The Apprenticeship of Money Kravis

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Kathryn Wylde has never been one to shy away from using, and re-using, the big metaphor. Lately it’s been a handy skill. As the new president of financier Henry Kravis’ $57 million New York City Investment Fund, it’s been her job to explain how infusions of borrowed corporate money, innovatively used, might result in big economic gains for the city’s poorest New Yorkers. Think about the empire Ross Perot built on government computer contracts, she says.

“Look at what Ross Perot did! He used private capital to build a multi-billion dollar company that’s entirely supported by government funds. That,” she insists, “is the model.”

A large nonprofit–at the moment she’s thinking, perhaps, United Neighborhood Houses (UNH)–could capitalize on the federal government’s new welfare-to-work requirements by, for example, helping mothers open their own daycare businesses. Assuming the government provides new money for child care, this could be a way for entrepreneurial moms to cash in and keep government dollars in the neighborhood. Private seed money would jump-start the operation; government money would support it. The potential? Wylde reckons maybe “one hundred thousand jobs.”

“Capital,” she says, serving up an echo of Oliver Stone’s Gordon Gekko, “is catalytic.”

Listening to Wylde talk, some might wonder if the air isn’t getting a bit thin up there in the world of high finance. After all, the city’s booming restaurant industry barely supports 130,000 jobs. Nonprofits that have been struggling to set up such program-related investments, all the rage with foundations right now, certainly report no such luck. At best, these enterprises have been generating 10 jobs here, 50 jobs there. Even UNH’s Emily Menlo Marks, who approached Wylde for help with a day care business, ventures that in the first two years her enterprise would employ no more than 80 women.

But Wylde maintains these are exactly the kinds of limits non-traditional investors like the Investment Fund can effectively push against. In the last year, New York City has seen the formation of at least three notable corporate-funded risk capital pools designated, at least in part, for community reinvestment purposes. This money has been set aside to back all manner of businesses, from manufacturing plants to technology start-ups, high-skilled to no-skilled, profit and nonprofit.

While it’s too early to say if this is a trend, backers claim the new money is part of a growing recognition on the part of the corporate world that urban investment is not only important but potentially lucrative. Retail chains, which backed out of city neighborhoods long ago, are moving back to stave off suburban competition. Business school academics are touting the competitive advantages of the inner city market.

And not insignificantly, the nonprofit sector is beginning to build its own expertise, using profit-making enterprises to support jobs training and program goals. Wylde says she has already received more than a dozen such proposals. And she expects that eventually, by necessity, most of the city’s community development organizations will be driven into profit-making partnerships to subsidize their work.

“This is really the next generation of not-for-profit activity now that government and philanthropic funds are less and less available and housing development money, in particular, is drying up” she says. “We all have to rethink our assumptions about this stuff.”


Such talk is not surprising, coming from the nonprofit world’s doyenne of the deal. In her former incarnation as head of the New York City Housing Partnership, Wylde presided over the financing and construction of 13,000 subsidized one- and two-family homes for working class families. With bewildering efficiency, she has placed these homes in some of the city’s most distressed neighborhoods. Part of her secret was a web of personal connections acquired over nearly three decades in the city’s banking and development world. As important, she could count on a useful constituency of civic-minded corporate funders and conservative policy makers cultivated by her bosses at the New York City Partnership and Chamber of Commerce.

By the mid-l990s, with public funding for housing on the wane, the cachet of her brand of development rose, in particular as Mayor Rudolph Giuliani searched for politically palatable ways to slide government out of the affordable housing business. Giuliani’s first stab at privatization of the city’s tax-fore- closed housing stock, a controversial policy called the Neighborhood Entrepreneurs Program, was considered vintage Wylde. Designed by a protégé, NEP provided a select list of local landlords with a cut-rate opportunity to manage, rehabilitate and eventually own some of the city’s more marketable apartment buildings. To blunt problems with tenants, the buildings were to be serviced by a local nonprofit. And everything would be controlled by Wylde, a manager endowed, in the words of one community developer, “with the subtlety of a steamroller with a broken clutch.”

