capital provider because in our eyes, if you do well, we do well. So the goal is how do we set you on a path that will lead you to success. So before I move over to Iran because we've got we have two different firms right with slightly different perspectives. Um so hope can you actually share a bit like what's the sort of the the typical profile of a company that you'd work with? What's your typical kind of the check size that you're you're you're working with? >> Um yeah so um the firm has evolved over time. Um we're now currently on our raising our sixth fund. So the typical type of company we're working with is going to be between five and I'll say 100 million in revenues. Uh we're writing checks between 5 and 35 million um into the company. Our sweet spot is going to be probably 15 to 25 million. we'd like to reserve some capital to support you uh as you continue to scale. That way you don't have to go on a road show again in 2 three years to raise more capital. Um and in those situations, we're also bringing we have a team of about 30 to 35 operating executives that are going to we're going to help surround you with to help you execute in scaling your business. A lot of these executives have run many businesses, scaled them, sold them. They know what buyers look for. They know what regulators look like look for. They know what you need to be understanding and executing from a compliance and adurance perspective. And so they are helping you think ahead of what are the bumps that may come uh ahead in the growth of the business and how do we make sure we're ready to attack those bumps. Um and then in most cases we're also working with you in thinking through how do we make sure allocation of capital is being made with the right return on investment in mind. Right? So when you're a single owner, you can wake up and just say, I think we need to go into Arizona. All my friends have moved into Arizona. They say it's great. There's lots of opportunities. We're going to open a plant there. But have you done the diligence? Have you done any actual homework? So, we try and bring resources to help you really understand like which markets are going to be the best markets for you to put your capital into. Arizona may be a good market, but it may not be the best market to start in. So, we're typically working hand in hand in just making you uh think through what the other side of the use of capital looks like and what benefits you may get by going into a separate market versus just making a decision on the golf pitch or at home or, you know, just a random decision just because we've provided capital with you. >> Thank you, Pope. So uh just as a reminder you see my friend Mark here is if you have any questions uh he's there to both facilitate um giving you a pen paper to do that and you also collect questions. Um also note that uh hope when you share like the range of companies in terms of revenue said five to 100 million I think as you said I saw a few hits kind of like say wow that's a a big range. Um, but I think that's kind of the the the point of this capital continuum because even if there are variety of different actors across the inclusive private credit space and so I would love to hear Elsa to share a bit about the Momentous approach which I know it's a newer brand but obviously the family of of of firms under the umbrella of Momentous has been around for a long time doing great work. So Rodney uh just to interrupt um whilst our typical range is 5 to 100 million some of our best investments have been entrepreneurs we met when they were at a million revenues in range. Right? So just because you're under that metric does not mean we should not have a conversation. Right? We want to see you make traction. We want to see how we can help you execute. We want to see how we can help you sort of think through what can accelerate your growth plan so that you can fall within our category at at the right moment. So don't let the 5 million sort of spook you off. It's just our mandate. Um but we like meeting entrepreneurs at any stage of their growth stage. >> Thank you Ronnie. So, as you mentioned, Momentous Capital is is an alliance of different organizations made up of um capital impact partners and CDC small business finance. So, speaking about the capital continuum, uh Momentus launched a um a separate uh third-party capital impact investment fund and this fund was raised along with the help of uh Charles Schwab and is $171 million. We are a firsttime fund manager. Um, Momentous Capital itself services very small businesses with the SBA 7A product, community um, development lending. And so in in the spirit of continuing up that same continuum, wanted to offer uh, a bit of a larger investment size, but um, nothing close to what Hope was speaking of. So I would say we are somewhere between a CDFI and a a larger SBIC. And so where we land in that continuum is our typical size is around four to 5 million. Our target products um we really bifurcate the kind of structure between two target type of companies. One is more on the growth stage which tends to be which tends to need more uh patient capital and that we structure as such you know considering the needs of a company that might be at a certain um beyond venture um past venture can't sort of use venture as as Rodney mentioned but not so big as it would go to an SBIC and then we also finance um what we uh what we deem as entrepreneurship through acquisition. So, ETA and these are small businesses that um are currently participating in what the industry is calling the silver tsunami. We have many, many small businesses that are, you know, boring but stable, cash flowing businesses that are almost in danger of dying out because we have retiring owners who have brought up these businesses from their kitchen table, have grown them, and their families, they've