Task Force Eyes Cooperative Equity Fund

Too many times, we have watched co-op borrowers valiantly launch expansion projects, only to struggle with the load of debt required to finance the quality of store demanded by today’s natural foods customer. The problem is not in the projects but in the financing structure. Try as we all do, it is extremely inefficient if not impossible to raise sufficient equity for growth in member-by-member increments on a store-by-store basis. Yet competitors such as Whole Foods can raise tens of millions of dollars overnight from Wall Street.

Member economic participation is one of the cherished strengths of the cooperative movement, yet in a modern and highly competitive economy, it is also one of our weaknesses. And consumer food co-ops are not the only sector to wrestle with insufficient equity. At a public policy forum organized by the National Cooperative Business Association (NCBA) in 2005, developing new and innovative ways to promote capital investment in co-ops was identified across all sectors as the most important policy priority for NCBA.

In response, in early 2006, NCBA appointed a task force of 16 members, including the present writers, to study the issue and make recommendations for further action. Task force members included representatives from the credit union, rural utilities financing, banking, producer, purchasing, and worker cooperative sectors, as well as several consultants and members of the community development finance field. We met six times over the course of the following year, both by conference call and in person, and hosted presentations from a number of experts in cooperative finance, capital markets, government programs, and socially responsible investing. We also heard input from task force members themselves on the particular capital issues facing their co-ops.

As part of our work, we looked at options currently available to co-ops, in addition to the traditional sources of member equity. These included the ability of some co-ops to offer a separate level of nonvoting preferred stock or the use of some kind of hybrid co-op model to offer a vehicle for outside community investment.

Despite the success of some of these innovative methods, we all felt that more needs to be done and that we, as a cooperative community, need to do it. Out of this work emerged a vision of better use of our capital structure. We want not just to spur the growth of new and existing co-ops. We also want to halt demutualization—the conversion of co-ops to investor-owned companies that frequently results in the economic value built up over generations being transferred into a few private hands.

While acknowledging that the cooperative capital model is currently in many instances a disadvantage—cumbersome, slow, difficult to explain—we also recognize the inner power of the model of widespread member engagement in common economic pursuit. The challenge we have set before ourselves is not just to “level the playing field” and make co-op capital access the same as for investor-owned companies, but to actually find ways to play to our unique strengths and take advantage of our differences. We want to make it not only better, but easier, to start and grow a cooperative enterprise.

The result of the task force’s work is a series of recommendations contained in a report issued in January 2007 and accepted by the NCBA board with unanimous support. Key among these recommendations is to study the feasibility of a specialized equity fund to be supported by and for cooperatives. The fund would provide an accessible means to meet the capital needs of new and expanding cooperatives, across size and sector. The goal would be for the fund to offer a wide variety of potential investors (including not only a co-op’s direct membership, but also community members, members of other co-ops, and like-minded individuals and institutions) a simple and accessible way to direct their investments to support co-ops according to a desired level of risk and return.

“Through my work both at Organic Valley and on the board of the Viroqua Food Co-op, I have recognized [that] access to capital is one of the biggest ongoing challenges of cooperatives,” said task force member Jerry McGeorge. “I feel NCBA’s task force has done a great job of engaging this thorny issue, and I feel the task force has given NCBA some good, solid recommendations to move this important agenda forward.”

Cooperatives themselves would be a key targeted investor sector for the new fund as well, through the voluntary investment of a small portion (1–3 percent) of net margins annually. Task force representatives from such co-ops as Organic Valley and Equal Exchange offered that their co-ops might be willing to make such a commitment, and we believe others will also.

Now, with the vote of confidence from the NCBA board, taking a hard look at the feasibility of such a fund begins. We have the good will and great vision of our task force members to build upon, including co-op consultant Walden Swanson, who offered this assessment of the project:

“Ode to the Co-op Equity Task Force”

Excellent work, sector voices streaming
Outsiders too; we think, anew
Audacious plan, historic priority, now
Equity available, like the Others’ too, for all, co-ops
What a process, excellent.