Private Equity

1
Private Equity EDM A Tactic in Search of a
Strategy

• Michael A. Stegman
• Director of Policy Housing
• John D. and Catherine T. MacArthur Foundation
• Paper presented at
• New Finance of Americas Cities
• Research Symposium
• Harvard Law School
• December 10th and 11th 2007

2
The Context

• Confessed former EDM junkie
• No proprietary data
• Perspective
• Policy

3
Paper Outline

• Paper in two parts Perspective and Policy
• I. Perspective
• Growing city appetite for private capital
• Role of private equity increasing rapidly
• With growing share of assets in private equity,
  greater role for public pension funds
• Before lauding public pension fund role in EDM,
  should look across whole portfolio
• Urban infrastructure
• Subprime mortgage instruments
• Outsourcing companies in global emerging markets
• What about lotteries?

4
Paper Outline

• II. Policy
• Motivation why had no presidential candidates
  embraced language or frame of EMD in economic or
  urban policies?
• Perhaps (private equity ) EDM is too limited a
  concepteven in small business entrepreneurship
  space?
• My motive for studying EDM was to calibrate
  public policy in light of growing private equity
  interest (and success? in m/w-owned firms and
  underserved markets
• EDM community displays little policy curiosity

5
Initial Frame for EDM goes back to Clinton Urban
Policies -- 1995Poor communities represent an
untapped economic opportunity for our whole
country. While we work together to open foreign
markets abroadwe also need to work together to
open the economic frontiers of poor communities
here at homeBy enabling people and communities
in genuine need to take greater responsibility
for working harder and smarter together, we can
unleash the greatest underused source of growth
and renewal in each of the local regions that
make up our national economy and civic life.
6
EDM in Historical Context

• 1994 mid-terms killed Clinton/Reich ETI
  initiative sending former CalPers official
  home
• Clinton New Markets initiative was EDM without
  Pension Fund component
• Several initial recipients of NMTCs from Wall
  Street
• Yet, EDM literature lacks any reference to these
  developments, or to policy generally.

7
Lots of Policy Issues

• Public Pension Fund stressnew accounting
  standards
• Repeal of SBIC Participating Securities Program
• CDFI Fund
• New Markets Tax Credit
• Transition of SBA Community Express Loan Program
  from demographically-based to geographically
  targeted
• Community Reinvestment Act (CRA) Reform

8
EDM Policy Conundrum

• Despite identifying insufficient information to
  price risk as most critical problem impeding flow
  of equity capital to EDM, a classic market
  failure justifying government intervention,
  proposal to develop EDM data clearinghouse
  recognizes no role for government in this complex
  enterprise

9
Going Forward

• The federal government should help overcome the
  information barrier to EDM investing
• It is critical to know both financial performance
  social impact of EDM investments to help frame
  the next generation of urban rural economic
  development policies
• As market-driven as EDM movement is, solving the
  problems requires both public private resources.