reached what they wanted to reach, right? They wanted to put their kids through school, their kids are professionals. They don't necessarily want to take over, you know, their parents' HVAC business or, you know, the roofing business. And so on the other end, we have quite a bit of entrepreneurs who come unfunded, who have all of the experience and want to be entrepreneurs who don't have a depth of wealth networks to help them uh buy a business. And similarly, these businesses go beyond what the SBA products would be able to finance, but are similarly smaller than what an SBIC would be looking at. And that's where we step in. So we have two core products. I will say on the first one on the growth our ticket sizes are smaller 1 to 2 million. We don't like to go under one but if we see a lot of growth potential that we can participate we may do that on the ETA acquisitions those tend to be along the line ticket sizes around 4 to 5 million sometimes a little bit higher if the business makes sense as well. Can you share maybe one example of uh a deal that can offer some some color for the audience? >> Yeah, so we have five impact verticals. That's something I also wanted to mention. So we have an impact lens on all the deals that we do. Our five impact verticals are access to um quality food, healthy food, access to health care, employee ownership, underestimated entrepreneurs um and community development. So along those five verticals, we see quite a bit of food health care um businesses. One in particular, we made um a growth investment 1.5 million. It's a healthy food distributor. It works with um underserved farmers, rural farmers, and it brings uh it brings those that food into uh schools and other um hospitals in urban areas. And we made a $ 1.5 million uh ticket there. Um it was a mezzanine revenue share structure. The way in which we uh structure our products is to really participate with the company's cash flows, which is why we make the payments a function of the growth. We give ourselves a certain amount of time for the investment horizon. We make a certain assumption there on whether or not this business is going to grow at a rate that will give us our certain kind of return. But then we leave a little bit of flexibility in the in the instance it may not. And then we also place a few structural mitigants in the case where the time horizon maybe uh becomes a little longer. Maybe do a step up to the required return uh things like that. So that's on the growth side. On the ETA side, we finance acquisitions. And so on that end, the risk that we try to mitigate for is transition risk. We have a lot of really smart potential entrepreneurs who've never run a business and then all of a sudden they have a very large operation, oftent times with key employees that grew up with the founder. On that sense, very similar to what Hope mentioned, we provide them with technical assistance from fractional services on strategic and financial services to make sure that they can do projections. They can structure a transition period with the seller. Um, we similarly structure things like seller rollover, uh, earnouts, things like that to help mitigate. And >> can you actually share just in case like a rollover? Can you explain um a little bit more about what that actually means for >> Certainly. So, in the sense that there's a business acquisition, we have a seller who, for all intents and purposes built a great business, but um I think you and I can imagine if maybe I received $5 million tomorrow as much as I'd like to help the new person get settled in. You know, maybe the Caribbean is calling me. So, um, great intentions, everyone's great, but you have to manage for the fact that there's a windfall coming to an owner and we want to make sure that we keep all incentives aligned. In that sense, perhaps what we what we structure is that part of the sale price is provided in some level of time after certain KPIs are met. Meaning you seller who know this business best are going to make sure that everything is done so that it's a smooth transition. Otherwise maybe you don't get everything you think your business is worth. So that is an earnout structure. A a rollover structure is when we ask if the seller can stay as an owner in a minority fashion. And really that keeps the business grounded. It keeps the employees feeling better that their founder did not go away and it also keeps them aligned. And a lot of sellers are very emotional about their businesses. So, it also gives them a little bit of um peace of mind that they're sort of leaving their baby behind, but they have their eyes on it. And I imagine because um you know we're talking about inclusive private credit you know oftent times when I'm having conversations with folks when there's an opportunity to sell to someone who's got cash ready to go you know that often times will bias a transaction towards someone that obviously doesn't have the capital which you know we go from there in terms of what that profile might look like. And I think the part of this is like the opportunity to ensure that there's a a more inclusive approach on a transaction to ensure that in and for example in an ETA um that you can actually have someone can come in and acquire a company who typically might not have the resources but you're structuring it in such a way in these different models where you can increase the likelihood of success. Right? Because if you're someone who's got a business and you can exit with someone who's ready to pay you 10 million today >> for sure. um it makes it more challenging to provide the inclusive credit. Right. >> For sure. For sure. It's definitely a challenge that we see and we want to we're we're constantly trying to balance risk mitigation uh and structuring and keeping everyone with skin in the game with the fact that we are