I am no stranger to the independent RIA universe. In addition to being a former private wealth manager, my professional career has been largely devoted to the intersection of money management and venture finance.
I have worked with dozens of wealth managers and family offices that regularly evaluate and allocate to private venture investments. Although they represent a fraction of the RIA universe, they are invariably among the most successful of their peers. These wealth managers are the primary target audience of this column and the Venture Populist blog.
I regularly advocate that RIAs that possess the requisite mandate, means, and mindset should embrace private venture investments–for the benefit of both their clients’ portfolios and their practices. Yet the majority of independent wealth managers should best leave this sandbox to VCs and angel investors.
Assessing Your Private Venture Readiness
Does your advisory practice possess the rationale and the resources to advise clients in startup, early-stage, and other private venture investments? Your advisory practice may be uniquely qualified, if you consider;
Trait Number 1: You are in the business of wealth preservation and wealth creation. While this may seem like stating the obvious, without question the primary source of family wealth in America is the result of private enterprise and private venture investments characterized by their potential for positive asymmetric outcomes.
Trait Number 2: You embrace Modern Portfolio Theory. Despite its flaws, which I have discussed in this space before and which have become particularly apparent during the past two years, MPT does advocate diversification into non-correlated asset classes. One-off investments in private ventures are distinctly non-correlated to broader asset classes and major market indexes and have exhibited less of a tendency to correlate during negative black swan events.
Trait Number 3: You possess the proper due diligence skills. In addition to those skills, you also need the doubting disposition that is critical in evaluating private investments. The skills that advisors have developed in the course of investment manager evaluation are relevant and applicable to the private equity universe. Moreover, your experiences have taught you to be cynical and skeptical of assumptions regarding future performance.
Trait Number 4: You have already set off on the path of independence. As an independent wealth manager, you have chosen to be an entrepreneur in a highly competitive, relatively low-margin industry. Your personal experiences should render you more prone to recognize the prerequisite personality traits of a successful entrepreneur…de rigueur in the executive team due dilly process. You also recognize the mission-critical elements beyond the strengths of the management team that determine the probability of successful enterprise.
Trait Number 5: You understand finance. As a stock, sector, or industry analyst you know your way around balance sheets, cash flow, valuation issues, and income statements. I am frequently surprised at the number of professional private venture investors that have little understanding of business and finance.
Trait Number 6: You know your responsibilities. You possess both an awareness of regulatory issues and a fiduciary responsibility that is consistent with the best practices of seasoned angel investors and VCs.
Trait Number 7: You are networked. Beyond your own practice, you have access to an expansive network of tools, resources and expertise that are essential to evaluating new technologies, industry sectors, new business models, intellectual property, and other elements of private investment. Your industry colleagues offer incomparable access to the analysts, research, legal and domain expertise that is required in the course of successful private investing.
Trait Number 8: You are in the flow. Most importantly, you have enviable access to the two most important resources of private investment–capital and deal flow. Your HNW clients most likely became HNW clients as a result of their own ventures in private investment. Serial entrepreneurs and HNW investors are an excellent ongoing source of deal flow.
Advisors that affirmatively identify with each of these traits may have the mandate and the means to expose their clients’ portfolios to the asset class that has historically created the vast majority of our nation’s private wealth and can dramatically differentiate your practice from its peers. More advisors should explore asset allocation beyond the lame limitations of highly correlated asset classes, stale style boxes, and pointless pie charts.