Minority Business Development: Where do we go from Here?

Abstract

It is the contention here that the development of secondary markets to add liquidity to minority and small business equity and investors will greatly increase the flow of investment funds to institutions that originate those assets. While that may be true, investment originators can also create derivatives to contain the risk or to speculate in those markets. Also, investment originators can issue bonds or certificates using their minority C&I assets as securities.

It is clear that a number of avenues already exist to enhance liquidity and investment flow to investors in minority and small businesses. Why then are they not being used? The primary reason for the exclusion of such assets from the derivative and secondary markets is the risk perception. It is felt that some form of guaranty or portfolio discount would be necessary to attract investors to these markets. That would mean governmental interference and regulation. However, the government is not willing to add “full faith and credit” to another financial intermediary, especially one where the downside risk is perceptively large.