Before Eduardo Rallo decides to invest in a company, he checks the home ZIP Codes of every employee. If a lot of them don’t live in low- or moderate-income communities, he moves on.
Among private-equity firms, Pacific Community Ventures stands out for measuring success not just financially but also socially. “We have to see both,” says 44-year-old Mr. Rallo, PVC’s managing partner.
PCV, which has invested $60 million in Bay Area businesses, is part of a growing private-equity segment called double-bottom-line investing, with the goal of making a profit and doing good.
Investment funds embracing the double-bottom-line philosophy support a range of causes, including anti-poverty campaigns in the developing world and environmentally sound practices. PCV’s aim is to build skills and create jobs in struggling California neighborhoods, including at least a dozen within a 20-mile radius of his San Francisco-based fund’s headquarters, at 51 Federal St.
“It’s important to be close to our market,” says Mr. Rallo, who envisions PCV as a place where “not-for-profits and for-profits can coexist.” Participants in the fund include commercial investors as well as philanthropic organizations like the Rockefeller Foundation.
Mr. Rallo says his returns support the idea that his local, hands-on approach works financially. “When you manage a growth fund you expect to have all kinds of results,” he says, noting that nondisclosure agreements constrain him from revealing the amount his funds currently manage. “But if we were not successful with funds I and II, I’m sure we would not have been able to raise money for fund III.”
He says two of his most high-profile investments, bakery Galaxy Desserts and bag maker Timbuk2 Designs Inc., performed so well after getting an investment and some expertise from PCV that they attracted new investors who bought out PCV out at a significant profit.
An equally important measure of success is job growth, says Mr. Rallo, who grew up in Cuernavaca, Mexico, and came to the U.S. in the mid-1980s to attend the University of California, San Diego. PCV has backed local firms that have created over 3,000 jobs, he says. The firms PCV has bought stakes in and advised have payrolls totaling some $50 million a year, mainly benefiting blue-collar neighborhoods, he says. Besides salaries, PCV insists the companies it invests in provide health insurance and retirement plans and, where possible, offer profit-sharing.
PCV’s investment in Timbuk2 Designs, a manufacturer of trendy bags based in San Francisco’s Mission District, underscores this approach. The firm bought into Timbuk2 during a recapitalization by the company’s founder in 2000. One of the conditions of PCV’s investment was that management carve out a 5% equity position in Timbuk2 for hourly employees to share when the company is sold.
That happened in 2005, when Timbuk2 was bought by another private-equity firm. The $22 million deal enabled 45 mostly immigrant sewers and fabric cutters to split $1.2 million. The largest payout was $90,000, to a 10-year employee on the assembly line. Even new hires got checks.
“That was the proudest day of my entrepreneurial career,” says Mark Dwight, then Timbuk2′s CEO, who since has become an investor in PCV funds, and has directed other local manufacturers to Mr. Rallo.
“They’re a team that recognizes that treating workers well provides its own competitive advantage,” says Matt Hoganbruen, managing director of Bank of America Merrill Lynch’s Capital Access Funds, referring to PCV, in which it has invested.
Finding investments that have the potential to do social good is a challenge. Mr. Rallo chose to invest in Richmond-based Galaxy Desserts, for example, which employs 200 people and produces French-style treats sold through chains like Trader Joe’s and Williams-Sonoma, because food manufacturing creates blue-collar jobs that are unlikely to be moved to another country. “We’re interested in the jobs that are going to stay,” he says.
Galaxy founders Jean-Yves Charon and Paul Levitan say PCV came along just in time in 2007. “We could have gotten bank financing, but it would have been much more expensive [than offering an equity stake], and we would have needed a lot more collateral,” says Mr. Charon, who launched Galaxy Desserts from a time-share kitchen in San Rafael. After PCV came in, the pair added 16,000 square feet of manufacturing space—and increased sales by nearly 70% their first year as partners.
PCV sold its $2.7 million investment in the bakery this past January to a French company, more than doubling its investment, Gallaxy said.”