There is much potential for private credit investors who look at firms owned by women and minorities, and it is a wasted opportunity not to delve deeper into these businesses, the author argues.

The following article, addressing the potential generated by diverse-owned firms, is written by Shundrawn A Thomas, founder and managing partner of The Copia Group, a private investment firm. The editors are pleased to share these views; the usual disclaimers apply to the opinions of guest writers. Email tom.burroughes@wealthbriefing.com if you wish to respond. Jump into the conversation!

For privately held middle-market companies, private credit has emerged as a catalyst for economic growth, particularly given the market shift toward private lenders over the past decade. Private investment firms generally offer more flexible lending structures than banks and are willing to provide subordinated loans. Businesses with strong balance sheets and cash flow can accelerate their growth through access to debt capital while not diluting the business owner’s equity or changing the ownership structure of the business. These attributes are particularly sought-after in the lower middle market.

While access to private credit can be a game changer for businesses, a significant challenge persists – accessibility, especially for businesses owned by women and ethnically diverse entrepreneurs. Women and minorities make up about 70 per cent of the US population. Ethnic minorities are forming businesses at a much faster rate than their majority counterparts. Women form businesses at nearly double the rate of men with women of color founding businesses at a faster rate than women in general (1).  

Despite these robust growth prospects, research by Preqin revealed that firms that are at least 50 per cent woman or minority-owned held a combined total of 2 per cent of all private credit assets under management. Diverse-owned firms are largely not participating in the transformation occurring in the private credit market, so investors are missing out on these untapped opportunities

Opportunity abounds
Given that diverse businesses are often overlooked and face structural barriers to accessing capital, there is a misperception of a lack of investment opportunity. It is instructive to put the scope of these businesses in perspective. Women own 40 per cent of businesses in the US and 13 million of the 33 million small businesses, according to the Small Business Administration. Female-led businesses generate around nine million jobs alone. From an economic perspective, their GDP would rank among the top 15 nations and is comparable to the GDP of Spain. 

According to Visa’s State of Female Entrepreneurship study, 66 per cent of women entrepreneurs report difficulty in obtaining necessary funding. Lendio reports that loans to women make up only 4 per cent of all commercial loans. This sheds light on an unmet market need that private credit can serve.

There is a corresponding opportunity with respect to minority-owned businesses which the Minority Business Development Agency (MBDA) defines as businesses owned by African Americans, Asian Americans, Hispanic Americans, and Native Americans. This cohort of business operators owns more than eight million companies accounting for $1.4 trillion in combined revenues. Yet numerous studies reveal that minority businesses are much less likely to receive credit financing when normalizing for credit quality and are generally undercapitalized. 

According to research from the Federal Reserve, 54 per cent of the time a white business owner will get their entire lending request approved from their bank. That number reduces to 32 per cent for Latin X or Hispanic business owners, and it drops to 26 per cent for Black business owners. This puts minority business operators at a disadvantage as they seek to grow their businesses, highlighting a void that private credit can fill.

The bottom line
There are boundless untapped opportunities for family office investors in the private markets, specifically in the lower middle market. This often-overlooked segment continues to gain significance due to reduced direct lending by banks and an upmarket shift among established private investment firms. There is also a greater concentration of diverse-owned firms in the lower middle market offering untapped investment opportunities. Capital invested by private credit providers can produce compelling cash yields while creating positive societal benefits. Providing non-dilutive or less dilutive capital to small and medium-sized businesses creates a multiplier wealth effect. 

These businesses transact with other local businesses, contribute to local employment, and engage in local philanthropy. This inclusive form of private credit investing offers a triple bottom line of competitive market returns, measurable social impact, and meaningful economic inclusion.

About the author
Shundrawn A Thomas is the founder and managing partner of The Copia Group, a private investment firm providing customized credit solutions for lower middle market companies and generating positive societal benefits through the power of inclusive capitalism.