Judging from interviews with those approached early in the Investment Fund’s capitalization effort, Wylde has
been useful to Kravis for similar reasons. As co-founder of Kohl-berg Kravis Roberts & Co., Henry Kravis is one of the city’s most respected–and feared–financiers. He pioneered and profited mightily from controversial corporate restructuring techniques that, not inci-dentally, were also blamed for the destruction of thousands of jobs nationwide over the last decade. Now he found himself on the other side of the looking glass.

After conceiving of the idea with developer and former Partnership chairman Jerry Speyer, Kravis embarked on a campaign to get 100 of the city’s wealthiest corporations and givers to “invest” $1 million each for 15 years with no guaranteed return.

While the goal of supporting civic-minded eco-nomic development projects sounded laudable enough, Kravis’ initial pitch–expanding the mori-bund Jacob Javits convention center, underwriting a Kennedy airport rail link, and spurring lower Manhattan development–focused on traditional concerns of the business com-munity. Some business people already financing community development work thought the plan was uninspired and even appalling. They felt the money should be used for more philanthropic purposes. “If it was anyone else but these guys,” says one banker, “they would have been kicked out of my office immediately.”

Kravis, according to Wylde, began to refocus when, still at the Housing Partnership, she pitched him the idea of having the fund invest in shopping strips to serve her retail-starved housing developments. Kravis was looking to support projects that would have a “huge ripple effect” because he had only managed to raise $57 million, not a huge sum in New York City’s $300 billion economy. The two agreed the fund’s money would be best spent providing start-up capital to innovative businesses or projects that showed promising job growth potential and were unlikely to receive conventional financing.

Problematically, loans made by the fund are going to be large–likely $250,000 to $3 million–and the payback period will be short. Borrowers will have to repay the fund, along with at least enough in interest to cover administrative costs, within three to five years. They will have to make a strong start–and refinance their businesses after just a few years.

Wylde admits this could be difficult. Her own financial experts tell her that viable ventures typically take seven to 10 years to turn a profit. To make this work, she says, all 56 investors must contribute their corporations’ staff time, connections and talent to the community start-ups that borrow from the fund.

Relying so heavily on free corporate help may sound risky, but investors hint that no one dares disappoint Henry Kravis. “He’s one of our biggest clients,” says one volunteer, explaining his motivation.


The way the fund has been structured, at least 40 percent of the investment must be used on projects or businesses benefiting low-skilled workers or low-income neighborhoods. And according to the fund’s written program goals, this percentage is likely to be much higher. Wylde asserts nonprofits will have an unprecedented opportunity to work closely with venture capitalists, corporate financiers and turn-around specialists, people who structure deals more complicated and innovative than anything typically done in the community development world.

Take, by way of example, United Neighborhood Houses’ at-home day care project. Wylde performs a quick calculation:

Point one: UNH, an umbrella organization for 37 settlement houses citywide, already has a $230,000 foundation grant to launch the project.

Point two: Kravis’ KKR just bought 85 percent of KinderCare Learning Centers, the nation’s largest day care chain. Executives there could probably be persuaded to help out with UNH’s project.

Point three: Some 300,000 children will need daycare if the welfare law is fully implemented, Wylde estimates. Assuming one worker for every three children, that’s 100,000 new daycare jobs that organizations like UNH could provide.

Add it all up: With KinderCare’s assistance on its business plan–and possibly some financing from the Investment Fund–UNH could be expected to build a formidable at-home daycare network. The Investment Fund, she cautions, has not even begun to formally consider UNH’s proposal. But it’s a simple example of how corporate money and connections could be used to squeeze the most out of foundation and government funds.

But what is the fund really going to be able to pull off? At its first board meeting last month, the staff passed around a one-inch thick book of proposals under consideration while Kravis com-plained that the media was already hounding him for results. “They keep pulling the carrot out of the ground and asking when it will grow,” he joked.

For the most part, the potential projects have only been drawn in outline. Six committees of corporate volunteers are studying proposals from nearly a dozen employment sectors, including health and science, manufacturing, and retail and tourism. So far, however, the fund has not committed to anything–except supporting Wylde’s plan for developing retail plazas at her Housing Partnership sites.

