Economic diversification has been an emerging “hot-button” issue in Indian Country for some time, but in the past year in particular, it has arguably become one of the top priorities for many of the nation’s most prominent tribes.
Still, while diversification is now a focus for many, there is a distinct group of tribes and supporting organizations that have made the most notable strides in developing and implementing structures and strategies that have not only supported the tribe’s key aims of (non-gaming) revenue generation and job creation, but have also encouraged such entities to help other tribes achieve a similar path.
Small Business Administration regulations have shifted to place increased emphasis on the level of diversification that tribes must achieve in order to compete in the process. And of course, given the limitations of any government-run program, there are many tribes being left out of the 8(a) program that are seeking other sources of support and opportunities for growth.
This article aims to provide additional insight regarding these topics by obtaining feedback from organizations offering financial diversification opportunities for profitability and sustainable economic development for tribal shareholders and investment partners.
Innovation Group Chairman and CEO Steve Rittvo recently sat down with several industry leaders in a roundtable Q&A to learn more about their economic diversification trend observations, strategies and successes. Participants included Kip Ritchie, chief operating officer of the Potawatomi Business Development Corporation (PBDC); Eric Trevan, president and CEO, National Center for American Indian Enterprise Development (NCAIED); Annette Hamilton, chief operating officer, Ho-Chunk, Inc.; Dr. Gavin Clarkson, associate professor at the University of Houston Law Center; and Bill Lomax, president, Native America Finance Officers Association (NAFOA).
RITTVO: What are the latest trends in Native American economic diversification?
CLARKSON: Many tribes are looking to diversify their economies away from a dependence on gaming. The two goals are revenue generation and job creation within the tribal community. Although it is often difficult to achieve both, a few tribes have established ventures that are successful on both dimensions.
LOMAX: With interest rates so low, many tribes are looking for higher-yielding investments, and the more sophisticated tribes are venturing into private equity with their investment portfolios. A number of tribes are also starting to look at the Alaska Native Corporation (ANC) model, and are making private investments into businesses often with the dual goal of profits and to provide quality job opportunities for their tribal members.
TREVAN: Diversification is not always how we build another casino somewhere or how we do the next large project. It is about the fundamental importance of creating jobs and economic opportunities for our citizens, and looking to those who are already interested entrepreneurs that have business to further, to create or provide a structure that is holistic. It is critical that as tribes proceed with their economic diversification efforts they be responsible by looking at opportunities both big and small.
How are tribes coping with the limited access to capital?
LOMAX: Limited access to capital is not a new thing for tribes. The free flow of capital from the late 1990s until 2008 was really an anomaly in Indian Country, though a few tribes got used to it. Capital is still readily available for the best-positioned tribes. As is the case in life generally, though, those who least need banks to lend them money have the most opportunity to borrow it. For those that do not have ready access, a BIA loan guarantee makes it easier to access capital and in some cases, the business opportunity is compelling enough to attract outside investment.
CLARKSON: Tribes are getting creative with such structures as seller-financed leveraged buyouts. For certain types of businesses, the growth potential by partnering with a tribe will provide substantially greater economic benefits to the seller.
TREVAN: The days of going to a bank and putting 20 percent down and securing a loan based on casino operations no longer exist. Lending, which has always been difficult, has become even more challenging for native businesses and tribes. Historically, tribes pay an average 3 percent higher for loans compared to the broader market, and broad, market-based solutions and changes are needed. And this has not just been with respect to larger-level projects; this affects even those seeking a $5,000 line of credit because of historic lower incomes. Since we recognize that this isn’t as easy to achieve as simply telling lenders to change their model, we know we need to explore other options. The days of tribal community lending, conglomerates for multiple tribes to leverage resources, and more public/private partnerships lie ahead. Financing as we know it is not the same and won’t be for some time, so we need to look to each other.
HAMILTON: I agree with Bill that tribes have always had to be innovative in finding access to capital. The recession and cutbacks have had an impact, of course, but since tribes have always had to be more creative with their financial sourcing, I believe we have been better prepared and capable of responding to the current environment.
