09 Feb Infinity Point CDFI & Local Ownership Catalyst Fund (LOCF)
Infinity Point CDFI & Local Ownership Catalyst Fund (LOCF)
Interview with Marc Tognotti, President & Founder of Infinity Point CDFI and the Local Ownership Catalyst Fund (LOCF)
Jen: How was Infinity Point CDFI and the Local Ownership Catalyst Fund (LOCF) Created?
Marc: The fund was started by Marc Tognotti, Founder & President of Infinity Point CDFI, in association with a team of independent professionals who, collectively, have converted more than 500 companies to employee ownership over the past 20 years (average 25 per year), by implementing Employee Stock Ownership Plans, or ESOPs. Infinity Point CDFI is a non-profit dedicated to transforming legacy companies across the United States to next-generation employee ownership. We created the Fund when we realized that impact capital is the missing key to make employee ownership transitions happen at scale. The Local Ownership Catalyst Fund launched its fundraising efforts in 2022 and is currently seeking its initial institutional impact investors.
Jen: How are your investment funds catalytic in a way that is different from other funds?
Marc: With the retirement of baby-boomer business owners, an estimated 325,000 small-to-medium private companies will close their doors or be sold every year for the next 10-15 years. That’s over 50% of all businesses that employee people in the United States! There will be many more sellers than buyers. The need of business owners for exit solutions will be huge. Many local businesses and jobs are at risk. By helping retiring owners sell their companies to their employees, the Fund will keep local businesses thriving and locally-rooted, and at the same time transfer business ownership and entrepreneurial opportunity deeply and broadly to grassroots individuals and communities. Very few business owners are aware that U.S. Congress has created extraordinary incentives for owners to sell their companies to employees using an Employee Stock-Ownership Trust, or ESOP. For owners who qualify, selling to their employees through an ESOP is far and away their best exit option. It’s also best for the employees, the company, the community and local economy. Why haven’t more owners been seizing this opportunity? The main obstacles are owner education and initial setup costs. Impact-investment capital will enable us to jump past these bottlenecks and rapidly scale worker ownership. That’s why we created the Local Ownership Catalyst Fund. With impact capital we can act as buyers instead of as service providers. We can approach selling owners and make a compelling buyout offer on behalf of their employees. We put down the initial capital needed to make the offer, and then engage the owner, ESOP professionals and bank lenders to complete the transaction. Using this approach, with $10 million of impact-investment capital, we can transform 100 successful companies to worker-ownership and enable grassroots individuals to acquire over $1 billion in wealth-producing enterprises! As buyers, we take the lead in structuring the transactions, to ensure that the benefits truly go to the employees and that companies implement democratic, ownership-culture best practices that develop the business- and financial-literacy of all employees, empowering them to think and act like owners.
- How does the fund shift power? (e.g., non-traditional credit evaluation, creative finance for the unbanked, etc.)
Our Fund shifts power on several levels. To begin with, we are transitioning conventional companies to a new and better paradigm where all employees share the rewards and responsibilities of ownership. A share in ownership aligns individual employee interests with company interests, and so worker-owners gain a stake in developing each other’s potential to the fullest. Ownership-culture best practices channel this enhanced motivation and alignment into continuous learning and improvement. Ultimately, the Fund shifts power at the personal level by activating worker self-empowerment and aspirations to reach continuously-higher levels of contribution, collaboration and purpose. After converting a company to worker ownership, within a few years, we witness a dramatic shift from employee mindsets to owner mindsets. Workers realize their agency to create value for themselves and others. It’s a big reason why these companies are proven to outperform conventional companies in every respect, both economically and in terms of social responsibility. Nearly 80% of the companies B-Labs has designated as “Best for the World” are ESOP companies. A power shift happens at another level as well. How do worker owned companies grow and expand? By creating more worker-owners and more worker-owned companies! Look at SRC, the ESOP that invented open book management. Over several decades, their employees have spun off 62 new employee-owned enterprises! As the next-generation worker-ownership model becomes mainstream, we are establishing a mechanism for decentralizing the economy.
- What is transformational about the businesses and entrepreneurs you invest in?
They are ordinary people, in all industries and walks of life, who have an opportunity to transform their companies into engines of leadership development, shared wealth creation, and social impact through a new enterprise paradigm that aligns individual interests with collective interests.
Jen: How do you describe the kind of non-financial returns the fund offers?
Marc: The non-financial returns are many and include:
- Local businesses saved from closure, relocation and downsizing
- Jobs preserved and created
- Ownership of wealth-producing business enterprises transferred to grassroots individuals
- Increased job security, income, and retirement savings for employees
- Increased employee financial and business literacy and leadership skill
- Increased opportunity for career advancement for employees
- Increased employment, especially in underserved communities
- Increased company social responsibility (e.g. as measured by B-corp impact metrics)
- Invigorated local economies and entrepreneurialism
- More level playing field between Main Street and Wall Street
- Demonstrated the power of broad-based equity ownership to align private interests with common good interests
Jen: Can you describe how you use integrated capital to do your work?
Marc: The Fund makes below-market-rate debt capital, accelerator services, and mentoring available to small businesses. We enable companies to take advantage of ESOP-empowered tax benefits and financing tools to lower their debt-repayment burden and risk, and to amplify the social and growth impacts of our capital lending.
