Our firm is experiencing an increasing number of clients who are seeking to fill the role of the bank by funding new investment opportunities in scaling existing businesses and funding entrepreneurial ventures.
Since these clients tend to be family offices, family foundations and entrepreneurs themselves, they’re excited about accelerating and amplifying the efforts of job-creating entrepreneurs in different stages of their business development. This can involve financing part of a new project or providing a loan to help sustain a current venture.
I have one family office client who is very excited about affordable, eco-friendly housing. In order to kick-start the construction of a green building project, the family office invested in the real estate for the proposed development. Investing in this real estate rather than the company itself allows them to reduce the risk that they won’t be able to recoup their capital. Even if building inspectors chose not to approve the project, they still retain rights to the property. On the other hand, if the project is indeed approved and the property does sell, the client will have the opportunity to fund the company with the proceeds from the real estate.
Another client is using a family foundation to do what is sometimes called “mission-based investing.” It involves loaning out capital to an existing, reputable business with sufficient cash flow whose work is effecting positive change in the world. The company in this case produces energy efficient heaters and efficiency improvements in building infrastructure — two things that are popular with landlords looking to reduce utility and energy bills. Because of increased demand for their products the company needs more working capital, which it can’t easily procure from today’s banks.
The client has essentially loaned money to the company. The entrepreneur retains equity, interest and control of the business and the family foundation is able to make a very attractive interest rate return on the loan. In this case, the client also has warrant coverage, which allows them to buy into future equity rounds with the company at a discounted price.
Ultimately, it’s the collaboration between the investor and the investment that generates mutual success. This kind of investing fills the gap that banks are leaving wide open, diversifies clients’ portfolios and, in these cases, generates a positive social and ecological impact linked to financial success.
As advisers, we help source these expansion and entrepreneurial opportunities. Many clients have their own connections, but we also work to connect clients with investor networks where entrepreneurs are present. What’s more, in the absence of the bank, it’s up to the client-adviser team to do the due diligence and make sure investments are sound. As fiduciaries, advisers often take a leadership role in the process, shouldering the responsibility of evaluating the company, the deal and its merits. It’s a more involved process than traditional investing, and clients look to us to be a partner in achieving their objectives of managed risk, attractive return and positive eco and social impact.
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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World, published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois, and serving clients in Idaho, New York and Wisconsin.
NOTE: This is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and does NOT imply any investment recommendations. Past performance is not indicative of future results. All investing risks loss of principal. The author, HIP Investor Inc. and HIP’s clients may invest in the securities mentioned above, including in the HIP Portfolios. Details and full disclosures are at www.HIPinvestor.com
Photography courtesy of HIP Investor, reprinted with article http://blogs.wsj.com/wealth-manager/2012/01/31/voices-paul-herman-on-clients-who-lend/ from Dow Jones & Company.
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