It wasn’t all that long ago that around certain private banks and corporate finance houses the phrase ‘dumb money’ could be heard rather frequently. It was sometimes used to refer to wealthy private investors because they were seen as a ‘soft’ source of capital. This perspective was and remains, it should almost go without saying, not merely wrong but actually the opposite of what we have found in our many years of working with such wealthy individuals. Indeed, those seeking investment would be well-advised to consider wealthy private investors to be the ‘smart’ money to target.
Where did the idea of dumb money come from? The thought process usually went something like this:
“Mr/Ms Example became very wealthy in the manufacturing/engineering/property [add or delete as appropriate] industry and now has substantial liquid assets. Now he/she is looking to diversify into energy/technology/life sciences but doesn’t understand the associated risks or financial model we have created. Therefore, let’s charge higher fees and/or sell him/her second rate deals.”
Whilst over the last few years this view is falling out of favour even in the larger and more traditional institutions, you will nevertheless still occasionally overhear it at industry functions and meetings if you listen carefully. It is incredibly important that people in the finance and wealth industries don’t succumb to this entirely incorrect – not to mention immensely condescending – point of view.
For those of us who work with many very wealthy individuals and families, we know that the opposite is almost always true. In addition to hiring experienced deal makers, the HNWI/UHNWI’s themselves are typically very successful businessmen and women in their own right. Many are entrepreneurs who have built large organisations from scratch, sometimes several times over. Therefore, whilst their sector expertise may be focused on one or two areas, their business acumen and entrepreneurial mind-set will be finely tuned and, I would hasten to add, greater than can generally be learned from a career in financial services! Furthermore, these investors will have networks built over time that are based on personal relationships and bring access to a diverse array of potentially valuable contacts.
These traits are particularly useful when considering the needs of a start-up or growth company and when combined with an experienced deal maker from the banking or investment sector it becomes a compelling combination. Indeed many businesses seeking capital should prefer investment from the private sector than traditional private equity funds because of the vast experience and focused support it can bring. This is not to dismiss the significance of the private equity sector, it remains huge in scale and significance, but start-ups should recognise that the private sector is a valuable source of ‘smart money’ – and it is a source that is growing.
The last decade has seen private wealth and the number of HMWI/UHNWI’s steadily grow to 14.7 million people holding $56.4 trillion in 2015 (source: worldwealthreport.com). This has been accompanied by a similar rise in private and family office businesses established within that area of private wealth. In addition, the investment preferences of these individuals and families have moved away from predominantly discretionary managed investment portfolios with a small amount of speculative venture capital direct holdings, towards a more balanced DFM and VC/Private Equity portfolio approach.
This trend is so pronounced that private investors represented by family offices now represent a material and credible source of capital across the globe. Accordingly the sector has attracted top talent to evaluate and structure investment opportunities. This is not only where some of the smartest money is, it’s where an increasingly willing and available source of capital resides, and start-ups should take note.
Whilst this perspective has been emerging for the last few years, we at Boston have known this for a decade as we have always sought to foster close relationships with our clients, helping them develop their businesses and consequently ours too. We regularly hold private functions for clients with similar interests to enable collaboration and growth opportunities that have directly facilitated transactions. It’s an entrepreneurially aware culture that stems from our heritage as a single family office and that permeates every area of our business.