Venture capitalists and public equity firms still have a good pitch for investors. Phillips is looking for startups growing so fast they could increase his original investment 10 times over, or more.
"The relative tax benefits are actually better for investing in operating businesses, particularly those with heavy capital assets," said Jonathan Tower, managing partner at Arctaris, an impact investment fund manager based in Boston.
Tower is planning to raise over $500 million for an opportunity zone fund and spend it on up to 25 primarily industrial and manufacturing companies, including some that he'll shepherd through mergers and acquisitions with other companies.
Finding good deals in distressed communities will be a challenge for real estate and business investors alike. But Schultz and Phillips are confident they'll strike enough deals to spend their initial funds. Arctaris is particularly well-positioned, as the firm has been investing in low-income areas for a decade.
Arctaris' approach is somewhat unique, however. "Traditional private equity is not used to selecting companies based on their place," Tower said, "and they probably don't have as good deal-sourcing relationships in those areas."
The Arctaris opportunity zone fund also includes a $15 million guarantee -- from the national Kresge Foundation, which focuses on cities -- that will help protect investors if the fund loses money.
Funds focused on small businesses unlikely to grow rapidly may need a guarantee, or some other risk-reduction mechanism, to attract investors.
The Community Reinvestment Fund, USA, a Minneapolis-based nonprofit that issues loans to entrepreneurs underserved by traditional banks, is considering creating an opportunity fund that will invest in businesses such as small food and beverage manufacturers and expanding child care centers, said Keith Rachey, senior vice president of development and community advancement for the fund. Rachey is hoping to raise between $50 million and $100 million that would be spent on up to 100 businesses nationwide.
"We're heavy into the feasibility piece of this right now," he said. Part of the challenge is finding business owners who are willing to relinquish full ownership. "Can we find enough small businesses in these areas that would be willing to give up a portion of their equity, for a period of time?"
It may be possible for business owners to buy back the company once the opportunity investment period ends, he said. He's also wondering if his fund will need to be bolstered with a guarantee.
Phillips, of the Pearl Fund, said that he believes opportunity zone investment will occur in waves. "The first wave is all the things you've seen with real estate investing, because it's easy," he said. But once the best property deals have been secured, such investments will slow, and business investments will accelerate, he said.
Eventually, he said, business and real estate investors will work together to secure office, warehouse or manufacturing space for growing companies.
Lettieri said that the real estate and business sides are working together already. "Every commercial real estate investor wants a tenant."
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