Case Study: How to Maintain Massive Cash Reserves (Without Missing Out on Opportunities)

Hard cash is an essential asset.?

It might not grow at the rate of your equity or bonds, and a large mound of cash sitting in the bank does come with its opportunity costs, yes. But despite all of that, it is an instantly accessible financial lifeline you never know when you will need.?

It is also one of the best ways to pass on your net worth or family estate to the next generation.

As we saw here, freedom and flexibility are rising higher on the values ladder with every passing generation.

Fixed assets like property and brick-and-mortar businesses do not necessarily provide the next generation with that freedom and flexibility.?

But you’re here for a case, a story, and I will give you one. This case study is Part 2, continuing on from this story about Ehsan here.?

Ehsan and his family have been discussing large-value Life Insurance with us for a while. Today, their situation has changed, and the need to get cover in place isn’t a nice-to-have anymore – it’s essential.?

Case Background ?

In Case File number 20, I shared the story of Ehsan, a second-generation family business owner.?

Ehsan’s family is worth about US$650 million. A few years ago, he was approved for US$60 million of life cover. At the time, he chose to purchase US$6 million worth of Life Insurance, stating that he felt as though he was already leaving his family behind with more than enough. He also had a previous policy in place for about US$25 million.?

Their family fortune came when Ehsan’s father, the patriarch of the family, started investing in some highly lucrative business ventures in the UAE back in 1982. They have always served as stakeholders and advisors to the businesses they invested in rather than being involved operationally in running the business.?

And so, the second generation of the family has been trained to manage money rather than businesses. Ehsan, his brother, and his sister are all formally educated in financial management and family business management and are even qualified mutual fund managers.?

But in the last year or so, the family has chosen to take a different direction with their investments.?

Instead of operating in businesses where they advised, grew the business, and reaped the returns from profitable exits, they chose to invest in a much more hands-on opportunity.?

They decided to invest heavily in an airport development project in a rapidly growing European tourist destination. They took on the opportunity with a business partner and are now in the infrastructure development phase of the project.?

The Challenge

Now, Ehsan and family are well-diversified – they’ve invested in many new and even unfamiliar lines of business before, but what is very different this time is the heavy capital investment required for this project. They will need to pump a lot of cash into this project, and it will be three or four years before they see any returns.?

This significantly changes their liquidity position.?

It’s a bit of a chicken-and-egg situation. For their cash reserves to replenish, they must wait for the airport to be fully built and ready for commercial activity. Even tightly managed timelines on projects of this size tend to stretch. So, let's say we’re talking four years at best, before they start to see returns.??

Solution?

This brings us right back to the solution that Ehsan and his father have been discussing with us for a while: The need to secure liquidity for their family estate.?

But today, the need for this decision isn’t simply for a ‘what if’ safety net.?

Today, this is a case of ensuring that Ehsan and his siblings put more back into the pot than they take out of it.?

Should anything happen to Ehsan, or any other key family members who are driving the business and finances front for the family, they will now need the liquidity from a Life Insurance policy. Investing in an operational business - in any business, for that matter - but specifically one as cash-intensive as the one they have chosen to invest in comes with its risks.?

There is suddenly a need to ‘replace’ the millions of dollars that they are going to pour into this business - a need to reinstate the ample liquidity that the family has always enjoyed.?

How to Free Up Family Money?

A single-premium Life Insurance policy can offset these challenges completely.?

Let’s say Ehsan and his siblings decide to get in place a total of US$ 150 million of life cover. This policy would cost them in the range of US$ 21 million.??

Simply put, Ehsan and his siblings are ‘buying’ the family 150-million-dollar inheritance with US? $21 million paid upfront.?

Not only does this safeguard the family should the worst happen, and a key family member passes away, but it also ‘frees up’ US$150 million minus 21 million? – a whopping 129 million dollars for them to invest in other ventures without drawing from the family’s estate.?

Over the last few years, I’ve seen an increasing number of ultra-high-net-worth entrepreneurs and family businesses use Life Insurance.?

I’ve seen them use it to free up capital from their estate, invest, or put that money to other uses while still keeping the family inheritance intact.?

For Ehsan’s family, this new line of investment into more operational businesses might be the multiplier that takes the family’s net worth to soaring levels – but it is then even more prudent for them to ensure that the right structures are in place to allow them to soar at the lowest possible levels of risk.?

To talk about how you can use Life Insurance to optimize your family estate, drop me a message, and we’ll set up a chat. I can tell you from 25 years of doing this, Life Insurance comes with a finite purchase window. If you can harness its power for your succession plan, ‘now’ is probably a better bet than tomorrow.?