This is one of the 2020 CEF Whitepapers. For more information on the Christian Economic Forum, please visit their website here.

by Brandt Brereton

Role of BaaMs in the United States

Approximately 2,000 private businesses in the United States are currently owned by committed Christians who provide varying levels of support for domestic and international ministry and missions within and outside the company. Because most of these business owners believe that God is the actual owner and that they are merely stewards, the title of Businesses as a Ministry (BaaM) has been adopted to characterize them. The profits of these companies fuel giving to the Kingdom both directly and through owner tithing to local churches and mission budgets. BaaM owners are stewards that view the operation, culture, and rich ministry within and through the business as something to be preserved.

The owners of BaaMs face unique financial difficulties as they manage their business because of the importance of maintaining owner control in order to continue ministry support both during and after their involvement in the business. The provision of shareholder liquidity and funding the retirement of owners is complicated by the difficulty in obtaining capital from traditional sources because of a portion of profits being diverted to ministry support both inside and outside of the company. BaaMs require access to a type of capital that does not require them to give up control of their business.  

Private Equity Acquisition Trend

Of the approximately 100,000 companies in America that employ at least 100 employees, it is estimated that an average of 4,000 of these companies have been acquired each year by private equity firms since the early 1990s. It is reasonable to infer from these numbers that 30% to 40% of private companies with at least 100 employees are now owned by secular private equity firms focused exclusively on profit. This trend will continue for demographic reasons as Baby Boomer private business owners reach retirement age.

Owners of private businesses who want to liquidate all or a part-interest in their company typically sell to a private equity firm. This prevalent practice is a consequence of one of two unfortunate situations. The first is that the typical owner and management team are not aware of any alternative means of obtaining significant liquidity while maintaining control of the company. The second is that most of the outside financial and legal advisors providing guidance to management are typically not familiar with any alternative to a business sale to a third-party private equity firm or strategic industry buyer.

Liquidity Options for Business Owners

When a business that allocates a portion of profits to ministry support (BaaM) is acquired by a private equity firm or industry buyer, the diversion of a portion of profit to ministry support will be immediately terminated as will any ministry occurring for employees within the organization.  

There is an urgent need for private business owners to be made aware of an alternative to the prevalent practice of selling a business to private equity firms or industry buyers in order to obtain the liquidity necessary to fund the retirement of owners. This alternative liquidity option would provide the following advantages:

• Fund the retirement / major liquidity distributions for owners

• Enable continuation / succession of owner control of the company

• Permit the diversion of significant profit for charitable purposes

• Facilitate beneficial employee stock ownership without cost to employee   

• Enable permanent reduction or elimination of corporate level taxes

In addition to the above benefits, significant personal tax advantages would be available to cover costs of implementing and taking advantage of such an alternative.

Inception of the Employment Stock Ownership Plan

The employee stock ownership plan (ESOP), also alternatively known as the employee share ownership trust (ESOT), was conceived in 1956 by Louis Kelso, a San Francisco attorney and investment banker. A book written by Louis Kelso and the author and philosopher Mortimer Adler, and published in 1958, The Capitalist Manifesto, explained the macro-economic theory upon which the ESOP initiative was based.   

The thesis of the book is that democracy is the only method of government worthy for human beings and that capitalism is the only system that can sustain democracy, because only in the possession of the means of production can a person be truly free. The authors also wrote (over 60 years ago!) that we faced a real and present danger from the progressive socialization of our economy. They recommended that tax policy should be implemented to encourage beneficial ownership of stock by employees to supplement their income and preserve our capitalist system.

As a consequence of the work by Louis Kelso for nearly two decades, his proposals were finally incorporated into a major reform of retirement law known as ERISA (Employee Retirement Income Security Act of 1974). Among the beneficial provisions are the following:

• ESOP-owned companies receive tax deductions for payments to employees

• Employees receive beneficial stock ownership at no cost

• ESOP trusts could borrow money to buy company stock

• Loans can be repaid out of tax-deductible corporate contributions

• Deferral or elimination of capital gains for certain sellers of stock to ESOP

National Center for Employee Ownership (NCEO)

The National Center for Employee Ownership (NCEO) – a private non-profit membership-based information and research organization – was founded in 1981 by Corey Rosen, who had worked as a professional staffer in the U.S. Senate where he helped draft ESOP legislation. The purpose of the organization is to educate business owners on employee stock ownership and managers of ESOP-owned companies on measurement and improvement of their ownership cultures. NCEO also produces publications and ESOP sample documents for the benefit of their membership. 

