Achieving Economic Diversification in Indian Country: a Private Equity Approach

13 Nov

A buzzword that has been gaining a lot of traction in Indian Country of late is “economic diversification.” This recent attention makes a lot of sense. Many of our Indian Nations have achieved significant economic success through gaming. This success has helped us move along the path to true economic sovereignty.

Our achievements in gaming and other discreet areas create a paradox: on one hand, they create needed revenues for nation and community building; on the other hand, they create vulnerabilities as our growing communities increasingly rely on single sources of revenue. As our gaming or other single industry businesses face increasing competition, legal challenges and regulatory changes, our exposure to sudden decreases in revenues rises. As most people agree, it is a dangerous position to have all of our “eggs in one basket.”

Most Indian nations understand the dangers of relying solely on gaming or other single industries for revenue that benefits our communities. The question becomes, how do we protect ourselves against this? The answer is economic diversification.

One method for diversifying our revenue sources is to invest in, and build, businesses in other industries. Some Indian nations have executed on this concept by establishing nation-owned holding companies that establish, or invest in, other businesses. These businesses often leverage the various and powerful sovereign advantages inherent in all Indian nations. My nation, the Seneca Nation of Indians, has gone this route with great success. We’ve built a number of successful companies in a diverse range of industries.

The holding company route, however, takes a great deal of patience, capital and human resources. It cannot be done overnight and often takes years to reach full maturation. An Indian nation needs to identify the right people to successfully build and run these companies, which often takes significant time itself. Equally important, Indian nations need to commit to separating their businesses from their political institutions, which can often be structurally and culturally difficult.

There is another possible route that is both faster and easier to manage. This is a private equity fund, founded largely with partners within Indian Country. A private equity fund is a pool of capital from partners that is invested in various private businesses according to certain strategies. Certain private equity funds can be diversified to include a broad range of industries, giving their partners exposure to a variety of companies. By pooling their capital, the partners are able to create valuable economies of scale and investment power that cannot be achieved alone. Experienced fund managers use their proprietary networks to access well positioned companies, invest the capital in these businesses and then help the businesses achieve success. The result is that the partners in the fund receive returns across a diversified range of businesses. In addition, the partners can gain access to valuable and exclusive investment opportunities in single businesses that may make sense as a direct investment.

Some parts of Indian Country have achieved significant success in gaming and other narrow areas. However, we’re at a critical juncture. These industries are facing increasing competitive and regulatory pressure. It is important to execute on a diversification strategy. An investment fund can function as a complement to a holding company strategy or serve as a stand-alone diversification strategy.

The ultimate economic power of Indian Country lies in our collective strength. A bundle of arrows is stronger than just one. By pooling capital across Indian Country to invest together, we can create significant investment advantages that we cannot do alone. The whole is truly greater than the sum of its parts. Most importantly, we can better create diversified revenues for our nations and communities, and Indian Country as a whole.

Investing in Indian Country — Navajo Nation to issue $120 million in A rated non-Gaming Bonds

1 Nov

The Navajo Nation will soon be issuing $120 million in non-gaming bonds.  This is big news from a Native economic development perspective for a number of reasons:

1.  The $120 million bond issuance will be the largest non-gaming issuance in years.  This underscores the fact that Indian Country is a burgeoning development force outside of the gaming space.  Bloomberg reports that the proceeds will be used for a variety of business projects, including convenience stores, shopping centers, hotels and other enterprises.

2.  The bonds will carry an A rating from Standard & Poors, which will result in an attractive rate for the Navajo Nation and security for investors.  It’s important to note that the Navajo’s A rating is higher than California.  This speaks volumes about the stability and credit-worthiness of Indian Country.

3.  The Navajo Nation intends to utilize its tribal courts in settling disputes relating to the bonds.  This is a significant milestone and confirms the predictability and legitimacy of tribal courts.  It’s an important step in affirming the sovereignty of Indian nations and our credibility in entering financial transactions with third parties.

The increased tapping of public finance markets by Indian nations in a non-gaming context, particularly with top S&P ratings, highlights the developing economic opportunities in Indian Country.  It’s fertile ground that can be leveraged for both Indian nations and outside capital providers.  In a challenging economic climate where federal and state government bond ratings are on the decline, and good deals are hard to find, Indian Country is quickly developing as a bright investment opportunity.