Wylde’s original pitch to Kravis worked. A month before the fund officially opened its doors, Kravis found himself standing before reporters with Governor George Pataki and Mayor Rudolph Giuliani, announcing that the Investment Fund would contribute $2.5 million to a $16 million package of federal, state and city loan guarantees to develop eight new shopping develop-ments in Partnership neighborhoods.

Others in the community development world look at this in-house deal and wonder aloud if Wylde, in keeping with her auto-cratic reputation at the Housing Partnership, will use the Investment Fund to reward businesses and nonprofits she has long done business with–while freezing out those she views as “competitors.”

Several nonprofit community groups never took part in the Housing Partnership’s programs because they felt it required a near-total loss of autonomy. Others simply didn’t see the need for Partnership-style housing in their neighborhood. Even so, they are wary of Wylde’s influence with the powers-that-be in business and government. “They’re scared shitless of her:’ says Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project.

Ludwig says nonprofits shouldn’t be parochial about this; most of them can benefit from whatever help and advice they can get from the business community. But she wonders how effective the Investment Fund will be, given that the volunteer committees reviewing proposals don’t include anyone who has actually struggled to set up an inner city business. “Is this really going to be translated into the neighborhoods? The proof will be in the pudding.”

Wylde maintains these concerns are unfounded. “If I wanted to control this thing, I couldn’t. It’s too big,” she says. “With most of the stuff I’m doing, I’m the most ignorant person in the room.” And she adds that the fresh perspective these outsiders from cor-porate New York bring to the field is essential.

To wit, the Investment Fund has a team of volunteers–from companies like Merrill Lynch, Citibank, Goldman Sachs and Tiffany–working on marketing and financing for the Partnership Plaza retail plan. Edward Toy, a private investment director for Teachers Insurance and Associates Annuity, the country’s largest pension fund, is devising what some might consider a radical approach to financing small business start-up costs. He would package the entrepreneurs’ debt and sell it on Wall Street’s asset-backed market, with the fund underwriting some of the risk. “It’s an alternative to the plain vanilla loan,” Toy says. “Lease streams, receivables, anything that generates cash–you can put it together and sell it these days.”

This is the kind of thinking that will make a difference, Wylde says with a laugh. “I feel like I’m an old lady with a bunch of kids.”


The true test of the Investment Fund will be in those deals that lie outside of Wylde’s well-honed area of expertise. And businesses–par-ticularly those that support living wages and worker training–are infinitely harder to build than housing, points out Ellyn Rosenthal, director of the food sector initiative at the Women’s Housing and Economic Development Corporation (WHEDCO). Putting together self-sustaining businesses that support a larger social mission has always been a kind of Holy Grail for those in the community development movement. Millions of government dollars were poured into such enterprises throughout the 1970s–and millions were lost. It has only been in recent years, as nonprofits began approaching these experiments with more rigorous attention to business detail, that there has been greater success.

Yet it’s exactly this concern over the bottom line that leaves Rosenthal and others wondering how useful the Investment Fund can be, given the three- to five-year repayment schedule on its loans. WHEDCO has launched a catering and restaurant business in the South Bronx this year to train kitchen and food service workers. Looking at her balance sheet, Rosenthal says she doesn’t expect to turn a profit for another four years–and that doesn’t include the cost of training, rehabbing the space or buying the kitchen equipment. The space and training are on a different budget, supported by public and private grants, and the kitchen equip-ment was donated.

Rosenthal says the kitchen equipment alone would have cost $215,000 to purchase. If she had borrowed that money from the Investment Fund, WHEDCO would have had to take out a conventional loan in the year 2001 to pay back the fund. “I couldn’t do it’ she says. “I would have to get much leaner and meaner to pay anyone back.”

While risk capital pools like the Investment Fund may be a useful source of money for nonprofits, no one should think they can replace government subsidies and other grants, she says. Rosenthal adds that Wylde’s corporate volunteers are likely to find accounting far more challenging when improving the lot of the employees is part of the equation.

