Investor Damage & How to Scale in a Volatile Economic Environment [Part 1 of 2]

In this two-part series, we will discuss the volatile economic environment, why it is impacting investor behavior, and how to scale your balance sheet or company during these times. I find that those who do very little private investing or are just on the capital-raising side of things do not have the same perspective, so sharing these ideas here may be helpful.

Of course, there are failed investment funds, failed companies, frauds, and things that don't work out in any economy, but in tough times, they pop up 4-10x as often. The momentum of good markets, cheap debt, and investors allocating left and right covers up a lot of mistakes, little losses, missteps, and re-capitalization is much easier when speed bumps come along.

This week, I learned of another deal that is likely melting down in real-time. This was a $20M fund, and likely, investors will lose all of their capital. Recently a $40M fraud turned themselves in to the FBI, a small global Ponzi scheme involving $5M of raised capital was found out, a large equipment leasing group was miss-managed and likely $10M of raised capital will take a 60% haircut, a publicly traded entity I invested in will not survive, and five car wash and multifamily deals I know are wiped out completely or on the verge of letting their investors know that they are facing a total loss.

As Warren Buffett says - when the tide recedes, you see who was swimming naked, and many times, the swimmers do not have ultra-healthy balance sheets, and it is not pretty. Many times those raising capital act 100% bullish and confident all the way up to the day they close doors and collapse, as if they didn't, they know they would stop being able to raise any capital at all.

Some of this is expected in business and investments; everyone knows there is always a risk when investing. We are just seeing a lot more of it right now, more in the past 18 months than we saw in the last 5 years.

The main point of sharing these thoughts here is that I see those raising capital sometimes wondering why simply a change in interest rates would make investors more cautious, but it is more than that. For some it is the election, for others the war, for others inflation/raising costs in their personal business is lowering their NOI or profit margins this year. For others, the interest rates have a great direct impact on their net worth and their real estate portfolios, and for those with floating rate debt, it can mean large markdowns or loss of capital completely in some investments they put capital to work in. This creates a somber, humbled mood in the investment space for some, where there is a feeling that we should be cautious, a bit more careful. It creates a flight to quality and makes investors prefer those with longer track records, whom they have known personally for longer, or to only allocate to the very best of ideas they encounter, and perhaps in smaller amounts while testing out a new relationship.

To make it harder, interest rates are high, so unless someone is getting 10% income/cash flow, they could just go into treasuries at near 0 risk for 4-5% and change in income.?

This is why it is challenging to raise capital right now - the bar on income investments has gone up, the fear level (valid fear) has gone up, the trust level and your skills/strategies need to go up.?

This shows, in part, how our investor club can be helpful to investors and those raising capital. Through our community - at a single event, you can hear from 125 speakers on stage, meet with peers, hear case studies of deals closed and new investment structure types created, and find helpful partners to help you meet your goals this year.

If you are looking for investors or partners you may need to kiss more frogs, the frogs may start with investing less, you may need great structures to get a deal done, more trust, better due diligence prep.? You either quit and throw in the towel or level up your game and figure out how to get it done, and we are here to level up your abilities, whether you are an investor or someone looking for investors.?

To end on a positive note, billionaire Howard Mark says that it is in these times, when most investors pull back, when most are afraid to take action, that Howard finds his best deals because everything is 20% off. He also says that when an industry, niche, or the whole economy is very toxic, that is when he gets deals of a decade or a lifetime completed. So while others complain or lick their wounds, or even if you are tending to a few of your own, keep in mind the time to be greedy is when others are fearful, and to be cautious when everyone is being bullish.

Part 2 of this newsletter will be out soon. It will suggest actions to take in a volatile market to protect yourself, focus your energy, and scale your balance sheet.

If you want to get more involved with our investor club and you are raising capital, please text me at (305) 333-1155 or see FamilyOffices.com for our upcoming events. If you are an investor, please register with us at https://InvestorClub.com