The ESOP Playbook

In 2017, my partner, Jared Hanley, and I wrote and published the ESOP Playbook. Jared and I are the two principals of Brereton Hanley, a boutique investment bank in Silicon Valley. Our objective in writing was to utilize our extensive experience in advising companies for more than two decades regarding ESOPs to accomplish two purposes. The first was to explain what an ESOP is and how a typical sale to an ESOP is conducted. The second was to provide an introduction to the many tools and alternatives that an ESOP can provide to a business. Because business owners can sell even 100% of their shares and still retain control of the company indefinitely, our hope is that this expertise can be taught and focused on the attrition of BaaMs problem.

A unique and very helpful feature of the book is the comparative analysis of the three most common corporate finance transactions: (1) the M&A (industry buyer) sale, (2) the Private Equity sale, and (3) the ESOP sale. For each type of transaction, the process is described, the parties and their agendas are discussed, and the pros and cons of the respective finance transaction types are enumerated. The parties covered for each transaction type are sellers, buyers, attorneys, CPAs, investment bankers, and employees.    

Emergence of Perpetuate Capital  

My partner and I recently joined a team of Christian entrepreneurs forming an investment fund organization (Perpetuate Capital) to provide a market-based source of capital to Christian-owned businesses without detrimentally impacting their culture, independent control, legacy, and ministry. Investor returns are targeted at or above historical secular market averages, which can be achieved by the right professionals.

Among the uses of the capital could be the purchase of shares held by a departing owner in a private company by using an ESOP, funding traditional management-led buyouts without the use of an ESOP, aiding in the divesting and acquiring of subsidiaries, and providing growth capital to profitable businesses. Perpetuate Capital exists to perpetuate the Kingdom impacts of BaaMs, while solving for shareholder liquidity at market-based costs/returns with fully aligned investors.

The key component of the initiative is the establishment of a structured equity fund that will accept investments of any denomination only from Christian individuals and entities and only provide that capital to BaaMs. The objective of the fund is to provide a return in the ballpark of 12%, which is the average return for secular structured equity funds over the last 25 years. Additional information about Perpetuate Capital and our partners can be found on our website at www.perpetuatecapital.com.  

My partners in this venture and I feel privileged to dedicate our God-given experience sets and what remains of our earthly sojourns to focusing on this achievable solution to a very tragic but avoidable problem. We are optimistic that the Kingdom-giving of existing BaaMs can not only be preserved but increased. We are also hopeful that additional Christian-owned businesses can be transitioned to BaaMs with this new knowledge and capital provision.

by James W. Murphy

This is an excerpt from the author’s book Faithful Investing: The Power of Decisive Action and Incremental Change. Published by Church Publishing Inc. and edited by James W. Murphy, the book was released in January 2020.

by FDI Team

In a time with so much uncertainty, we are grateful for the consistency that comes from being part of a community rooted in the unchanging truth and power of the gospel. We are especially thankful for the way our grounding in Christ enables us to pivot without diminishing the power of the message. 

After much prayer, we have made the decision to move the Faith Driven event entirely online.

It’s often easy, perhaps natural, to view pivots as inconvenient. But in the way that only God can, what appeared at first to be a setback is turning into a beautiful blessing. Where our plans can be good, His are better. 

There is a story in Scripture that is often overlooked—sandwiched between the martyrdom of Stephen and the conversion of Saul—but is a perfect representation of the blessing that can be found in pivots. It’s found in Acts 8 and describes how Phillip, a Greek Jewish Christian, was divinely re-routed for incredible purposes. He was headed for Gaza when he encountered a man connected to one of the most powerful rulers in Africa, who consequently believed and was baptized. Immediately following this interaction, “the Spirit of the Lord suddenly took Philip away…Philip appeared at Azotus and traveled about, preaching the gospel in all the towns until he reached Caesarea”(Acts 8:39-40). 

Philip set out from Jerusalem planning to reach Gaza—49 miles southwest of the city—but after one specific encounter, was rerouted ultimately to Caesarea—75 miles northwest of Jerusalem—where he faithfully served and shared the gospel, earning the moniker “Philip the evangelist” (Acts 21:8). His plan wasn’t wrong or broken; God’s was simply bigger. 

We feel the same way: we had a good plan, sought the Lord’s guidance, and are now humbly and faithfully following Him in the new place He’s lead us to. 

Our team has been excitedly dreaming about the opportunities afforded by an online event. While we’re upset to not see everyone in person for what we hoped would be a family reunion of sorts, we are excited for the live stream. Not only have we added several new speakers—including Lecrae, JD Greear, Anthony Tan, Derrick Morgan, and Jewel Burks—but now you can watch from anywhere in the world, making the wisdom, encouragement, and even fellowship of our Faith Driven family accessible to a wider audience. 