dealing with a segment of the population that just doesn't inherently have deep wealth pockets. And that's the whole point. The whole point is to provide access to people without it. And then you think as an investor, well, I need someone to be invested. And so we sort of we have to get very creative with the way we manage those risks. >> The one thing I'd like to add is so one thing we've been looking at deeply is uh impact sustainability, right? So when we go to exit a business, are the people we're selling the business to going to be good stewards of that business afterward? We're out of the picture, right? So, um, you might not get the highest price, but are you leaving the business in the right hands? Are they going to continue doing all the things you've put in place to make sure it's a great workplace environment? It's a great um environment where the employees feel wanted, they feel engaged, uh, you're implementing all the things that drive value creation, right? And so it's it's a thing. Obviously, there are more impact funds now than there were 10 years ago. So it makes the selection process easier, but it's still something that's on the back of our minds. >> I mean, to that point, I mean, obviously this is something that's lit for many of you in the audience, but it continues to actually um emphasize the complexity, right? because you're competing with and market folks who aren't thinking as much about mission preservation and you know how's this going to impact a new owner and these sort of questions. Um and I know this is something that is faced by everyone in the audience. I want to bring Michael in because part of this conversation obviously is I mean I know a lot of you are fundraising and often times businesses don't realize that actually you know Momentous has to get the money from somewhere. they they have in Menus has investors, HCAP has investors. Uh I think you have folks like Schwab and JPMC that provide uh critical allocation. Um but want to bring Michael in because you've been you know Nelson talked before coming on stage talking about how much of a um partner you've been with Momentous. So you know I know you have a broader background right u but can you from your position as an LP can you speak to like why these strategies are really important? Yeah, sure. Thanks everyone. Um, so just just for a bit of background, um, I don't know if folks know, but Charles Schwab um, owns three banks, has three bank subsidiaries. And while our, uh, investment program springs from regulatory obligations, we try to marry impact, risk, and return uh, to have the most of each. Uh and so when we are looking across the spectrum of lending, investments, grants, and services, uh that's what we do. We run a missiondriven business, uh at Schwabang Community Development. Uh and Momentous is a perfect partner for us because not only have we lent to community impact partners in the past, but as a firsttime fund, they need the support of impact investors. uh while at the same time as an investor you have to make sure particularly with a first-time fund that they have the wherewithal to manage across a long-term patient capital commitment. Uh and you see even particularly with first-time funds how it's rare that the partners stay together over a 10 to 15 year period. So what's what's great for us around the investment with their ills fund is they have the infrastructure of momentous they have policies and procedures in place and the goal is to have impact with return um but at the same time we don't really on our small business side on a real estate side we do but on the small business side we don't really do straight equity investing and the momentous fund structure as we think about the continuum of capital offered a preferred equity structure for investors and for us that's a really interesting piece of the puzzle when a firm like Schwab who doesn't have the kind of large balance sheet that a JP Morgan Chase has really doesn't do a lot of this uh and so we are willing to trade uh for impact and risk a somewhat lower rate of return to be in a preferred equity structure at the fund level. Uh and so we are constantly looking particularly on the small business side the equation to do that. We have a whole lending platform. We have a grants platform. We have a community sort of advisory services platform. On the investment side though we don't do SBIC's. We don't invest directly. We need folks like Gary Nelson and hope to tell us these are the good companies to invest in. Um but particularly on the impact side, both of these funds think about how to create generational wealth for the entrepreneurs, right? Erin Nelson was talking about how these are really businesses, but what is going to happen to them? What is going to happen to the entrepreneur at the end? We need to figure out ways as impact investors to provide the wealth creation not just you know for that entrepreneur to retire but to create generational wealth. This kind of preferred equity structure allows banks that might not invest in venture that might not invest in the SBIC structure to do it. Folks may remember at the beginning in the early 2000s, venture capital was part of the SBIC program. After the financial crisis, there were losses. It went away. So, how can banks participate and preferred equity as part of the capital continuum is really makes a lot of sense. And then particularly with a fund that's offered by Momentus that has a lending platform, a small business lending platform advisory and now it has the ability to offer subordinated debt with preferred equity at the fund level to an investor like us and and that's critical. If I could ch pick up on one of the points that you mentioned which is really exciting and challenging and why it's so important for us to all be on stage and talking about this is there's a capital