Most big money was created through equity, which means there’s a centuries-old relationship between entrepreneurism, ownership, and wealth. These associations have evolved with time but still remain largely in place as more private wealth is created through the formation of start-ups, aided by the buoyancy of the private capital markets. Understanding and supporting these dynamics can be an important key to developing relationships with the truly rich.
One of the most telling and significant findings to come from a large-scale luxury research project with private jet owners, a group of people with annual incomes of almost $10 million and fortunes of nearly ten times that amount, was that more than three-quarters of them attributed their wealth to equity. That is, owning something (say a company, an idea, or a product) that either produces income or can be sold to another entity in a private or public transaction to generate proceeds, and is often a critical mechanism in amassing substantial wealth
Private operating companies take many forms, but often much of the owner’s personal wealth is intertwined with the company for as long as he or she retains control (and sometimes for many years after). As such, the wealth is not in the form of cash but rather in the form of the company and its assets. “A lot of private wealth is illiquid and concentrated and, depending on the exact nature of the situation, may also be uninsurable, unhedgeable and unregulated,” explains Hannah Shaw Grove, senior vice president at iCapital Network and co-author of Maximizing Personal Wealth: An Advanced Planning Primer for Successful Business Owners. “Generally speaking, business owners and entrepreneurs have a high comfort level with this form of ownership, risk and illiquidity.”
This mindset makes them potentially good candidates for other forms of private ownership and investment – and entirely different from the average investment advisor or wealth manager. The vast majority of today’s advisory professionals have built their businesses, and thus their client relationships, amid strong economic conditions and financial markets. As a result, their investment capabilities are dominated by public equities and fixed income and they position themselves and their services accordingly.
While logical, this approach can be self-defeating for a financial advisor who wants to attract wealthier clients and successful business owners to his or her practice. Affluent families want a curated suite of services and investments that cater to their specific needs, strengths and interests, and this includes providing them with access to select deals and opportunities that they cannot source on their own and may be closer in spirit to the way their wealth was originally created.
Private investments are strictly for sophisticated investors. Even among the universe of qualified purchasers some of the characteristics such as long lock-up periods and high investment thresholds may be deemed unsuitable. But for those who desire it, very little can match the exclusivity and return potential of a high-quality private investment opportunity.
The research shows that around two-thirds of ultra-wealthy individuals are investing in private funds and direct deals at any given time. Strong, long-term performance vis-a-vis other asset classes is the single biggest driver, but the exclusive nature of these offerings should not be overlooked as a key selling point. “Access and deal flow are critical differentiators for financial advisors right now,” says Grove. “If they can’t deliver what their wealthy clients are looking for, someone else will.”
Article originally posted on Forbes written by Russ Alan Prince