Chase Fund Targets Minority Telecoms –

Chase Capital Partners this month announced the formation of a $500 million private equity fund that will invest in minority- and women-owned communications companies.

The fund’s focus signals that private equity professionals increasingly are focusing on minority- and female-owned communications companies-a trend that is being spurred on by communications industry professionals and the federal government.

The formation of Chase Capital’s as yet unnamed minority investment fund comes amid increasing concern from politicians that mergers between the big-name players in the communications industry are leaving the smaller, independently owned companies with fewer choices for the future of their businesses. Indeed, the efforts of Chase Capital and others have the support of the Federal Communications Commission and are in anticipation of the passing of a bill introduced in the U.S. Senate last month which seeks to increase minority participation in the communications industry.

To be sure, funds and transactions with broad minority market focus have been on the private equity landscape for some time. However, recently three entities besides the Chase vehicle, have targeted the communications industry as ripe for diverified ownership. These include 21st Century, a fund that targets communications companies with minority executives, TSG Capital, part of its $515 million Fund III will invest in telecommunications companies, and dba Communications, LLC, a platform company formed by three larger private equity groups to back group of Latino executives in a telecommunications acquisition.

Diversity at Chase

Chase quietly launched its effort in June, and so far has secured commitments totaling approximately $175 million but has yet to announce an official first close or a final target. The fund will likely hold a first close at $300 million and likely will set a $400 million to $500 million cap, said Reginald Hollinger, a managing partner at Chase Capital who is overseeing the fund while the bank holding company looks to add more investment professionals to manage it.

He said the $175 million in commitments, which came strictly from communications companies, anchor the fund and will carry it through its first investments, which Chase Capital will begin making before an official first close.

Hollinger said the fund will invest in both start-ups and established companies, as long as their management consists of minorities or women.

Chase Capital does not take sole credit for the new initiative. Hollinger said the idea came from leaders in the industry after a group of them met last year with the National Association of Broadcasters in order to brainstorm about ways to increase minority ownership in their industry. The result: they took their idea to Chase Capital, which agreed to manage a direct investment fund.

Some of the leaders behind the idea for this fund-who are also backing it with their own money-include Mel Karmazin, chief executive of CBS Corp., and Lowry Mays, head of Clear Channel Communications. The two have received some criticism in the press because their respective companies currently are in the midst of significant mergers with other companies, prompting some analysts to wonder whether good intentions and support for diversified communications ownership are really meant to sway regulators into approving the mergers.

CBS is awaiting approval for a proposed $36 billion merger with Viacom Inc., while Clear Channel is waiting for the go-ahead to buy Dallas-based AMFM Inc., for approximately $16.6 billion. San Antonio-based Clear Channel is the U.S.’s largest radio empire.

Support from Washington

Supporting minority-owned businesses is very much en vogue in Washington, D.C., Hollinger said, as government leaders recognize that private sector initiatives can foster diversity in the communications industry.

In a statement, William Kennard, chairman of the FCC, said the Prism Communications fund is an important step in helping minorities and women who would like to own or manage radio and television stations, giving them the opportunity to “participate more fully in the nation’s most important forms of media.”

Another group in Washington is proposing changes that would further benefit minorities and women in the communications industry, as well as small communications business owners in general. Senator John McCain, a Republican from Arizona who is also campaigning for the Republican nomination for president, and Senator Conrad Burns, a Republican from Montana, last month introduced a bill to the senate that, if approved, will seek to broaden ownership opportunities through market-based incentives. The Telecommunications Ownership Diversity Act of 1999 is intended to give established telecom industry players economic incentives to make deals with new entrants and small businesses through a change in the tax law.

The act proposes changes that, if approved, would give telecommunications business owners a tax deferral that would become available under two circumstances, according to a statement issued by the Senate.

Under one circumstance, the tax deferral would become available if the owner sells the telecommunications business to an eligible small-business purchaser, based on net worth and gross revenue of the smaller company, and then reinvests the proceeds in another telecommunications business; and, second, if the owner sells a telecommunications business to any purchaser, but reinvests the sale’s proceeds in an eligible small business, said a spokesperson at the Senate Committee on Commerce, Science, and Transportation.

Government initiatives, such as the Ownership Diversity Act, are already having an effect on the industry.

Qualifying measurements to determine eligible small businesses will be recommended by the secretary of commerce and established by the secretary of treasury upon approval of the act by the senate, the spokesperson said.

Government initiatives such as the Ownership Diversity Act are already having an effect on the communications industry, and on the investment strategies of private equity groups.

Lyle Banks, president and chief executive of Banks Broadcasting, a company which was established and funded earlier this year by private equity fund 21st Century, said legislation such as McCain and Burns’ proposed bill is critical in an effort to level the playing field for entrants into the communications industry. The push from the private sector better secures a much-deserved place for African Americans, Latinos and women in leadership positions in communications, he said.

Banks said he owes the establishment of his company to 21st Century, a $175 million private equity fund which was launched last year by Hicks, Muse, Tate & Furst Inc., and LIN Television, which was acquired by Hicks Muse in 1997 (BUYOUTS Aug. 30, p. 6). 21st Century is managed by former Dallas City Manager John Ware and focuses on acquisitions and investments in companies that are either minority owned or operated, companies that sell to minorities or have significant operations in urban areas.

Ware said he anticipates doing more communications investments in the future since more opportunities are likely to become available for small business owners such as Lyle Banks.

TSG Capital, located in Stamford, Conn., invests in companies serving fast-growing, under-served markets, said Darryl Thompson, a partner at the firm. Thompson said his firm focuses less on managers of companies, differentiating it from the 21st Century fund, and concentrates more on demographic trends and minority consumers’ needs.

TSG Looks Afield

The firm this summer made an investment in Pointe Communications Corp., a provider of telecommunications and network services to businesses and residential customers in Hispanic population centers in the U.S. and South America. TSG earlier this year invested in Vista Media Group, a billboard operator that serves African American and Hispanic populations in New York and Los Angeles. Last year, the firm invested in Z-Spanish Media, a Spanish-language radio network.

Also realizing the potential of communications companies who provide services to the growing Hispanic population, three buyout groups in September joined forces to acquire approximately $1.2 billion of GTE Corp.’s rural telecommunications properties in New Mexico and Texas (BUYOUTS Sept. 13, p. 11). GTE had specified its desire to sell properties to ethnic minority-controlled groups. Welsh, Carson, Anderson & Stowe, Vestar Capital Partners and Citicorp Venture Capital all were backing different sets of Hispanic-American executives and competing for the properties, but the groups decided to join forces and form dba Communications instead.

The 12 Hispanic-American executives involved in the deal will own approximately 12% of dba Communications instead.