continuum available not only to the businesses as they grow but to your point Michael different capital allocators want to allocate different types of capital. So our bread and butter is lending, but then we have access to a small portion of the balance sheet to make equity investments that have an impact thesis. And then as you mentioned kind of on the swab side, looking for that preferred equity as your investment product into a fund that can then on lend and do credit or mezzene debt or preferred equity or some of these other exciting innovative instruments. So, it's really important to have an ecosystem that's working together and fosters innovation so that we can have conversations, meet the needs of the providers and the small businesses. But, yeah, it's a lot to keep track of. It's not simple. >> Yeah. And the really interesting thing is a lot of funds uh they don't realize that there are folks that would be interested in investing if they could invest in a preferred or in an AB type structure um meaning senior subordinate structure. And I've actually had conversations with funds that have tried to get us to invest. And I said, "Well, what if you offered something else on, you know, maybe you could do prefer it and we would take the whole thing." Um, and you know, if you're raising $100 million at the fund level, well, maybe we could give you 25 at the preferred and we'd be willing to take something, whatever it is. You know, we'll take the first 10 or 11 as an IRRa. And if you're offering your investors a 15 or 17, this is a way to leverage your fund and we'll cap our return and that will allow you to do more investments and give your, let's call it, your straight equity investors a higher rate of return. And we've had some players who have said, "Oh, didn't occur to me that someone might be interested in that." and have created a separate preferred equity structure so banks could invest in that vehicle. >> You know that which you both have shared um it it brings to a question you know Diana you talk about the ecosystem. I'm curious how often from your sides of the desk are you actually proactively working with other peers when there's a fund that comes to you that to your point Michael you know there's some you know Schwab uh likes to take a certain type of approach JPMC takes a certain type of approach folks in the audience that are managers particularly if you're emerging it's hard to keep track of and navigate for yourselves oh this is what THRO's looking for this is what JPMC is looking for this is how often are you working in collab sort of collaboration or kind of curating with with your fund managers. >> Is this a plug for Soap because coming to conferences like this where you can really meet other allocators um and establish those relationships so you're able to have conversations with because you say peer but a peer >> for us doing this type of work could be anything from a bank doing community reinvestment act investing could be a foundation could be a family office. We have some pension funds that are looking at similar funds that we are. So, it's really having convenings like this where you can have established relationships to know who to pick up the phone, who's interested in this type of fund that has this type of structure. But to your it's extremely important and I think that's as an impact investor and impact allocator. Part of what we bring to the table is it's not just yes or no and a black box. It's yes, it's no and I can introduce you to this person. Um, and I think that's what we really try to try to focus on. I mean I I think on the real estate side we see a lot of collaboration around these kinds of structures. I think we don't see it that much at all on the on the business equity side. Um you know we see some specialized funds um even there we see it on the loan side. So we're in something called the veteran loan fund that is is run by a CDFI called people fund. Um, you know, the goal is to get loans out to veteranowned businesses. Um, and so you see senior subordinate structures there, but they're small. Uh, and it's mostly banks. You get a few insurance companies and foundations. Uh, I think on the real business equity side, it would be great, for example, if the SBA would come out with some kind of a product um like that. uh they could put a slug of preferred in or they could provide the first loss equity and have others come in and do preferred, right? They do it with the two with the leverage, right? But then they're the senior by themselves. Um and then you know, you see that in SBI in in the SBIC program, but outside of it, we don't really see it that much. Um we've I'm going to use one of the buzzwords. We we've been a catalyst in trying to get more of that um on the small business side, particularly trying to work with CDFIs to create programs um that would allow more small business equity to get out. Uh but it's hard. I I mean obviously many of you are in a situation where what it sounds like too Michael and Diana is that it's it can be as opaque for you on your side of the table as well in terms of what are the right partners to work with to to sort of you know appropriately get the right type of capital even to the fund managers themselves. Uh and I'll put this to the audience to think about because I know a number of you are in fact fund managers or maybe allocators yourselves. you know what are some of the things that you're thinking about actively in terms of collaboration with other allocators right um because I know for a lot of fund managers that's a hard that's one of the biggest challen significant challenge is trying to figure out the landscape the terrain right and so I'm curious about you know what many of you are doing or what you're actively thinking about um because we're love to get some of those learnings on this side as well