Ideas are Easy, but Execution is Hard

23 Jan

I’ve been saying it for years — ideas are easy, but execution is hard.  As communities with sovereign advantages that are appealing to businesses, Indian Country needs to keep this in mind.  For years we’ve unfortunately been taken advantage of by the proverbial snake oil salesperson, with the latest venture that will make us millions.  The easy way to ferret that out is to ask for a business plan, projections and a detailed plan of execution.  What you get in return will be telling.

Ideas are easy.  The Seneca Holdings’ group is consistently approached with ideas for investments and ventures utilizing our sovereign advantages as an extension of a sovereign Indian Nation.  Some are good, some are bad.  But there are a lot of them, and they don’t take long to think up.  The real differentiator is the plan of how those ideas are going to be executed on.  That’s the hard part and the critical difference between a project that works and one that doesn’t.  Right now I’m reading “Do More Faster” by David Cohen and Brad Feld.  In the book, Tim Ferriss articulates this point perfectly.  He makes the point that he won’t sign a non-disclosure agreement as an investor because ideas on their own don’t have much value.  In his words, he won’t sign it because “entrepreneurs who [ask for an NDA] clearly overvalue ideas and therefore, almost by definition, undervalue execution.”  So true.  He makes the further point that there are probably a lot of other people working on the same idea — it’s the execution that will prove the winner.

In Indian Country, we’re continually pitched with the latest and greatest idea (particularly in the green energy field of late).  Some of these may make a lot of sense for a Native community and its economic interests.  But the key is finding the right partner who can help execute correctly on the idea.  That’s where the real value is.

Appropriating Native Economies: When is Enough, Enough?

5 Oct

When is enough, enough?  Native Americans have been asking this question for centuries.  The answer is clear, at least as it relates to the systematic and unrelenting quest to strip Native communities of their lands, sovereignty and access to economic recovery: it’s never enough.

The latest salvo in this unyielding attack is highlighted in, and furthered by, a recent series of Washington Post articles by Robert O’Harrow.  In his skewed and context deficient articles, Mr. O’Harrow targets Alaska Native Corporations, entities created by the U.S. government to help settle historic land and other claims by Alaska Natives.  ANCs were sold to Alaska Natives as a way to build their economic futures.  Overnight, their indigenous rights and claims were transformed into shares of corporations.  The quid pro quo was giving up tremendously valuable resources, as the U.S. sought to acquire hundreds of millions of acres of oil rich land to meet its burgeoning energy needs.  Implicit in this exchange was a responsibility of the U.S. government to assist the ANCs in building their economies, so that their shareholders, Alaska Natives, might be able to escape the grinding poverty crippling many of their communities.  This responsibility is similar to the U.S.’s relationship with Indian Nations, and its fundamental obligation to honor treaties guaranteeing crucial rights.

Mr. O’Harrow, both explicitly and implicitly, complains about the ability of ANCs to participate in a level-setting federal contracting initiative administered by the Small Business Administration.  Under this initiative, known as the “8(a) program,” companies owned by economically disadvantaged minority individuals can access procurement channels in an effort to help level the playing field in the often relationship-driven world of federal contracting.  ANCs, Indian Nations and Native Hawaiian Organizations also have this ability as the faces of Native community groups and sovereign Nations.  The 8(a) program is one of the few real opportunities available to ANCs, Indian Nations and NHOs to help better their poverty-challenged communities, arguably the most disadvantaged people in the U.S.  Because the 8(a) program views Indian Nations and Native Hawaiian Organizations as essentially the same as ANCs, Mr. O’Harrow’s attacks against ANCs are leveled against all Native communities.

As an enrolled citizen of the Seneca Nation of Indians, who works every day to help try to bring economic sustainability to our people, it saddens me to witness yet another assault on our efforts to rise above the effects of generational poverty created by years of governmental oppression.  Our lands were stripped away.  Our people were killed in a systematic removal process sponsored by governments offering cash for dead Indians.  We were corralled onto tiny “reservations,” where we were expected to adapt almost overnight to foreign systems and values.  In the face of all this, we’ve persevered.  We’re still here fighting to be self-sufficient and retain our priceless sovereignty as a people.  However, outside forces often conspire to turn this uphill battle into a sheer cliff.  We constantly face attempts to strip us of our remaining resources and opportunities, as state and federal governments consistently remind us that enough is never enough.