How are tribes coping with recent attacks on ANC, tribal and native Hawaiian participation in the SBA 8(a) programs?
HAMILTON: Historically, tribes have performed well with respect to government contracting, and we understand the importance of working with the government, side by side, to try to provide the best value to all parties while still maintaining compliance with regulations. There are occasionally challenges, of course, but entities such as Ho-Chunk, Inc. recognize that it is to everyone’s benefit to strengthen the program as a whole and encourage the impact created on the reservations. Tribes are adapting to the process, and Ho-Chunk, Inc. in particular is doing its part to participate.
RITCHIE: I believe that despite some of the negative attacks, Native 8(a) is working for tribes, ANCs and native Hawaiians. While some issues have been identified within the program, we are working together as native people to ensure that there is improved transparency, ethic compliance and policies and procedures. Tribes are still relatively new to 8(a) compared to ANCs, for example, but the approach is that we will continue to make improvements to the program and demonstrate that government is getting good value.
There is no question it is working, and supporting tribal economies by providing them with economics tools for long-term sustainability. Tribes and ANCs have worked to make their voice heard in D.C. to help provide the facts about the success of the program. Some of the specific successes PBDC has seen in government contracting have been in industries such as technical services, engineering and I.T. The 8(a) option hasn’t been as beneficial for industries such as manufacturing to date, due to the intensive capital
investment, but that doesn’t mean they can’t be a fit in the right scenario.
What is the typical size of a deal?
TREVAN: In my opinion, there is no typical size and in fact, tribes that only look at opportunities of a certain scale may be doing themselves a disservice.
Diversification should yield a profit, but it doesn’t always have to mean “big deals.” It is important to look at the $100,000 and $100 million opportunities simultaneously; varying levels of ROI bring exceptional value when it comes to a successfully diversified portfolio.
RITCHIE: PBDC has traditionally looked at deals $500,000 and up. I advise others that it is OK to go smaller, as long as the potential target is a strong company with a model that fits the tribe’s strategic growth plan and investment criteria. We have done little by way of manufacturing or startups to date, but government contracting and IT are specific examples we have been open to, even though relatively smaller. And since financing is more competitive, leveraged buyouts, JVs and partnerships are options tribes are actively involved in to close deals and to start building capacity on their reservations. We have minimum criteria and requirements and may put $1 million into a deal if it meets certain investment tenants.
For example, if we have consistent management, the business cash flows, there are opportunities for growth, and, we’re able to use tax advantages to grow companies faster. So, down the road, the small deal becomes much larger. We have reviewed deals up to $3 million or $4 million independently, and as part of a syndicate, like the Four Fires project. We might consider larger deals in the future. We do look for deals where multiple tribes can invest together. This will require more due diligence and research, but the fact remains that tribes doing deals together is a major topic of discussion in Indian Country. I suppose it is fair to say that we are a private equity firm with unique advantages of “buy and hold” compared to other PEs that may seek to turn around an investment quickly. If holding an investment means opportunities for tribal training, employment, long-term wealth and other considerations, then we are open to it, which means we are a PE firm with goals of not just making a buck.
Where are you finding the best deal flow?
HAMILTON: Ho-Chunk, Inc. has gained extensive experience with non-gaming deal flows. We work in tandem with the government to fill a niche or need while simultaneously diversifying our tribal economy. The new SBA regulations are designed to encourage a broad level of interests, and we recognize that as benefiting the tribal corporation. The outcome is easy to see as tribal corporations are diversifying significantly, with deal flows focusing on a broader base of businesses. Ho-Chunk, Inc., for example, has been at the forefront of this, with 19 different subsidiaries currently in place, including entities specific to renewable energy, various government contracting entities, convenience stores, and marketing, distribution and logistics companies as well. The SBA monitors and regulates the level of diversity, and Ho-Chunk, Inc. has achieved this by evaluating channels of businesses vertically and also horizontally.