right um and actually as a one as a reminder, if you have other questions or comments, thoughts, please, uh, Mark is in the background lurking back there. Um, but it's actually a good segue because I'm I'm curious, uh, for for the two for hope and you're El Nelsa in terms of some of those challenges that you face. I know you're at different places, right? Because you're firsttime fund, but with backing sort of institutionally from a a legacy institution. Um, hope you point out you're at your six fund. So I'm I'm sure you have different kind of challenges but would maybe start with you just to share since you're you're you're a first time or you're first- time fund manager out of Momentus. >> Yes. So definitely with a first-time fund manager it's sort of letting the industry know that we are here that we do offer these products and particularly that we are um sort of wedged in this little missing piece of the continuum. Um, I know the SBIA world is huge. You know, we just came from this really big conference and there's so many SBIC's. Um, and so we have an impact lens and we are smaller. And so the challenges for us is to make sure that businesses know that this capital exists, this capital is flexible. And the challenge has been, oddly enough, there's a huge need, but the market is so fragmented. kind of similar to to the point you just made Diane. It's like the conversations that we all need to be having together. There's a lot of alignment in the industry, but I think there's a lot of fragmentation. So, the challenge has been um sort of letting the market know that this capital is here. And you know, we're a lean team as a fun first- time fund manager. And >> how how large is the team? >> We are seven as of yesterday. So, we got someone new. No, someone um It's a change. It's a good change, not a bad change. Um, it's a lean team. Um, and so it's this matter of, you know, you speak about scale and trying not to do deals that are too small because we still need to deploy. And so those are specific to a first-time fund manager. Um, there's obviously the rest of the challenges that we're all facing economic and impact wise these days. But I think for us is finding like-minded co-investors who are in the same field and we don't feel like we're trying to do impact in a larger commercial way because there are many many many businesses that do re need our capital and we just want to make sure we can reach them. Can I can I just add a challenge and hope alluded to it earlier and we've talked about this in advisory committee meetings and so on is finding one of the challenges that these funds face is the tradeoff between return and impact that they have to make on an ongoing basis um while being a risk manager. I mean, these it's it's easy to invest in, you know, an AI startup that's getting gobs of money that might have great return or be a zero and find 20 other companies and all you need to do is hit one SpaceX and you've made the fund and your reputation for funds 2, three, four, five, whatever. It's much harder to be in this space where you have investors that have expectations, but the expectations are risk return, but then in this third expectation about impact, it's really challenging to be successful when you have to add that third challenge in. >> Um, so looks like we're running out of time. Well, so I'll be quick. Uh the way I look at it, there are five main things. Uh Michael, you touched on one risk return profile and I'd say loss ratio. That's one thing that LPS are going to look at. The second is does your mandate align with the LP's mandate. So for example, if you're a Florida fund and you go to Alli Bank who does not have any need for CRA in Florida, that's not going to be a fit, right? So do your homework, understand what their requirements are, what they look like, and then, you know, position yourself the best way possible to meet their needs. The third is obviously um communication. Most fund managers only apply only communicate with LPS when they're fundraising. Like communication should be ongoing. We communicate with our LPS on a quarterly basis. We don't wait until we're fundraising. So that way the traction is there. They know what's going on. There are no surprises. they are literally internally when they're speaking with their IC, their IC knows what what's going on with that fund, where they're at, how their performance is going. The other thing I would also say is team building. Um, it's important to build a strong cohesive team because again your LPs are not backing one fund, right? they are looking at this as we want to be there for a series of funds and if it's a one-man show that's a risk for them right so those are the things you want to look at um and think about and um I would say have conversations with your peers as well like it's important to talk to other funds like hey we spoke with JP Morgan um it seems like were not a fit. Um, how or what worked for you when you first got introduced to them? >> No, I appreciate that. I think that last piece because pointing this out too in terms of building out a team, you're at seven people as of today, I think you said or yesterday. Um, I know for a lot of emerging folks, it's sort of the the ability to to build out the firm without having enough aum to have the fees structured to be able to build out the the quality team that is needed. It wasn't a question that came from the audience, but I'm you know, I know folks are are sitting with this question around how to do both. How do you build out the operational sophistication? And I know Diana, you pointed out just like, you know, even offer an example of how you've leveraged grant capital as well. You know, there's a range of ways of looking at that, but I'm curious from the for the for the allocators, right? Like how do you think about that question for folks where