Fund Profile: Good Scout Capital
We’re excited at Ownership Matters to feature two emerging fund managers who are introducing an investment thesis to fill out the employee ownership asset class. Good Scout Capital is a private equity firm based in Los Angeles headed by BIPOC fund managers and is woman-led.
Designed as a traditional private equity fund with a high impact component, the Good Scout model is inclusive capitalism, seeking to align investors, operators, and workers in the financial success of their portfolio companies. Their first fund requires a 20% equity floor for workers in exchange for investment to align workers’ incentives alongside investors and operators.
Key industries of focus are food and agriculture, tourism and hospitality, health and wellness, and workforce training / impact consulting.
We spoke recently with founders Rupal Patel and Karlo Marcelo.
Excited to connect with this very interesting new model you’re working on. Maybe we could begin with hearing how you came up with the idea for this private equity fund focused on “sweaty” enterprises?
I founded Good Scout Capital with Karlo Marcelo, whom I met in graduate school at the University of Michigan. We were both in the Public Policy program and both focused our studies on poverty, racial equity, and the working poor. We became fast friends and have remained peers in the space over the last twenty years. About two years ago we began to develop Good Scout to fill an investment and impact gap that would benefit investors, operators, and workers. To create Good Scout, I applied the lessons I learned as a former community organizer and private equity executive, blending unique and complementary skill sets and experiences.
That’s a pretty unlikely combination!
It is! Over twelve years as Principal at Renewable Resources Group (RRG), I developed a 1.6 gigawatt solar energy portfolio and created the first farm labor cooperative in the U.S. — California Harvesters, Inc. The energy portfolio included one of the largest solar photovoltaic projects operating in the world today and was acquired by Berkshire Hathaway.
The projects included union contracts and other environmental benefits beyond the clean energy production. California Harvesters is one of the largest farm labor service companies today, employing 1,200 farm workers with annual revenues of $10M. I served as Chair of the Board for the first four years, raised capital, and supported the management and operations team at California Harvesters. RRG, Ford Foundation, Democracy at Work Institute, The Working World and The Workers Lab were important partners in launching CHI and I’m so grateful for their contributions.
These two examples of solar energy and cooperative businesses made clear to me that capital can accelerate environmental and social change at scale, and revealed some things that informed the investment strategy and the DEI thesis for Good Scout Capital.
First, we need to simplify the cooperative model in early-stage enterprises. We also saw that financing products for seed and early stage SMEs, which are often led by diverse entrepreneurs, are limited — and yet they are critical to innovation in the space.
Then there’s the way that capital and impact investors can play the same role in accelerating change in wealth and income inequality as they did for climate change — by including workers in the capital stack.
And finally, in order to attract investors to labor- and gig-focused businesses we need to de-risk the investment with a diversified portfolio and an active PE team that provides back office support to the portfolio companies.
So was your conclusion that if you could create a vehicle for farm workers, you ought to be able to create a vehicle for any “sweaty industry,” as you call it, out there?
Exactly. It’s a model that can be replicated and now we have better lessons to execute it. The way I look at it, we raised $5M to capitalize the farm labor cooperative and that was also a $5M investment in learning about how to bring this to scale. These concepts of employee ownership are actually mainstream now. Just look at what KKR has done with their industrials or how Pete Stavros launched Ownership Works, a new nonprofit focused on the same principles we created at Good Scout. It’s a really exciting time in the employee ownership capital space.
But then you had to come up with a thesis that described what kind of capital project would work for enough investors. How did that analysis work? And how optimistic are you that those people would be out there somewhere?
Yeah, I think there were a couple indicators that Karlo and I looked at. One is recognizing that ESG investing is a big driving factor in capital right now. Investors are very familiar and can deploy their capital in numerous environmentally focused funds. When it comes to the S for social, however, there are limited funds and even fewer that seek to achieve metrics as clear as ours, which is focused on growing the profits of the enterprises so that the bigger pie results in bigger shares for everyone.
Karlo and I analyzed the social impact fund offerings and identified three trends among the funds: They were either community centered funds, targeting a specific demographic population, placed-based specific funds, or “do no harm” funds that took a passive investing approach.
When we thought about what investment gap Scout Alpha Fund could add value to, we wanted to bring in as many investors as possible into this space, since we are natural organizers. Additionally, we understood in our experience working with investors that impact portfolios were often unattractive if they were solely focused on impact and not on returns. We want to diversify the portfolio in order to reduce risk in social impact investing so that it produces market returns and high impact, similar to environmental funds. It’s possible, and our 20% employee ownership floor model shows it can work.
We wanted to create a single impact thesis and metric simply focused on ensuring that every portfolio company has at least a 20% minimum equity for its workers. It’s really about making sure that the impact thesis was clear in the fund, but giving us flexibility to be diverse in the kinds of companies that we invest in.
The second piece around the risk is making sure that we are sourcing the best available talent among underrepresented entrepreneurs around the country. We didn’t want to cut off opportunities in New Orleans or Chicago or Atlanta. We did not want to limit the communities that we could serve. So when we think about underrepresented entrepreneurs, we don't just think about BIPOC and women entrepreneurs, we think about veterans, formerly incarcerated persons, the white working poor, all groups who have all been isolated from the capital markets for decades.
Karlo, what would you want to emphasize here?
Certainly the growing economic inequality over the last few years is something that really drove us to also look at government and philanthropy. We both had a lot of experience in those areas, and they were harder to move, slower to move. And they had been disrupted and contaminated because of the social inequality and growing economic inequality. So that became challenging.
The private sector seemed like the place really to create change in economic inequality. But it’s hard to change the culture of corporations. So the SMEs (small and medium enterprises) became the obvious target for us. It’s Main Street SMEs that have traditionally been the wealth and income generating vehicles for middle class Americans.
And we wanted to make sure to target gig workers and low wage folks, where these kinds of innovations of cooperative economics are part of the deal making and underwriting of the business already.
And from there, it’s really important to be really inclusive about what DEI [diversity, equity, inclusion] means. That was key for us because the performance of the enterprise beating out the competition of these non-co-op economic enterprises is really important to our thesis.
So, for us, it’s important to cast a wide net, to find the best operators, to be nationwide and not just place-based, not just focus on one community to bring together the racial struggle and the sexual orientation struggle with the working poor struggle. Bringing all those together around these SMEs.
You’re really hoping to prove a striking case with the market.
Yes, so the returns are really important to us, the performance of the fund is really important to us. And the competition inherent in America is really important for us to continue.
One of the phrases we like to use now is a little bit borrowed, but we like to say we care about virtuous competition and not vicious rivalry. So we believe in competition, we believe in virtuous competition to drive us to be the best of who we are. And that’s what we’re trying to do. That’s what we believe American capitalism can do.
Thanks so much to you both — we’ll keep in touch.