The Seneca Nation has experienced this onslaught in spades.  We retained tiny pieces of our original lands as the U.S. steamrolled over our communities.  In the 1960s, despite our reliance on sacred treaty promises that it would never take more land, the U.S. built the Kinzua Dam, which put much of our territory literally under water and resulted in the forcible relocation of many of our people.  Just this year, the U.S. passed the PACT Act, which was purposefully designed to eviscerate the Seneca Nation’s successful tobacco industry, an industry that employed and supported thousands of people.  It’s no secret that big tobacco corporations maneuvered and manipulated legislative backrooms to guarantee the passage of the PACT Act, as they quickly reacted to Indians taking slivers of their precious market share.  And now, as we begin to enter the federal contracting space in an effort to build a sustainable and diversified economy, we’re hit by broadside attacks like Mr. O’Harrow’s.

Mr. O’Harrow focuses on exceptions to prove the rule.  Potential for abuse is inherent in any governmental system.  To focus on a small number of isolated cases, however, just isn’t fair.  His facts are selective.  Many of his statements are opinion-laden and conveniently ignore important counter-points.  For example, Mr. O’Harrow attempts to characterize the contracts that ANCs receive as outsized.  However, he doesn’t point out that ANCs, Indian Nations and Native Hawaiian Organizations combined receive less than 1.3 percent of all contracting dollars.  He also tries to paint ANCs as cornering the market on sole-source government contracts.  Again, he fails to put this into context.  Just this year, Boeing received a single-source contract totaling $11.9 billion – more than twice what ANCs earned last year on a collective basis.

Mr. O’Harrow also takes issue with the fact that Native companies hire some Non-Natives to help build operations.  I am the first person to advocate for more Natives in leadership positions.  We’re getting there, but it takes time.  After years of forced boarding schools, sub-standard educational systems and efforts to marginalize our communities, we’re making great strides to build our business acumen while staying true to our traditions, culture and ways.  As a Native educated in the “outside” world, it’s a privilege and honor for me to have the opportunity to come back to my Nation to help further its economy.  There are many others like me, and many more who work day-to-day to build the skills necessary to advance our Nations within an environment with different systems and values.  It’s a challenge to walk in two worlds, and it’s foolhardy to expect these important skills to be developed overnight on a broad scale.  Our Native companies generate the funds necessary to continue to send our children to school and prepare for our collective future.  It takes time to do this in a systematic way.

Many new rules previously proposed by the SBA are designed to deal with the potential for abuse that Mr. O’Harrow highlights, rules which many ANCs, Indian Nations and other Native groups support.  However, Mr. O’Harrow uses a broad brush as he attempts to paint all ANCs (and by association, Indian Nations and Native Hawaiian Organizations) with the color of a few self-selected, and non-representative, examples.  To not put these isolated examples in the overall context of a necessary program that has demonstrably helped struggling Native communities is both inappropriate and irresponsible.  Enough is enough.

Accrediting Tribes and Increasing Private Equity Investment in Indian Country

16 Aug

As so aptly noted by Professor Gavin Clarkson, the Wall on Wall Street was built to keep Indians out.  The SEC has continued this exclusion, albeit through less visible ways.

Over the last decade, many Native American Nations have built incredible economic success through gaming, manufacturing, monetization of natural resources, and other avenues.  Although the financially successful Nations in Indian Country are in the distinct minority, they are well poised to invest in all of Indian Country.  The have the opportunity to “raise all boats.”  This is sorely needed since, as estimated by Professor Clarkson, there is a roughly $44 billion private equity deficit in Indian Country.  Unfortunately, the SEC has put up a formidable barrier to this needed capital deployment.  It comes in the form of the SEC’s definition of “Accredited Investor.”

A private equity fund is basically a pool of money from investors, which is invested in private companies that need it to successfully grow.  Who gets the money (and how much) is determined by the investment professionals that manage the fund.  Before that capital can be deployed, the managers need to go raise some cash.  As any seasoned private equity investor in the fund raising process will tell you, the lawyers almost always tell you to limit your investors to “Accredited Investors.”  By limiting your investors to “Accredited Investors”, you can safely go to sleep at night without worrying that your fund will be classified as a “public offering,” which is the legal equivalent to a stiff kick in the teeth.