We are hoping that by making the event available globally, we will be able to reach out to those who would have difficulty joining us in person either for financial or time constrictions. 

In the spirit of further opening the event to those who couldn’t attend in person, we’re offering a “bring a friend” pass to everyone who registered for the in-person event. Additional scholarships, especially for students, are available. If you are needing a scholarship, contact Team@FaithDrivenEntrepreneur.org and we will work with you! 

We cannot wait to share this event with all of you and to see how God will be glorified through the virtual coming together of His people.

Article originally posted here by Inspire

by Robert Netzly

The biblically responsible investing (BRI) movement is booming as Christian investors move billions of dollars each year to switch their portfolios into biblically responsible investments, seeking to avoid profiting from abortion drug manufacturers, adult entertainment distributors, LGBT activism, human trafficking and other immoral issues.

As the biblically responsible investing (BRI) movement continues to take Wall Street by storm, the question of performance routinely surfaces. Questions such as, “Will I have to sacrifice performance if I switch my portfolio to biblically responsible investing?” are natural, logical and very appropriate questions to ask. Perhaps it is because we are wired to assume that if we do the right thing we are going to suffer for it, the proverbial “good guys finish last” situation, or maybe because we are fearful that if we do something out of the ordinary, like biblically responsible investing, that we are taking a big risk by venturing outside of the perceived safety of the herd, but whatever the reason, investors and financial advisors are frequently tripped up by the question of performance, often even skeptical toward the growing amount of research data showing that good values and good returns are not mutually exclusive.

While one way to answer the concerns about performance is simply to point to the actual track record of biblically responsible investing funds, which you can research for free at inspireinsight.com, or to read the independent, academic research that analyzes the performance of biblically responsible investments relative to secular investments, which you can find on the research page at inspireinvesting.com, I want to address the performance question in a different light today, drawing from two passages in the New Testament.

Follow Me

Jesus had a unique way of calling people to follow Him. He just said, “follow me”. No cajoling, no convincing, no explaining, just a simple and authoritative call to follow. One of those encounters is the well-known story of Jesus calling His first disciples,

“While walking by the Sea of Galilee, he saw two brothers, Simon (who is called Peter) and Andrew his brother, casting a net into the sea, for they were fishermen. And he said to them, ‘Follow me, and I will make you fishers of men.’ Immediately they left their nets and followed him. And going on from there he saw two other brothers…and he called them. Immediately they left the boat and their father and followed him.” (Matthew 4:18-22)

Another famous story of Jesus calling a man to follow him is the story of the rich young ruler, who comes to Jesus asking what he needs to do to inherit eternal life. Jesus tells him to follow the ten commandments, to which the rich man replies “all of these I have kept since my youth” (umm, really?). Jesus’ following reply was not what the young ruler was expecting to hear,

“…He said to him, ‘One thing you still lack. Sell all that you have and distribute to the poor, and you will have treasure in heaven; and come, follow me.’ But when he heard these things, he became very sad, for he was extremely rich. Jesus, seeing that he had become sad, said, ‘How difficult it is for those who have wealth to enter the kingdom of God!’” (Luke 18:22-24)

In these two stories we find Jesus giving the call to leave what you have and follow Him, and two very different reactions to that call. The fishermen are called to leave their income, their livelihood and their business assets to follow Jesus, and their response is one of faith, “immediately they left their nets and followed him.” The rich young ruler is called to walk away from his earthly wealth and follow Jesus, and his reaction is one of sadness and disobedience.

Counting The Cost

Here is my point, sometimes (oftentimes?) Jesus calls people to make earthly sacrifices in order to follow Him by faith. Does Jesus call everyone to leave their business or sell all they have to follow Him? No, certainly not. But He does call some people to that, and if He calls you there can be no room for deliberation, only counting the cost and immediately following Him.

Has the Lord pricked your heart about investing with biblical values? If you researched at inspireinsight.com and discovered that you were actively profiting from abortions and adult entertainment, would that bother your conscience? I would submit to you that is the Lord calling you to pursue biblically responsible investing for His glory and your joy. I would then submit to you that the question of a hypothetical performance sacrifice is irrelevant, because if God is calling you to switch your investments to biblically responsible investing, it does not matter what the cost is. Our only option, and indeed our greatest joy, is immediate obedience.

Don’t get me wrong, I believe and have experienced that Christians are not required to accept lower investment returns in order to invest biblically responsibly. But even if that was the case, or even if it somehow became the case in the future, does it matter? Would we reject the call of God because we are unwilling to give up performance potential? Or would we immediately drop our investments and follow Him?

