Why Invest in the US Emerging Domestic Market?

There are numerous reasons for LPs to invest in private equity firms targeting the US Emerging Domestic Market (EDM).

EDM private equity investments provide investors with needed diversification

The EDM is a primary focus of NAIC’s members, a cadre of private equity investors that manage funds ranging in size from $2.5 million to $2.5 billion, with a median range of $175 million to $200 million. NAIC member firms invest financial and intellectual capital in small and middle market companies. These kinds of investments provide institutional investors with much-needed diversification that helps them to balance their investments, which are frequently weighted towards large buyout funds.

EDM private equity investments generate strong returns

Private equity firms targeting the EDM have been shown to be highly profitable. “Minorities and Venture Capital: A New Wave In American Business,” a 2003 study conducted by Tim Bates and William Bradford, summarized the analysis of  returns of venture capital firms investing exclusively in minority-owned businesses between 1989 and 1995. The mean and median internal rates of return (23.9 percent and 19.5 percent respectively) supported the author’s findings that “minority enterprise venture capital investing is very profitable.”

NAIC member firms have demonstrated over the course of nearly 40 years that the risks associated with investing in the EDM are no greater than the risks associated with private equity investing in the general market. As with any risks associated with private equity investing, risks within the EDM sector are appropriately managed by skilled private equity fund managers with experience in the space.

It should be noted that firms focusing exclusively on minority-owned businesses comprise only a subset of NAIC member firms. The majority of NAIC member firms have invested successfully in both majority-owned and minority-owned businesses.

EDM private equity investment is good for the economy

As numerous studies have shown, business ownership among women and people of color is growing at rates that outpace that of traditional U.S. business owners. In order for these new businesses to thrive, they will need to secure access to sources of investment capital. As venture capital and private equity investments help these companies succeed, investors also will succeed, generating more capital for further investment.

At a time when the global economy is reeling from the effects of the subprime mortgage collapse and when the instability of foreign nations with emerging economies increases the risk of investment abroad, the EDM sector offers opportunities with strong return potential. NAIC is committed to helping the private equity community become more conversant with the EDM space and to nurturing relationships between emerging managers and institutional investors.