Private Equity & EDM: A Tactic in Search of a

Strategy

Michael A. StegmanDirector of Policy & Housing

John D. and Catherine T. MacArthur FoundationPaper presented at

New Finance of America’s CitiesResearch SymposiumHarvard Law School

December 10th and 11th 2007

The Context

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

Paper Outline

Paper in two parts: Perspective and PolicyI. 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?

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 concept—even 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

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 abroad…we also need to work together to open the economic frontiers of poor communities here at home…By 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.”

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.

Lots of Policy Issues

• Public Pension Fund stress—new 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

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

•

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.