Thought Leadership / Commentary / Direct Investing for Family Offices Part 2: Opportunities & Risks in Today’s Market
Posted by Mirador
Factoring Economic Headwinds Into Your Direct Investing Strategy
If economic conditions weaken during the next 18 months…
How will your direct investment portfolio respond?
• Will your operating companies and real estate holdings stagnate or grow?
• Will your thesis, search criteria and deal flow sources properly consider the opportunities and risks?
Perspective: The Canary in the Coal Mine
How well-run, well-capitalized and recession proof is your direct investment portfolio and stategy? Are you prepared for neutral-to-negative economic conditions?
Interest Rates: (higher) tight monetary policy could negatively impact profitability and cashflow.
Inflation: (higher) increased labor/material costs and limited pricing power vs. historical levels.
Sentiment: (subdued) lower business and consumer measures vs. historic norms could slow spending.
Liquidity: (restricted) inability to access capital could become prohibitive and extend holding periods.
Fiscal policy: (uncertain) potential tax policy and regulatory changes from recent election cycle.
As a long-term strategic investor in operating businesses and real estate, an economic slowdown creates a unique opportunity for you to collaborate and problem-solve with your portfolio companies, management teams and deal sources.
Identifying and analyzing specific factors that positively or negatively impact your existing and potential debt and/or equity investments in venture capital, established operating businesses and real estate (commercial, industrial, retail and residential properties) will ensure you have a proactive plan and be positioned to create long-term value for your family.
Ways to Protect Direct Investment Capital During an Economic Slowdown
As a steward of family capital (investor) and/or fiduciary (board member) of a direct investment portfolio, here are five areas on which to focus to help you meet your direct investment goals.
1. Transparency
Do you have a dashboard that tracks key performance indicators?
• Revenue & profitability projections
• Debt load, maturities and covenants
• Management compensation
• Operational/employee risks & opportunities
• Corporate development initiatives
• Customer and tenant (real estate) health
2. Alignment
Are the proper incentives in place to ensure stakeholders are aligned?
• Are the milestones used to compensate management still applicable?
• What conflicts of interest exist or will exist during an economic slowdown?
• Do investment terms or rights warrant review and/or change?
3. Management
Does leadership have the experience needed to anticipate and address trouble?
• Do your management teams have what it takes to get through a recession?
• Have they done it before? What’s their record?
• Have they communicated their updated plan?
4. Cash
Does each business have a cash reserve on-hand to weather the storm?
• Do you have a clear picture of how the sources, uses and cost of capital are changing?
• What contingency plans are in place to access capital from banks, investors or other sources?
• Are weekly, monthly and quarterly cash flow reports used by management?
5. Action
Does management and the board have a bias toward action?
• Whether you have a vote, you always have a voice as an investor.
• Consistently communicate positive (and negative) news with family members, where applicable.
• If you do not have the expertise on-hand to address specific issues, act and engage.
A New Approach – Optimize Your Direct Investing Program
To harness a family’s unique characteristics and optimize its direct investing approach we created the V3 5-Part Direct Investment Program Framework. An integrated approach that includes the important steps of the traditional private investing lifecycle through the lenses of a family office.
This is Part 2 of a 3-Part series. Watch this space for Part 3 – Direct Investing for Family Offices – Optimizing Across Generations.
Our Road Map Service includes a simple set of interviews and direct investment portfolio analyses. At the completion of what is approximately a 45-day process you receive a customized Road Map Report which identifies opportunities for you to implement 20 key actions to strengthen your Direct Investment Program.
Schedule a call with an expert to start creating your Direct Investment Program Road Map.
Contact us at either investments@v3-limited.com or info@mirador.com.