— by Robert Kim

This October, I had an amazing opportunity to moderate a panel on faith-driven impact investing at SOCAP.  This was a special moment for me as this panel allowed me and the panelists to share about Jesus at one of the most prominent yet secular gatherings of impact investors and social entrepreneurs. 

Three panelists were Bryce Butler (Founder of Access Ventures, a private operating foundation committed to deploying 100% of its assets to impact investments), Gloria Nelund (Founder of TriLinc, an impact private debt fund that has deployed approximately $1 billion in emerging markets), and Todd Johnson (CEO of iPAR, an innovative impact reporting / analytics app that allows investors to monitor impact across asset classes).  I was incredibly encouraged and grateful for their enthusiastic “yes” to join this panel and share about the role their faith has played in shaping their impact investing journey.    

I’d like to share a few points from the panel:

1.  Understanding the purpose of capital and pursuing a healthy relationship with money is the first step towards a rewarding journey in impact investing.  Too often, our goals and behaviors are influenced by fear and greed that stem from idolizing money.  Truly embracing the perspective that money is just a tool liberates us to explore what money, and furthermore capitalism, can do other than simply meeting our own needs or, worse yet, feeding our insatiable greed to want more.  Such freedom allows us to use money as a resource to pursue the very calling God has equipped us for.  It enables us to creatively use all types of capital – philanthropic and investing – as a resource to benefit communities in need (physically and spiritually).  Convinced that all assets belong to God, Bryce is directing 100% of Access Ventures’ assets to pursue the foundation’s mission (not just the 5%, required by the U.S. government).  This model allows the foundation to catalyze a lot of the important work for communities in need, using both philanthropic and investing capital.  For example, Access Ventures uses its philanthropic capital to meet the immediate needs of a homeless community (e.g. food and clothing, etc.) in Louisville and uses the investment capital to invest in sustainable solutions that help prevent homelessness for families at risk (e.g. affordable housing). 

2.  Jesus’ love compels us to create new ideas and solutions to tackle some of the pressing societal needs.  For example, TriLinc has structured innovative investment vehicles and processes to give retail investors opportunities to make impact investments (impact investing has been and still is largely available to accredited investors only, so democratizing access to quality impact investments has always been a need in this industry).  Under Gloria’s leadership, TriLinc is changing the narrative that only the wealthy has the ability and opportunity to create impact through investments.  TriLinc is just one example – there are many more (e.g. a private equity firm has developed a process to help Christian entrepreneurs integrate their faith into the companies’ operations and culture.  Various Donor Advised Funds are ‘re-imagining’ the role of philanthropic capital to not only support non-profit organizations but also invest in faith-driven social entrepreneurs).  God’s love compels us to innovate and push the boundaries of existing paradigms for the sake of communities in need. 

3.  Lastly, our panel session touched upon the need to grow the faith-driven impact investing ecosystem.  While I am grateful for the opportunity to share about the Christian faith at SOCAP, the Gospel-influenced perspective has been largely missing in the impact investing conversations for the past 15+ years (I fully recognize that BAM and other Christian NGOs have been doing amazing mission-oriented work through micro finance and small businesses for decades.  Still, a majority of Christian investors and organizations have not been actively involved in shaping the impact investing industry). 

Fortunately, this is changing. 

More Christian investors – both individual investors and institutional organizations – are looking to deploy investment capital for financial, social, and spiritual returns.  Very exciting!

I’m excited for two reasons: for one, more capital will flow into sustainable mission-oriented companies that can help share the story of Jesus.  Secondly, Christian investors will have the opportunity to share the “why” behind their impact investing journey with peers in impact investing industry and share about the love of Christ.  

As we come together and prayerfully support the growth of this ecosystem, we will likely need to address some of the questions below (and many more!):

1. What is the definition of faith-driven impact investing?

2. How do we create a culture to embrace a diverse set of opinions and values while focusing on our common faith?

3. How do we maintain the spirit of sacrificial giving while pursuing market-rate financial returns in impact investments?

4. Is it wrong to generate market-rate financial returns through impact investments?  Should such a goal be encouraged or discouraged?  What are the pros and cons of each perspective?

5. How do we balance the need to evaluate and monitor impact while accepting the fact that spiritual impact is hard to measure?

6. What are some of the frameworks and processes that we can use from the impact investing industry to grow the faith-driven investing ecosystem?

While this ecosystem is relatively young, I’m encouraged to see some of my colleagues from forward-thinking organizations come together to collaborate and prayerfully lay the groundwork to help build up this ecosystem. 

The truth of the matter is..there is order of magnitude more capital in investing pool than in philanthropic pool.  Imagine the scale and depth of impact if an increasing share of the investing pool can be directed for good.  This is incredibly exciting.