188. Opportunity Zones — A Fit for VC? (Steve Glickman)

188. Opportunity Zones --- A Fit for VC? (Steve Glickman)
Nick Moran Angel List

Steve Glickman of Develop Advisors joins Nick to discuss Opportunity Zones — A Fit for VC?. In this episode, we cover:

  • Quick overview of your background prior to Develop Advisors?
  • Walk us through the origin story of EIG?
  • You are also the founder & CEO of Develop Advisors – tell us more about the work you do with fund managers.
  • Let’s talk about OZ’s — and we’ll start with the basics — Give us an overview of the $6T OZ program.
  • Incentives aside from tax benefits?
  • Which asset classes are best suited to invest in OZs?
  • How is an Opportunity Zone defined? What credentials make a community an OZ?
  • As governors change — are these OZs going to change with different administrations?
  • Is the expectation that entrepreneurs will actually relocate to these areas for the HQ of their business? It seems like that is a bit of a stretch.
  • Are there statistics on the number and amount of private capital funds that have been raised with a mandate to invest in OZs?
  • In your estimation, what are some risks factors and/or potential unintended consequences that we should be mindful of?
  • Part of my hesitation around this topic and why I’ve waited to cover it until I could get you specifically on the program, is because with any new gov’t incentive program or over-hyped area in general (like we saw with crypto last year), it attracts a lot of “opportunists” or even “charlatans” looking to capitalize on something that’s new and not well understood. How do we avoid and discourage “bad actors” from taking advantage of either LPs or Entrepreneurs?
  • One of the services that Develop Advisor’s provides is the OZI or Opportunity Zone Index. What is this attempting to measure?
  • What do you say to the pundits that claim the majority of the benefits will accrue to the financial services investors and not to the distressed communities?

Guest Links:

Key Takeaways:

  1. The Qualified Opportunity Zone “OZ” Program was architected by the Economic Innovation Group (EIG) and passed by Congress in the Tax Cuts and Jobs Act of 2017
  2. The program’s origin began with discussions between Steve and Shawn Parker (Napster, Facebook) about how to incentivize investment in America’s distressed communities.
  3. Steve is the founder and CEO of Develop—the first independent full-service advisory firm for OZ Funds and co-founder of the Economic Innovation Group (EIG)—the group who architected the OZ program.
  4. The $6 trillion OZ Program is the largest community incentive program in U.S History.  It provides a federal subsidy on capital gains to equity investments of 10+ years in opportunity zones.
  5. The incentive includes a deferral of capital gains tax, a discount on the tax at certain time marks (5 years and 7 years), and a complete capital gains tax exemption after a 10 year holding period.  It is the only part of the tax code which entirely forgives capital gains on a given investment.
  6. Real estate has been the driver of investments, but investment types have grown to include energy and infrastructure, advanced manufacturing, venture capital, life sciences, and education.
  7. Investments must come through Opportunity Funds—special vehicles of which 90% of investments are in OZ’s.
  8. 12% of the United States is classified as an opportunity zone, from Detroit to parts of Atlanta and Brooklyn.  Governors have discretion to select 1/4th of “low income communities” in their state to designate as OZ’s.  These regions are defined by having a median income at 80% of the state’s median annual income or having a poverty rate of > 20%.
  9. Current opportunity zones will stay in place until 2028, when new zones will be selected based on updated data (if the program is successful).
  10. OZ’s are risky investment areas in already risky alternative asset classes; the subsidy is a reflection of that.  With this increased risk, they project to drive higher than median returns in the target asset classes.
  11. The OZI (Opportunity Zone Index) is a tool created by Develop Advisors to support data-based investment decisions and avoid subjectivity.
  12. The legislation was structured in order to align incentives of private investors and the distressed communities in which they will invest.  OZ’s long term time horizon aims to align these interests.