In a video interview about the column, Jeff Goldberg, the article’s author, describes garden-variety vendors of investment advice as, “…these Jiffy Lube kind of places. They’ll take your money. They’ll invest it in the same things that everybody else is being invested in.”
Is that a cruel but fair commentary? It is if advisors keep doing what they have been doing yet (insanely) hope for different results…and good luck securing new clients amidst the new prevailing wisdom. Face it, with the exception of advisors that embraced alternative asset classes and/or market timing, the vast majority of advisors portfolios were marked to market in the selloff and their clients have likely lost a generation of investment opportunity that may never be made up.
In prior posts we have posited and proofed the problem;
- Stocks are not worth their risk premia and bonds look downright scary.
- MPT, B&H and traditional asset allocation models have been completely discredited
- Diversification is not easily achieved because in crisis all correlations go to one.
But we also spoke to the solution;
- The vast majority of private wealth in America is the result of participation or investment in private venture….such as business start-ups, venture capital and private equity.
- The HNW investor understands and appreciates the wealth-creating potential of private venture investing (PVI)…in many cases that is how they became wealthy.
Advisors could materially improve their value proposition, their competitiveness and their client’s portfolios by developing PVI competency and integrating the asset class into their practices.
Why I Hired My Advisor
I know too well that this message will be lost on 80% of advisors who view private investments (in start-up or existing businesses, private equity or venture capital) as a new problem, rather than a solution. That’s probably the way it should be as it is likely that only 20% of IAs possess the capacity and the client-base that could support and embrace the asset class.
But every advisor benefits from a discussion that introspectively considers the true value proposition that they provide to their investment client. Invariably, portfolio performance (relative to client objectives) will always be a factor that advisory clients consider when they evaluate their advisors. Advisors should be open to asset classes that have a proven history of being non-correlated to equity markets and providing exceptional relative and absolute returns over intermediate-term market cycles.
The performance of the private investment category is indisputably compelling and speaks for itself. The most recent Thomson Reuters US Private Equity Performance Index data released through 2008 show the “All Venture” category (which includes data from early/seed, and later-stage VC funds) returned 17% over the last 20 years against the 6.1% return of the S&P. Over return periods less than 20 years the performance relative to equity indices has been even more compelling.
Venture Populist seeks to assist advisors (and investors) by advocating the integration of private venture investing into more investor relationships and portfolios and providing a forum and resource for like-minded professionals and investors.
Advisors that allocate to private venture investments claim that they differentiate their practice (from their advisor peers that are pursuing the same HNW clients) and strengthen their advisor-client relationships by increasing the quantity and quality of the advisor-client dialogue.
Private wealth and family office portfolio managers consistently maintain that the majority of their client dialogue (at the portfolio level) is spent discussing private investments. Have you ever noticed your reflection in the glazed pupils of investor’s faces when you discuss Modern Portfolio Theory or the Efficient Market Hypothesis? That’s a monologue. Discussing the prospects of a private investment in a start-up, emerging or established business…with a HNW investor who made his money in business…and you have dialogue. Business people enjoy talking about business. That provides the advisor with an excellent opportunity to engage clients on a different level than advisor-client, vendor-customer, or salesmen-prospect. Rather, as two professionals contemplating a joint business transaction.
In subsequent posts I will speak to additional ways that an advisor’s practice is positively impacted through PVI including;
- Better client retention rates,
- The development of a collaborative client “community” within the practice,
- Incentivizes for clients to refer new clients to the practice, and most importantly,
- The increased potential for improved portfolio performance,
…while radically differentiating his practice from his peers and invigorating the value proposition to the client.
Album: Private Practice, Dr. Feelgood, 1978
Popularity: 37% [?]
Haven’t the likes of Madoff, Petters and dozens of others stifled investor confidence, not only in PE investments but more so in their advisors? How do you profess to regain trust sufficient to promote higher risk vehicles? Add to the lack of trust a heavy dose of economy shock and you might very well have a recipe for PE failure altogether.
You’d hope that after being diagnosed with cancer, a survivor would deepen his appreciation for his own life and seek new ways to embrace his surroundings. So too mush the PE “community” begin anew by embracing concepts of trust, transparency, and accountability. In the handful of offerings I’ve seen lately, it mostly appears to be business as usual. If investor confidence were not enough to drive a change in course, you would at least think that the demand for sustainability, the threat of regulation, the cry for accountability and transparency would drive a change to the tired business plan.