“Capitalism is a system that really successfully exploits labor. Profit margins can hang on how much an employer pays its workers,” she says. “That’s why I think it’s really hard for a nonprofit to do this.”

In an essay that’s been making the rounds in the economic development world, Harvard Business School professor Michael Porter comes to a similar conclusion. The author argues that community-based organizations have been successful in low-income housing development primarily because they could rely on heavy government subsidies and develop a specialized talent for the work. In business, he says, they lack the resources to hire large numbers of people and their mission almost inevitably puts them in conflict with the for-profit company’s bottom-line interests.

Porter believes the best hope for the future of inner-city job development lies within the for-profit business community. Once bosses understand and become comfortable with what he calls the “competitive advantages” of city neighborhoods, they will be able to more clearly evaluate opportunities there.

Among his suggestions, Porter says corporations should establish long-term relationships–either in the form of joint ventures or supplier agreements–with smaller, established inner-city businesses. “Such relationships, based not on charity but on mutual self-interest, are sustainable ones,” he says. “Every major company should develop them.”

But what if there were a way for nonprofits to negotiate these relationships? New York City, after all, is home to a few “profitable” nonprofits, such as Bronx 2000, a community development group with a successful plastics- and wood-recycling business, as well as innovative cooperatives like the employee-owned Advanced Technological Solutions, a computer restoration plant in Bedford-Stuyvesant.

Wylde suspects that major corporations could be convinced to take these success stories to larger scale. Given that corporations routinely take advantage of government subsidies, such as tax breaks, to expand or relocate their businesses, working with similarly subsidized nonprofits only makes good business sense.

At least that’s the notion the Investment Fund has been trying to sell to one of the world’s leading car companies.
In a project that’s shaping up to be Kravis and Wylde’s first foray into program-related investment, the Doe Fund, a local homeless assistance program, is seeking to open a multi-million dollar auto parts factory in the city’s Northern Manhattan-South Bronx Empowerment Zone. Some 200 to 300 formerly homeless men and women would be trained and employed in a state-of-the-art factory, says the Doe Fund’s chief operating officer, Bill Spiller, adding that the factory could also serve as a teaching model for other manufacturing firms looking to improve the efficiency of their own shop floors.

The proposal now under review by the car company would set up a for-profit subsidiary of the Doe Fund, with the profits used to help support the organization’s other housing and work programs. With more than $100,000 in consulting help provided pro for fear of scuttling the deal, has expressed serious interest in the bono by the business consulting firm Deloitte & Touche, the Doe idea. But the real answer will come when and if they negotiate a Fund developed a pitch emphasizing the organization’s financial business plan, pinning down the true costs of the venture. The stability and the raft of tax and utility cost breaks for which their company, he admits, is worried about New York City’s reputation factory would be eligible. The “pre-business plan” also emphasized the Ben-and-Jerry-like public relations benefits of running a factory in collaboration with a homeless organization and detailed the success of a similar venture in Michigan, Focus Hope, supported by Ford and General Motors.

“This is a credible, logical proposal,” says Steven Gunders, a partner at Deloitte & Touche. “At the time we got it, it was a half-baked cake. Now it’s a fully-baked cake.”

It also probably didn’t hurt that Henry Kravis fired off the proposal letter–and personally pitched the plan to company higher-ups. Spiller says the automobile company, which he can’t identify for fear of scuttling the deal, has expressed serious interest in the idea. But the real answer will come when and if they negotiate a business plan, pinning down true costs of the venture. The company, he admits, is worried about New York City’s reputation as an expensive place to do business. Spiller is hopeful that executives will be mollified when they calculate the value of the Empowerment Zone subsidies and state-subsidized tax and utility breaks. “We think we’re on the right track,” he says.

So will the Investment Fund have the “huge ripple effect” that Kravis wants to produce? Wylde says she’s hopeful it will. But if nothing else, she adds, it will commingle people from the city’s insular corporate and nonprofit worlds–and that alone is likely to have important ripple effects. “People have to see the big picture,” she says. “Parochial thinking is not going to do any organization any good.”

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