Impact Investing in Quality Jobs
Private equity firms can create positive social impact by investing in job quality and cultivating an engaged workforce, says Tim Bubnack at HCAP Partners.
The unemployment rate in the US has hovered around 4% since November 2021, having soared to 14.9% in April 2020 at the start of the Covid-19 pandemic. Over the past three years, the number of jobless individuals has been broadly seven million at any given time. In such a tight labour market, businesses have struggled to find and hold onto employees.
Creating quality jobs – defined as providing fair wages, benefits and good working conditions that enhance worker well-being – can help a company attract staff and minimise turnover regardless of the economic cycle, according to Tim Bubnack, Managing Partner at HCAP Partners, a California-based private equity (PE) firm and impact investor.
“Job creation becomes paramount when an economy’s underperforming or in recession,” he told ESG Investor. “Quality job practices can help win the best talent to support business expansion, which fuels the recovery.”
HCAP was among the first PE firms to recognise and value the benefits of investing in employees to strengthen their portfolio companies. One of its largest limited partners, the Ford Foundation, is also keenly focused on quality jobs in the US.
In 2013, HCAP created the ‘gainful jobs approach’ (GJA), which is organised across the themes of economic opportunity, health and wellness, and diversity, equity and inclusion (DEI). Within these themes, it focuses on six job quality attributes: broad-based participation, opportunities for advancement, sustainable livelihood, belonging, paid time off, and wellness initiatives.
“Over the years, we’ve identified quality jobs practices and can bring them into a company by constructing a roadmap together. We also work with the management team to implement best practices over the lifetime of our investment,” explained Bubnack. “We believe that building health and wellness and DEI programmes, for example, will create better economic outcomes for both company and employees.”
Strategy evolution
HCAP was founded in 2000 with a US$40 million fund and remains a modest size, investing out of a US$353 million Fund V. It originally focused on making targeted investments into small and medium-sized enterprises (SMEs) located in low-to-moderate income (LMI) communities in California, which have been historically underserved and face multiple barriers to accessing credit.
Typically, the HCAP isn’t a controlling majority investor. It makes four-to-six-year loans and/or equity investments in SMEs as a minority shareholder, and is usually the first institutional capital invested in a company.
“When we went to market in the mid-2000s to raise institutional capital, our thesis was to focus on underserved communities,” said Bubnack. “By the time we went to raise our third fund (US$92 million), we could show good returns from deploying capital into these communities.”
At that time, several key foundation investors challenged HCAP to be more intentional about creating better jobs and outcomes for the portfolio companies’ employees, given that the majority were LMI wage earners.
In response, the PE firm developed the GJA programme, which is an operational impact framework consisting of: a measurement system to assess existing job quality standards and improvements; active portfolio engagement to implement workplace initiatives aimed at creating high-quality jobs; and exit alignment with its impact thesis of improving job quality through “carrot agreements”, which provide employees with bonuses so that they share in the upside of the acquisition.
“The GJA creates good practices and excellent outcomes for underserved populations,” explained Bubnack. “We also believe it reinforces our economic return thesis regarding investment in these companies.”
A win-win
HCAP predominantly invests in the US healthcare industry, such as businesses focused on improving access, lowering cost and increasing the value of care. It also invests in business services, technology and niche manufacturing companies. Its target segment is businesses between US$10 million and US$100 million in revenue, which are usually owner-, operator- or founder-led.
“It’s not that these companies don’t care about or want the best outcomes for their workforce, but they don’t have a professionalised approach to building in economic outcomes or DEI programmes to benefit the staff,” according to Bubnack. “Adopting the GJA can create a real positive social impact for the employee base.”
The PE firm has developed health and wellness programmes, skills training and ways to improve employees’ ability to participate in the company’s profitability whether via bonus or stock programmes.
“Through our involvement in a company, we see higher wages, upskilling, greater participation in 401(k) retirement plans and increased business ownership,” he said.