I think that the economy (and the likes of Madoff, Petters and many others, as well) has given PE an opportunity to be the new market leader. As a good friend once said, the last thing we need is more regulation and management of innovation and business by the government. Well PE needs to show investors, the government, NGOs and many others that true value, innovation, sustainability and accountability can be developed through private venture investments. In the end, not only will the advisors regain trust and re-kindle the flow of money, but we will begin to realize improved portfolio performance as well.
Thank you for the thoughtful post. I certainly agree that (generally speaking) investor confidence in advisors has eroded. That has been the subject of a number of the VP posts. It would also follow reasoning that investors are subsequently more aware of higher risk opportunities such as private venture investment. As stated in the most recent post (Modern Portfolio Fallacy), “venture implies risk-taking… they are nearly synonymous. A venture investor is knowingly acknowledging and accepting an implicit and quantifiable serving of risk that is decidedly less than a range of positive (asymmetric return) outcomes”. Most investors that saw 25-50% of their portfolios vanish, did not think such an occurance was a possibility and much of that blame lies with the financial services industry and advisor respresentations that portfolio risks are mitigated through faulty models such as MPT.
Venture Populist has spent most of its blogging space thus far making the case for a new paradigm for asset allocation (by challenging the traditional methods). What we have not done (yet) is define a new paradigm and what we really mean by “private venture investment” (PVI).
When VP speaks of PVI we are primarily referring to (and advocating) direct investment in private ventures. According to the Kaufman Foundation, about 495,000 new businesses were started each month between 1996 and 2007…and no material decline in entrepreneurial activity is expected during this recession.
This type of direct private venture investment requires effective due diligence upon the part of advisors, but the responsibility of success or failure lies with the entrepreneur, unlike the hedge fund frauds that you referenced where middleman machinations can defraud unwitting investors.
As to your remaining comments, I could not agree more. Entrepreneurs have a responsibility to design their new ventures in a responsible manner that embraces accountability, transparency and sustainability…anything short of that is not only a missed opportunity, but simply bad business.
Thanks again for your comments.
Your comments regarding the majority of investment advisors rings true.
There are a few of us who believe in alternative investments such as real estate, operating businesses, private notes/financing of business and even venture capital.
One option for investors to consider is using a “self-directed IRA” along with an LLC to invest in the start-up or growth of a venture.
Most investment advisors won’t go near this because they have no vested interest in the venture and don’t know how to get paid from it.
This is something that a true “advisor” can help with the education of the option and even possibly with the due diligence.
And business owners or those who have made their wealth through operating a business or owning real estate will certainly understand the benefits of investing in such things.
Heck, an investor can achieve the diversification we speak about not simply by buying GM, BA or ATT but by buying into a variety of businesses or real estate that are geographically diverse.
I disagree with Neal that Madoff has stifled investor confidence in private equity. It certainly has affected confidence in advisors though.
What it has done is force investors to actually perform due diligence and require transparency in deals. Surprise, surprise that this is actually a good idea! As Dale Swensen, CIO of Yale says, “No sensible investor manages private assets passively.” Investors and their advisors were passively managing assets and not asking the right questions. This happens in every boom cycle – the only question that matters is “What’s my return going to be?!”
When the focus moves to why this is a good deal and who else is involved, bad deals don’t get funded. And the best deals attract capital even in tough markets.
Here at Trinity Private Equity Group, we have been delivering presentations across the nation on where private equity fits in an investors portfolio – and how it drives value. What Venture Populist points out and most investors have never learned is how private equity and venture deals drive value. Those that get it, don’t have Madoff-syndrome because they are more actively engaged.
I’ve been a blind follower of MPT for years and have drunk the kool aid from my firm that buy and hold is the ONLY way to be an investor. It has been a tremendous conceptual hurdle for me to even contemplate that there’s a better way to invest, and that just maybe ‘going long’ 100% of the time isn’t the magic elixir for every client.
[...] private venture investments–for the benefit of their client’s portfolios, as well as, their practices. Yet, the majority of independent wealth managers should best leave this sandbox to VCs and angel [...]