RIAs Need to Offer Private Investments to Stay Relevant

Do you Tap Dance into Work?

Warren Buffett does.

 I don’t.

I haven’t for a while.

But I think that’s about to change.

London … 1998

I spent the late ‘90s and early 2000s in London. It was a good time for me.

I was working in the City as a Derivatives Analyst, creating exotic derivative products for clients I never met with Notional values as long a telephone numbers.

I was still a junior on the team and my role entailed a fair bit of explaining these monsters to the middle and back office. I learned to speak Risk Management Greek and interpret Debits and Credits in Linux and PHP script! It was a good time.

Frankly, I was more interested in sampling everything that London life had to offer. It took very little for me to escape to the continent for a long weekend compliments Ryan Air or EasyJet.

I was newly married … no kids … earning a princely sum for a 25 year old!

I recall a specific afternoon browsing around Camden Town’s eclectic Street Market. I recall this particular day well because it was Sunny. It was never Sunny in London.

The charm of Camden is its canal and locks. Popular in summer, Camden has an old, traditional, manually operated lock that regulates the water levels as waterbuses run westward toward Regent’s Park.

My state of mind was open and I was inquisitive. I loved the cool dusty bookstores in Camden Town - think Hugh Grant and Julia Roberts in Notting Hill. 

I was hungrily devouring the classics:

• Hemingway;
• Dickens;
• Dostoevsky;
• and an economic exegesis called The Great Reckoning by James Dale Davidson & Lord Rees-Mogg.

It was the first time I had heard about deflation and the coming depression.

I thought the world was about to end!

I don’t think I’ve been the same since.

That book left an indelible stain on me. I worry about the markets every day. I’m obsessed with Risk. Two bear markets later and I have yet to feel exuberant enough to tap dance into work.

However, that cloud seems to be lifting and I’ve recently become more optimistic.

Why?

Recognize that today most clients seem pessimistic about the market DESPITE a 200%+ gain in the S&P500 from March 2009.

Combine that with an observation we are in a Tech 2.0 boom – tech everywhere reshaping everything.

And we have the makings of a delicious contrarian setup where this Bull market may yet have a way to go – believe it or not!

Technology is the great disintermediator – the deflator – permeating every facet of our lives.  So great a disrupting force that it is eliminating large swathes of middle men from practically every transaction AND will continue to do so for the remainder of our lifetime.

To demonstrate how radically technology is reshaping Financial Services, here is my own made up timeline:

1. Google went public in August 2004 using a controversial Dutch auction method where the highest bidder received their allotment first – effectively marginalizing the IPO banker whose job it is to place the entire issue at the best possible price – the tactic was actually a disaster for Google at the time but would never have been possible without their tech enabled distribution system.
   
2. It is unlikely the crash of 2008 would have been as severe with no sub-prime securitization. The confluence of cheap debt, easing of lending standards and rising house prices meeting the technological ability to slice, dice and scatter mortgage obligations (MBS, CDOs) across the globe made for an intoxicating cocktail.
   
3. Disintermediating exchanges all together, in 2012, companies like SharePost and SecondMarket dominated the market for trading private shares of Facebook prior to the company’s $16B IPO.
   
4. SEQS or Socially Engineered Quant Strategy – describes a collection of startups that attempt to make sense of financial big data to provide profitable trading signals – arbitraging out the traditional Wall Street analyst.
   
5. Crowdfunding - the JOBS Act of 2012 has opened up the private investment universe to accredited investors like never before. Under Rule 506(c) of Reg D, private companies can now advertise for investors publically. Sites such as AngelList and Crowdfunder are public platforms for private investors and are driven by social networks and social proof.
   
6. Challenging the traditional financial advisor, the rise of the Robo Advisor is now upon us. Providing asset allocation, rebalancing et al. - mostly using Markowitz’s efficient frontier - at a fraction of the cost of traditional wealth managers. Millennials are adopting the Robo in lieu of their father’s traditional advisor. Take a look at Motif Investing for an interesting take on capturing alpha thru thematic investing.
   
7. My future vision – this may have been done already, I don’t know. But if it hasn’t I would like to be the first to try. Using social media, millions of investors could be mobilized to take over a company!
   
   How?
   
   If one million investors would each purchase $100 of stock that’s essentially a $100M block.  A 10% position in a $1B company – certainly large enough to affect some element of change. Possibly under the guise of making that company more environmentally friendly for example.
   In addition, introducing one million potentially new clients to any business should have a positive effect on its economic value!
   SMART IDEA? I think so; let me know what you think.

From clients going Robo and demanding lower fees to every RIA offering a model ETF or mutual fund portfolio, how can wealth managers differentiate themselves today from the Herd?

Consider again that Facebook listed at a $16 billion market cap - who received the value accretion from $0 to $16 billion?

Q: How do You the RIA remain relevant today?

A: You offer your clients access to the Private Markets

RIAs Need to Offer Private Investments to Stay Relevant

As markets everywhere become disintermediated and localized they are becoming more fractured and paradoxically smaller.

FACT: Companies are staying private for longer - Is the IPO Outmoded?

• There are 49 VC backed companies valued at $1 billion or more called Unicorns – there is no need to IPO for higher valuation;
  
• Time and cost of going and staying public – estimated at 6 to 9 months. Per PricewaterhouseCoopers it costs $13m for a company raising $100mm - $200mm – that’s a 7 - 13% cost of capital!
  
• Public Market Scrutiny – Wall Street has a short(er) term focus than many corporate managers; managing for quarterly growth may occur at the expense of longer-dated more profitable projects;
  
• As discussed above private company stock can now be bought and sold using services such as Secondmarket, reducing the need for liquidity that an IPO provides.
  

Wealth Managers are usually tapped into the local market by virtue of their clients. You are ALREADY seeing local deals that may be too small to percolate into larger markets -  That is ALPHA and your clients are demanding it!

Organizations such as ours or PPB Capital Partners (no affiliation) can help you package your offerings in a compliant way.

We have already established that doing nothing in this environment is a losing proposition.

So start offering your clients access to private deals today, otherwise your competition will.

Regards

Greg

Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

Advisory Services offered through Atlanta Capital Group.