The benefits extend beyond the individual employee to the whole community, as good jobs can lead to greater local economic activity, more stable households and lower public health and benefits costs. Implementing a good jobs programme can also increase tax revenue for local and state authorities to provide social and other services. “Both Republicans and Democrats agree that quality job creation can have a lasting impact on communities,” said Bubnack.
For many portfolio companies, the main benefit in implementing the GJA is a reduction in staff turnover, a metric that HCAP tracks and monitors. This is particularly important in the healthcare sector, where many organisations have faced attrition of more than 50% per year amid low morale and increased burnout rates following the Covid-19 crisis.
“Lower turnover is a direct result of GJA, which leads to a better economic return for HCAP and the business’s management team or owner,” he said.
Quantifying impact
Bubnack is well aware of the effort required by the managers, owners, operators and employees of HCAP’s portfolio businesses to implement and run a GJA programme. “We give them the roadmap, but they do all the hard work,” he said.
For example, the process involves a deep dive into 25 attributes around economic benefit, health and wellness, and DEI practices within HCAP’s portfolio companies.
“The businesses understand that if they take the time and build out the programme, it’s part and parcel of the value creation that we’re working on across the business,” Bubnack explained. “It starts and ends with people in every business area – sales and marketing, finance, strategic relationships, etc.”
Each company is graded on where they currently stand with regards to the different metrics, and HCAP pinpoints areas in need of improvement. The PE firm also helps the company create a reporting package, to ensure its board of directors is informed of progress on a quarterly basis.
Importantly, HCAP is constantly refining the GJA programme, making improvements to deliver more data to the portfolio companies’ management team. For example, it works with Upmetrics, a software program and impact measurement and management platform, so that its companies can view and access the data. “Our community partners can also access information on a fund or individual company level,” he added.
A key tool for HCAP is employee surveys. “Getting direct employee feedback is important because it creates better engagement and culture, as well as operational excellence,” according to Bubnack.
Recently, the PE firm – together with Ellen Frank-Miller, CEO of the Workforce and Organizational Research Center (WORC) – developed a more robust survey for each portfolio company, called Worthwhile Jobs Employee Survey and Index Score. Bubnack remarked on its utility for assessing how well HCAP’s quality jobs practices are working inside each company.
HCAP shared the results at its recent CEO summit. “We are able to compare and rank our companies against each other in terms of outcomes and how they’re progressing on their goals,” he said.
The firm plans to continue with the index survey on an annual basis to provide even more data for its portfolio businesses. “The key to our whole programme is ensuring that employees have a voice and are part of the journey,” Bubnack added.
Gathering momentum
HCAP’s most recent two funds, IV and V, operate as small business investment companies (SBICs) focused on investing in underserved SMEs. A substantial amount of HCAP’s capital comes from the US Small Business Administration (SBA), an independent federal agency, which backs and provides leverage to the SBIC funds, alongside its limited partner capital.
“One of the most successful bipartisan programmes in the US for perhaps six decades is geared toward investing in underserved small businesses,” said Bubnack. “The SBA has been important in supporting impact asset managers like us in creating quality jobs and has developed new programmes to get capital into underserved markets in the US.”
As of Q4 2023, HCAP’s fourth fund has invested across 17 companies, with 72% of the capital deployed towards traditionally underserved businesses. Its fifth fund has invested across 12 companies, with 57% of the capital also allocated to underserved businesses.
As workforce-related issues are a topic of growing interest to investors, Bubnack would like to see more PE firms incorporate job quality considerations within their investment processes to do right by workers, drive positive social impact and enhance returns.
He pointed to several US firms that are focused on employee outcomes, such as KKR, which has an employee ownership programme, as well as impact-focused fund managers, such as TPG and Hamilton Lane.
“Increasingly, PE firms are investing in companies that implement programmes centred on workforce development and rapidly grow their workforce in the right way,” Bubnack said. “It’s already quite an impactful movement in the US.”
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