you mentioned Michael, we pointed out that one of the things that was attractive about Momentous was that even though it was a first- time fund, they had some cap institutional capacity, you'd worked with them um you worked with capital impact partners over the years. So I'm just curious how how if you have any thoughts in terms of that challenge that fund managers typically have where you're building the team the operational capability but your first time >> impact fund managers are held to a very high standard because you need to not only meet commercial returns but you also have to meet impact targets from um LPS and each LP might have a slightly different impact target that they're providing capital with the intention to receive. So it's a lot of I think the biggest challenge is data especially for emerging managers showing how you have a a track record of finding the right businesses offering them the right type of capital um and helping them grow in a sustainable healthy way that kind of creates value doesn't extract value um but the biggest thing is data and then a whole list of KPIs on the commercial side and the impact side trying to synthesize that and grow on that and to your point have LPs that can work with you and are aligned in that mission. >> So, so let me first say that some of the best returns that I've had have been with first-time funds. You know, they've got a lot of flexibility. They're smaller. Um, they generally do things that more wellestablished funds, uh, like when you're on fund six, you have a way of doing things. You've done it. You keep doing it over and over. You know what's been successful, know what works for you and your partners. I think the answer to your question really is like a lot of due diligence particularly around what they've done before. So where were they before? Um what institutions were they were are they doing the same kind of investing as they did at their old firm? Are they doing something different? Have they done impact investing before? Do they know that third rail, you know, return, risk, and impact? Have they done it? Um a lot of due diligence. Do you meet with them over and over and over in many many different settings to see how they work together? Have the partners worked together before? Right? Do you think that there is a dominant personality that might is there, you know, be dominant in that firm? Do all of them have the business development side of the equation? Do all of them have the risk or are they structuring their partnership as someone's really good at this, someone's really good at that? because then if one of them leaves, you're not going to be really good at that. So, and you don't make, you know, you miss sometimes. I mean, let's just be honest, right? You don't always get it right. Uh, and then also at the macro level, you you can't be doing one of these and then you don't do another one for five years. Like, you've got to be doing this because you're going to have some misses and you have to make up for it on a portfolio level. Otherwise, the institution that I work for is gonna say, "We're not letting you do this anymore." >> No, thank you. So, appreciate that, Michael. Um, so we just have a few questions that we're going to take in from the audience. Thank you for asking them. Checking my time. Um, I'm going to start with this one because it was going to be a question I was going to pose to the panel. Um, but you know what what is a what ideas do you have in terms of scaling inclusive private credit? Like if you if you like Diana, if you could kind of like create that like if you had all authority and power to do it like what would what would you think about doing? >> I would think about two main themes. So innovation and partnership. So, it's being able to test and pilot new things because I think that's what we're talking about today is making sure that newer products are available to folks and that they're aware of them, understand them, and can access them. And then partnering. So whether it's partnering among allocators to make sure that um we're communicating clearly to fund managers or partnering among fund managers so that it's clear to a small business we're exactly where they fall on the spectrum between a CDFI and Momentous and a later stage SBIC like HCAP. Um or I think what Michael you mentioned before about thinking about more public partnerships or the SBA could come in offer more incentives um to folks to help crowd more capital into the space. I think there's a lot of room for um thought leadership and testing new ideas that can help this um asset class to grow. >> That's what I was going to say. I mean, the most successful partnerships are across the spectrum. And the one thing that we've been missing, uh we've seen it on the real estate side is the public side. Um, you know, some of the most successful things on the real estate side, the low-income housing tax credit, for example, is a public private partnership and it's been hundreds of billions of dollars for affordable housing. So, the SBA is sort of a, you know, it's sort of off on the side. It's not really deemed, you know, mission critical in terms of of funding for the country, but it has produced some of the largest corporations that we have. I can't remember if it's UPS or FedEx. I can't remember which one. >> Apple. Yeah, Apple. Like, >> so I think we need more >> and Tesla. >> And Tesla. Yeah, we need more. You know, the SBIC program is an example of we need more in the public private space. >> Uh, one I'm sorry, >> no, I was going to just quickly mention I come from the international impact investment side. So I spent 13 years working for funds with LPS from uh from Denmark and and Germany and Sweden. And those LPS uh really shaped the way I I sort of looked at what what the capital is looking for. And I think that if we want