How a $100 billion in federal loan guarantees could transform our economy
by Karen Kahn
A new paper from Richard May, Robert Hockett, and Christopher Mackin offers an innovative proposal to scale employee ownership and build a more inclusive economy. “Encouraging Inclusive Growth: The Employee Equity Loan Act,” published in the journal Challenge, argues for a $100 billion federal loan guarantee program targeted to support the sale of “middle market” companies to management and employees.
Targeting the Middle Market
Where employee ownership has been most successful over the last 35 years, the authors argue, is among high-performing privately held companies. Citing familiar data regarding an ongoing silver tsunami of retiring business owners, they assert that these demographic trends make this an opportune moment to go to scale. Research shows that a large percentage of 39,000 middle-market firms, with revenues of $50M to $1B, will turnover within 10 to 15 years. With 26 million employees—one-sixth of the US workforce—transforming these companies to broad-based ownership could significantly narrow the nation’s growing wealth gap.
The authors propose a new $100 billion federal loan guarantee program similar to guarantee programs that support home mortgages, small business lending, and large corporate users of the Export-Import (EX-IM) bank.
The Financing Obstacle
The obstacle the authors cite is financing. These are exactly the kinds of firms targeted by private equity, an industry with close to $3 trillion to deploy. They argue that if private equity stands at the ready to initiate these acquisitions employee ownership must be able to step in on a competitive basis.
Because employees have traditionally not had access to equity capital, employee ownership deals are financed by “a combination of (a) bank leverage using company assets as collateral and (b) sellers taking back substantial subordinated long-term notes.” As the authors explain, “the seller in these transactions must often wait for five to ten years to fully realize the cash proceeds of the sale of their business to an ESOP.”
A private equity deal allows the seller to cash out right away, with no financial risk. But private equity has other consequences: the PE model that has evolved over the last several decades is highly extractive, often resulting in employees losing jobs and communities losing the businesses that drove their economies for generations. Private equity firms hold the company for a relatively short period, applying quick fixes to make the company more efficient (which usually involves laying off workers), and then sell to another private equity firm or a large publicly held company that has no commitment to the community. As the authors note, the commitment to shareholder value that underlies this acquisition model is a driving force behind existing patterns of economic inequality.
The loan program would “level the playing field,” giving managers and employees the opportunity to compete with the private equity industry to buy their firms.
The Employee Equity Loan Program
The authors propose a viable economic fix: a new federal loan guarantee program similar to guarantee programs that support home mortgages, small business lending, and large corporate users of the Export-Import (EX-IM) bank. They argue that such a program, which they call the Employee Equity Loan Program (EELP), should not be restricted to its present uses.
. . . if measures for reducing wealth and income inequality in U.S. households remain a priority of policy makers, then the historically effective work of using credit guarantees should not stop at the water’s edge of “small business.” EELP seeks to build on SBA [Small Business Administration] achievements in a materially larger economic niche — the middle market of the American economy.
Their preference is to house EELP in the Department of Commerce Economic Development Administration. They propose $100 billion annual program, which would add only 1/10 of a percentage to current outstanding federal loan guarantees of $2.25 trillion (raising it to $2.35 trillion). The current financial infrastructure—with loan officers at various banks and other secured lenders trained in the use of employee ownership designs—could be put to work initiating these loans with federal backing.
Existing Federal Loan Guarantee Programs by Size
| Program | FY2014 Appropriation ($ in billions) | |
| 1 | FHA Mutual Mortgage Insurance Fund | 1,130 |
| 2 | VA Mortgages | 398 |
| 3 | Federal Student Loan Guarantees | 242 |
| 4 | FHA General & Special Risk Insurance Fund | 153 |
| 5 | Farm Service/Rural Development | 124 |
| 6 | Proposed EELP Loan Guarantee | 100 |
| 7 | SBA Business Loan Guarantees | 99 |
| 8 | Export-Import Bank | 63 |
| 9 | International Assistance: State Department | 24 |
| 10 | Commodity Credit Corp. Export Loan Guarantees | 4 |
EELP would “level the playing field,” giving managers and employees the opportunity to compete with the private equity industry to buy their firms when they are put up for sale.
The authors estimate that over ten years, the infusion of $100 billion in annual loan guarantees would create 13 million employee owners in the U.S. workforce and one million new jobs, and contribute more than $1.7 trillion in additional wealth to U.S. workers’ households.
Over ten years, the infusion of $100 billion in annual loan guarantees would create 13 million employee owners in the U.S. workforce and one million new jobs.
Next Step: Congressional Action
To launch EELP would require an act of Congress, what the authors are calling the Employee Equity Loan Act. Noting the bipartisan support for ESOP legislation in the past, they are hopeful that legislators will see the significant benefits EELP would bestow:
- Requiring the government to do a better job using its credit rating to earn returns for its citizens, while stimulating private sector business growth and job creation in local communities.
- Providing urgently needed capital to directly assist the growth of employee ownership in U.S. companies, significantly improving financial security for millions of Americans.
As the authors conclude, EELP is “a policy initiative at scale” that has the potential to reverse the damage of the 2008 recession, in which so many Americans saw their financial security collapse. Rather than redistributing wealth through “divisive redistribution policies,” EELP would employ a “pre-distributive” design that enlists the private sector to enhance community wealth through shared ownership. It’s a policy that deserves serious consideration.
For further discussion of the Employee Equity Loan Program, read our interview with Chris Mackin and Richard May.
About the paper’s authors: Richard C. May (dick.may@awcfund.com) is the founder of American Working Capital, LLC; Robert C. Hockett (rch37@cornell.edu) is the Edward Cornell Professor of Law at Cornell Law School. Christopher Mackin (cm@ownershipassociates.com) is a lecturer at the Rutgers School of Management and Labor Relations, and founder of Ownership Associates, Inc.
Karen Kahn provides communications consulting and editorial support for Fifty by Fifty.
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