Equity Crowdfunding (ECF) & Your Personal Investment Strategy [Part 2]

We have recently started our equity crowdfunding campaign. https://equity.pitchin.my/businesses/nicholas-actuarial-solutions

In this one week, this has attracted a lot of momentum and also many questions. Some of these questions relate to the potential investors' personal investment strategy. As a professional actuary, I do not provide personal investment advice, neither am I in a good position to provide unbiased advice, given my main intention is to successfully close the crowdfunding campaign. Nonetheless, I can try to assist with this short article, applying what I have learnt in the actuarial examinations that led to the award of the Certificate in Finance and Investment from the Institute and Faculty of Actuaries.

The previous article got us started with the concept of risk and wealth accumulation objectives. This article I shall cover wealth distribution and cash flow requirements.

Wealth Distribution vs Wealth Accumulation

During your wealth accumulation phase, the focus is to build maximum wealth. However, during the wealth distribution phase, the focus is for investments to generate income. There is normally a need for cash flow income.

Let's say a person with $10,000 is faced with two investments:

Investment A provides a dividend of 10% p.a. over 5 years and no capital growth (i.e. it pays $1,000 every year and at the end of 5 years the value of the investment remains at $10,000).

Investment B provides no dividend but a capital growth of 30% p.a. but no dividend (i.e. it pays nothing every year and at the end of 5 years the value of the investment becomes $37,129).

If it is immediately concluded that Investment A more suitable than Investment B in the wealth distribution phase then the concept of wealth distribution phase is misunderstood.

People in wealth distribution phase typically requires cash flow income from their investment. However, it does not necessarily mean that an investment with regular cash flow is preferred to an investment with only capital gains. One needs to consider:

• how much regular cash flow is needed?
• are there any potential one-off cash flow outgo?
• what other sources of income are available?

In this example above, if the investor needs a cash flow of $1,000 per year and has no other sources of income, then Investment A is preferred. If the investor has other sources of income that can deliver this cash flow need, the clearly Investment B is preferred due to the higher expected returns.

What if the investor has a cash flow need of $2,000 next year? Simple. Invest $8,000 in Investment B and keep the rest of the cash for your cash flow needs.

Real-Life Example

As an example, one of my potential investors enquired about how much he should invest in my company. He asked if he should invest more?

I replied that I am unable to answer this question because I do not know his personal circumstances. I do not know his cash flow needs. I do not know if he is in wealth accumulation phase or wealth distribution phase (one cannot assume that someone in the mid-30s is in the wealth accumulation phase, sophisticated investors have already made their fortune and can retire early). Even if someone is in the wealth accumulation phase they may be faced with potential one-off unexpected cash flow outgo.

Equity crowdfunding provides high upside, however, the nature of private equity is that it is less liquid than equities listed on a stock exchange. It is a long term investment. When investing in equity crowdfunding, one must understand that the nature of the investment is one of long-term growth and not short-term dividend/regular income. Growth stocks by nature do not provide high dividends.

Nonetheless, our equity crowdfunding campaign provides investors with a plethora of options:

1. Our company may be sold in entirety to another bigger company.

2. Our company shall be listed on alternative exchanges (some may ask when, but I shall not provide a definitive answer. Certainly within 3 years we should have the ability to do so, but we must do it in a manner and timing that benefits our investors)

3. Sell equities on pitchIN secondary market (coming soon next year)

4. Sell to other investors

5. After the growth phase, our company shall become stable and can start to pay dividends.

As an investor, the decision may be made in parts to achieve different cash flow needs, for example:

• how much to invest initially (this is a very important decision, because it is not often that you will come across private equity with high growth potential)
• how much to divest in every stage
• how to balance your cash flow needs and your investment portfolio

I hope this is a short succinct example to illustrate personal investment strategy in terms of cash flow and wealth distribution. Visit us at https://equity.pitchin.my/businesses/nicholas-actuarial-solutions