RITCHIE: PBDC relies heavily on networking and relationships created with others in Indian Country. Add to that our local and regional community of Milwaukee, Wisconsin and the Midwest, and other relationships with attorneys, banks and government contracting organizations (such as the NCAIED and the Native American Contractors Association), and we have found great success at identifying companies that are privately held and would consider Native American ownership through an acquisition or JV. As a result, PBDC currently maintains over seven subsidiaries, passive investments and JVs in a wide range of industries and target markets.
In what ways are you finding the most success in leveraging the tribes’ competitive and sovereign advantages?
TREVAN: The biggest advantage is reduction (if not elimination) of fees and taxes based on the tribal-owned structure. This is something all sovereign nations should be exploring. What I see all of Indian Country doing now is trying to identify the next era, whether it be with respect to advances in gaming or joint-venture and teaming opportunities for non-gaming investments. There are (private) economic development groups fighting for tax credits for businesses while tribes have historically had huge comparative advantages with respect to tax incentives to structure as a tribal business. I believe strongly that the future lies in our ability to reinvent and diversify ourselves through partnering, mentoring and teaming.
CLARKSON: The fact that tribes (as governments) are non-taxable entities gives them both direct and indirect advantages. Obviously, from a direct perspective, limited taxation allows for more of the profits to flow back to the business. Indirectly, though, this is also beneficial in that opportunities for LLCs and other structures can yield benefits for the non-taxable tribe and their taxable partners. Such entities are complex structures and require (legal and financial) oversight, but if established correctly, an active, non-Indian partner can also witness some of the tax liability protections through their association with the tribe. The appeal of such situations inherently increases the pool of potential partner or JV candidates by potentially extending the tax advantages to them.
Are tribes finding success in joint ventures, teaming, partnering?
HAMILTON: Joint ventures, teaming and partnership opportunities are some of the key ways tribes are adapting to the new regulations. Those involved with the process will work closely with the government to comply, but the fact remains that some tribes are left out of the government process and still need other means to sponsor growth. Partnerships—particularly those with other tribes—are some of the most important resources helping such entities compete and grow. It takes years to build up the infrastructure and to achieve true “diversification,” and organizations need a foundation during that phase so they can win the competitive contracts and look at public/private partnerships too. The new regulations encourage more success with JVs, teaming and partners for this reason, and it is great to see more tribes helping those just getting under way. Ultimately, I believe this will add strength to the 8(a) program.
TREVAN: Coincidentally, I ran a panel at the REZ Conference in Las Vegas recently, and asked the attendees to raise their hand if their community had a corporate or legal structure specifically for tribal development; about half of the audience raised their hands. I encouraged all of those who didn’t to speak to those who did, because now is the time for Indian Country to help one another. Now is the time to have the discussion. People outside of Indian Country are certainly having these discussions, and we need to have them as well. It is in the best interest of our citizens, governments and nations.
What types of efforts have you seen from tribes specific to the ene
rgy sector?
HAMILTON: Renewable energy is important to Ho-Chunk, Inc., both from the perspective of creating economic opportunities for our people and for the well-being of the broader community. There is a lot of talk on renewable energy, but the truth is the technology level has yet to settle in. Tribes are inherently at the forefront on this issue, though, because of their commitment to preserving the environment. At Ho-Chunk, Inc. we are working diligently to determine which renewable energy opportunities are best-suited for us as well as for those in our communities. We have invested socially on our own reservation, so that we are keeping pace with technologies, albeit for now on a smaller scale. If and when it is time for a larger investment, we will be ready.
TREVAN: I have seen many tribes take the approach to first seek opportunities to reduce costs by supplying their own energy. If successful, they can move to step two, which evaluates if there is an opportunity to yield energy to the grid. Going into such efforts, though, tribes should recognize they are competing against conglomerates of energy competitors with century-long track records, and consider partnerships that may add value to the effort. Tribes should certainly be engaging in conversations with one another to develop and move forward with an energy agenda that is competitive with existing providers.
