Private equity firms, strategic corporates, and search funds and pledge funds make the short list of potential buyers of private businesses. High net worth individuals (HNWIs) belong on the list too.
HNWIs are defined as a persons having over $1m of investable assets, and they are most likely retired executives, doctors, lawyers, bankers, young entrepreneurs, or inheritors, have little to no personal debt, own their homes, and typically enlist financial advisors and estate planners to manage their wealth. Stereotypically you can find them at country clubs, charity dinners, race tracks, and upscale resorts, but more likely right next door. There are an estimated 38 million people who fit the description throughout the world, three million of whom live in the United States, and of that three million about 500,000 are considered ultra high net worth individuals (UHNWIs), having accumulated more than $30 million in total assets.
Naturally the overwhelming majority of HNWIs are sophisticated, confident, financially astute and entrepreneurially wired. Though they rely on financial advisors to manage some of their money, by no means is passive investment the only option they consider. With such a cloudy and uncertain economic picture for the domestic economy, resultant skittish public markets, and the exposition that ever-upward home prices was a delusion that fueled a credit bubble still deflating from which we will remain deleveraging indefinitely, it is feasible that we witness the evolution of traditional asset allocation among HNWIs from passively investing with managers to actively buying businesses. If the traditional portfolio model of 60/40 stocks/bonds (of the publicly-traded variety) is now in question or not enough, why couldn’t we see capital spread from a leaking valve to new frontiers like private markets? As one financial advisor managing $400m and many HNWI clients said to me, “Why wouldn’t it be palatable (for HNWI to invest in private businesses)? It’s a bet on entrepreneuralism. A lot of these guys are entrepreneurs themselves and respect other entrepreneurs, and know firsthand what it’s like to be a private business owner. I can’t imagine that it wouldn’t be a viable way to invest.”
A HNWI told us last week that he was very worried about the economy and that he has all his money in “cash, gold, and Apple Computers,” the ultimate safety portfolio, a testament to a the possible necessity of capital flows into nontraditional asset classes like private markets.
[The traditional play in the face of uncertainty has been to invest in gold. A debate about whether the end of Bretton Woods and the ensuing time period dominated by fiat money is just an aberration in history that will revert back to the mean of a gold standard is beside the point. At the end of the day gold is an unproductive asset. HNWI’s are deservedly confident. What better exercise of this than to buy and run a company that you can control rather than be at the whim of the market’s zero-sum game?]
Why wouldn’t it be palatable?
donny lucarelli has letters of credit everywhere, knows firsthand what it is like to be a private business owner, would want to
“Why wouldn’t it?” Basically a bet on entrepreurialism, can’t imagine that it would not be a viable way to invest your money.
Great way to invest in businesses besides restaurants and nightclubs.. looking for vending machines and billboard companies.. often have gained expertise in a certain area and can apply it to others.. all you need is a million dollars to be a venture capitalist per se, but without the risk involved in VC that hinges on mass appreciation of a technology or an asset.. instead you are just buying cash flows in a real, stable, proven business.. AxM put him in front of people, as how else would anyone know who he is… also runs a private equity arm of a large hedge fund