The SEC, through Regulation D of the Securities Act of 1933, defines who (or what) is an Accredited Investor.  It includes high net worth people and other special groups.  However, it does not include Indian Nations.  So, the fundraising private equity folks are likely not going to accept money from Indian Nations without a lot of heartache and additional expense.  More importantly, people are going to be less inclined to raise a private equity fund that invests in Indian Country if they can’t seek money from Indian Country itself.  So, the financially successful Indian Nations can’t invest in funds that want to finance companies in Indian Country that desperately need capital to replicate their success.  This is absurd.

There is no rational reason to exclude Indian Nations from the definition of Accredited Investor.  The only possible argument is that Regulation D is intended to protect unsophisticated investors from being ripped off and Native Nations should be protected.  I would agree that some Nations at the beginning stages of economic development should be protected until they further develop their economies.  However, there are many Native Nations with the sophistication, expertise and capital to soundly evaluate investment opportunities.  So, I would propose that only Indian Nations with a threshold capital amount and access to sophisticated investment advice be deemed to be accredited.  Once that is done, I can’t think of a reason not to include Indian Nations in the definition.  The only remaining reason is to keep up the Wall on the Street.

Native Businesses: the Power of Community

20 Jul

In addition to a host of positive differences that separate Native Businesses from Non-Native Businesses (sovereign advantages, etc.), there is one fundamental difference that energizes the business and, in the end, makes it more competitive in the marketplace.  Native businesses serve, and answer to, distinct social communities.  Unlike non-Native companies, Tribally-owned businesses embody the economic success of tribal communities and, I would argue, serve a higher purpose.  In most Tribally-owned company contexts, including the company I oversee (Seneca Holdings), the profits run directly to the Tribal government for education, health care, social services and generally helping to support an entire community.  In the end, Tribally-owned companies are responsible for helping to ensure that our communities and citizens flourish.

This kind of responsibility is inspiring for managers, employees and other people that help run Tribal companies.  Every day we’re reminded that our work directly helps support our own community, a community that has been, and often continues to be, under attack from outside forces.  I can’t think of a better incentive to do well and make sure our companies prosper.  This is very different from a faceless stockholder base that most non-Tribal company executives work for.  Money often becomes the incentive in that context.  With due respect to Adam Smith, I think family and community trumps money as incentives.

Working for a Tribally-owned business and being part of the citizenry also creates a built-in employee incentive plan.  If I’m a direct stakeholder in the outcome of a company, I’m going to do all I can to make it successful.  That’s the reason non-Native companies set up employee stock option plans.  Tribally-owned businesses already have that kind of plan built in, at least as it relates to employees that are also citizens of the Indian Nation.

So, what’s the take away?  Tribally-owned companies are different from non-Native businesses in a variety of ways.  The most fundamental of these differences is that Tribally-owned companies directly serve their community and its members.  Incredible incentives are already built-in to make those companies successful.  This is a significant, and socially important, competitive advantage.

Native Companies More Effective in Government Contracting

2 Jul

I was in Anchorage last week for a conference and had the opportunity to meet with a number of successful Native-owned companies.  What the Alaska Native Corporations are doing is particularly amazing and inspiring.  They are creating tremendous value for their communities through supplying valuable goods and services to federal agencies.  The key is that they’re executing both efficiently and effectively.  A number of federal agency representatives were at the conference and the message was the same — the Native-owned companies fulfill contracts faster and more effectively than their non-Native counterparts.

As an example, ANT LLC is owned by the Alaskan Native Village of Eyak and is building underwater acoustic gliders for the Navy.  They’re building the gliders in Alaska with great success.  The Company has grossed approximately $20 million since it’s inception in 2005.  The Navy has praised ANT for its speed of production and overall effectiveness.

There’s no reason Indian Country in the lower 48 can’t replicate this success.  Some Nations have, but they’re in the minority.  My visit to Alaska only confirmed that there is tremendous value waiting to be built in Indian Country.

Follow

Get every new post delivered to your Inbox.