Jen: How do you address racial justice, income inequality, and/or gender justice through your products and services?
Marc: Fewer than 5% of all businesses that currently employee people are minority owned. Yet the people who work in these companies closely reflect the demographic diversity of our nation. By transferring ownership to employees, we are creating companies whose ownership truly reflects our national diversity. Through shared ownership, these diverse workforces are incentivized to build trust, mutual respect and collaboration across their differences in pursuit of shared success. More broadly, the fund seeks to address racial, gender, income, and even climate justice at a root level through transformation of conventional economic structures. The conventional corporate paradigm concentrates ownership and extreme wealth in few hands, puts private interest in conflict with common interests, and incentivizes some to benefit at the expense of others and the planet – we see these as deep, root causes of social and environmental injustice. Conversely, broad-based equity ownership—in worker-owned companies, and in other contexts—creates more wealth by sharing the wealth, aligns personal interests with shared interests, and rewards individuals for contributing to shared purpose. Worker-owned companies, especially when paired with best practices that create direct line-of-sight from individual choices to collective impacts, empower everyone to take responsibility for improving the business and fulfilling its mission. That helps explain why a recent Democracy Collaborative whitepaper found employee-owned companies to be the “Best of the Best” of socially responsible enterprises: “Mission-led employee-owned firms embody a powerful model of enterprise design for a new era of environmental sustainability and social equity.”
Jen: Can you share with us an example of an investment?
Marc: Infinity Point’s Local Ownership Catalyst Fund invests cash as a down payment to catalyze the sale of a company to employees. After the transition to worker ownership, we then bring professional technical assistance to implement ownership-culture best practices in these newly-converted companies. While the Local Ownership Catalyst Fund is seeking its initial institutional investors, we are already working with a number of legacy companies whose came approached us with an interest in ESOP conversion.
For example, we’ve been working step-by-step with the owner of an anchor company in a rural Colorado community to make the transition to employee ownership. We have made a $25,000 commitment, at the conclusion of the ESOP transaction, to establish a company fund that will sponsor community events that further employee ownership.
We will begin to implement our investment-fund model, and our scaling strategy, when the fund receives its first institutional investments and reaches the minimum implementation threshold. We expect to be fully funded, and to begin implementing the strategy, by the second quarter of 2023.
Jen: What do you tell people who think your fund is risky?
Marc: All funds that we lend to companies will be invested alongside a major bank lender who carries out independent due diligence and must approve the transaction. An independent professional Trustee also carries out independent due diligence on behalf of employees. These transactions are scrutinized by independent attorneys representing all parties, the business owner, the Fund, the bank and the employees. In addition, we only invest in established companies with a strong track record of success. ESOP companies are uniquely allowed by law to repay their loan principal and interest with pre-tax dollars, which is one reason banks favor them. They have more cash flow available to repay their loans, further mitigating risk. According to the NCEO’s data, only 2 in 1,000 ESOP companies default on loan repayments—and we know the mistakes that those two companies made. After the sale to employees, Infinity Point takes two board seats with the company to ensure successful transition to the new model and implementation of best practices that improve company resilience and performance. The data shows that these companies outperform significantly. Lastly, our fund only invests a small amount in each portfolio company, on the order of 1% of every deal, so that our investments are highly diversified across our portfolio. The primary purpose of the Fund is not to generate high financial returns on investment, but to bring just enough capital to the table so that the business owner will entertain a formal employee-buyout offer. In that way, we use the Fund to convert the maximum possible number of companies to employee ownership and make the maximum possible social impact.
Jen: What is the risk of not investing in your fund, considering the systemic risks the world is facing?
Marc: Risks of not investing in the Fund and its mission include:
- Continued concentration of wealth and power in fewer hands, including through buyouts of local businesses by private equity and large corporations
- A deepening income and wealth divide
- Further weakening of local economies
- Less access to capital and entrepreneurial opportunity in towns and cities
- Greater unemployment across the U.S.
- Lower quality jobs
- Increased racial and social strife
- Increased dependency on government welfare and safety nets
- Increasing alienation of employees from higher purpose and ability to contribute meaningfully
- Failure to develop the broad based grassroots leadership capacity and big-picture awareness needed to effect systemic change
- Shrinking ability for individuals and local communities to be masters of their own destiny
- The American dream will become unattainable
Investment Thesis/What is your rationale for your approach to investing? Infinity Point CDFI through its LOCF seeks to catalyze and multiply for future generations the formation of next-generation, worker-owned enterprises. This decentralizing business paradigm, when brought to scale, will distribute empowered opportunity, long-term financial security, ownership of mission-driven companies and self-regenerating capital to millions of grassroots individuals and communities across the United States.
Geography: We work across the United States supporting small businesses in local communities nationwide, including in disadvantaged and under-capitalized rural and urban communities.
Year Founded: 2021
# of Investments: 0 (we are currently in negotiations with 2 institutional investors, and expect to be fully funded by Q2 of 2023)
# of Investors: 2 (The Founders are currently the sole investors in the general Fund.)
Funds Raised: $55,000 since inception, being utilized for operations
What’s on Marc’s Mind?
Book: Louis Kelso, Democracy and Economic Power – an education in economics and the potential of broad-based equity ownership to create a more just economy and society
Song: “Bella Ciao” – an Italian folksong that became the anthem of the resistance to fascism during WWII