to continue to grow and crowd in commercial and the public and public partnership is a lot more well done in I in my view in in Europe and outside the US just because there's so much more public funds toward commercial impact. But everything that I've implemented as a first-time fund manager has been from my learnings and my previous funds which you know I think that the US is getting is getting there but because we don't have that tradition of of c of commercial capital carving out impact in the same scale as I think outside of the US is we're we're getting there but I would I would look toward international models who are doing impact and impact measurement as you mentioned and the data impact measure measurement is a lot more standardized um metrics and just general KPIs. So I would say that >> um my idea is a little out there. Um the SBA has been around since 1958. They've funded over 200,000 companies, deployed over hundred billion dollars. They have tracked every company that's been funded by an SBIC since they were formed. They get quarterly financials. They get quarterly valuations. They know the performance by sector, by company size. I think it would help allocators if they could get access to some of maybe it's a scoring system that allows them to say hey these are the tier one these tier two these are tier three and whether it's by sector it's by fund or it's by size of business that way I mean every year we have between 90 and almost 200 SBIC's being licensed Right. And you probably get a thousand in emails in your inbox from new funds. It would be easier if there was a way we could just have a platform where you can actually just go in and really be able to sort of say I am looking for these types of impact funds that are in climate or are in quality jobs or are in rural areas and they track record or performance per the SBA is this. No, >> I mean the data point is a huge one. I think that's access to data in filtering and access to performance data because to your point if all these funds are doing incredible work but offering different products, how do you what do you compare them with? What's the public benchmark? What's the private pool? How do you really evaluate performance? And to your point, having more data accessible um would be huge and it's necessary um for this to scale. Sorry, I was going to note one more question which uh I think it's going to stick with you Diana and Michael because it came up a couple times in the questions but um sticking a piece on like emerging fund managers. What are ways that um institutions like JPMC, Schwab, others can bring more emerging fund managers or is it possible to bring more emerging fund managers onto platform, right? Because again, I know a lot of folks are navigating these questions about how do we actually get LPS, how do they actually get capital. Um so I'm just curious about if you have any ideas or thinking around it. Um well, first we need folks who are interested in the space. Um and then we need to do more publicizing of the different programs that these kinds of institutional investors might be interested in. So you have foundations, insurance companies, banks, who are the other investors? I mean, pension funds, um, particularly some of the city and state pension funds, they all have emerging manager programs. Um, I've been co-investors with New York City investment fund and so on and so forth. But I think, um, there's no easy answer to that question, unfortunately. I think that banks have been willing. I think the SBIC program really is a way to get institutional capital into firsttime funds um because there are safe harbor for CRA number one and so you got a lot of banks um but also just the SBA does do a level of due diligence that you get that impremature and it allows you to also do things across a spectrum of small businesses. I mean a lot of folks I mean you said5 million to hundred million like are those really small billions businesses $100 million like so that kind of capital I think then becomes available you could leverage you could get you know if you raise 30 million you could get 60 million in SBA low lower cost SBA capital so I think the SBA program is a good idea for emerging managers >> the last thing I'll say is kind of our team does look at our impact finance team does look at emerging managers for our portfolio but Our issue is capacity because we are a small team um and we'd love to um kind of give a platform to all the funds that we chat with but we have to manage their portfolio end to end and so then it's really dealing with the capacity constraints. So yeah, it's it's it can remain. >> If I could just make a plug for the uh CDVCA, the community development venture capital association, they work with emerging managers. They have technical assistance they provide as well. Uh and I know Kerwin for like 30 years more. >> Well, I just I know we're transitioning out, right, Mark? He's really my Okay. So, um I know so I wanted to first thank the palace. So thank you all uh for for for this conversation both both for the conversation but the work that's being done but also again uh for me wanted to take I mean we it reiterates for me like the the the deep challenges in expanding the capital continuum again I know a lot of folks in the audience who are really navigating this um and there are no unfortunately I'm like consistently looking for like are there some silver bullets that can help us but the reality is that this conversation consistently reminded me of is that there's a multitude of things that have to be happening at the same time. There's a lot more opportunity, I think, for collaboration and and really kind of being clear about what opportunities there are across peer. I know to your point, Dana, you can have different types of peers. 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