Capturing Unique Wealth Planning Opportunities for Private Equity and Venture Capital Professionals
Alternative investment Partners, Managing Directors, and Principals benefit from great advice on financial planning issues just like successful people in other industries.
While the investment expertise of private equity, venture capital, and other alternative investment managers may overlap with that of their personal financial advisor, that actually makes Alt Managers more likely to recognize the value of a specialized wealth advisor. Investment expertise may also make Alt Managers more likely to choose a high performing advisor that adds more value.
Alt Managers are also prone to extreme demands on their time, making time freed by delegating to a great advisor extremely valuable. The more direct execution an advisor is willing and able to effectively take on, the more valuable they will be to an Alt Manager and their family.
The value of saved time and applied expertise increases even more when considering the additional complexities Alt Managers begin to face at the partner, principal, or MD level. While not an extensive list, below are a few of the unique opportunities that the right advisor can capture for Alt Manager clients and their families:
Unique investment opportunities – Alt Managers may have discounted or free access to their firm’s funds at accessible dollar thresholds. They are also likely to be tied into the investment industry through which they may gain access to funds – some of which might offer compelling evidence of prospective returns. Advisors can help Alt Managers prudently capture these opportunities in the context of their overall financial profile including tax planning, asset location, estate planning, and a tailored asset allocation model that prudently captures the characteristics of these alternative funds.
Capital calls – Alt Managers are more likely to have large commitments to their firm’s funds or other high-quality funds from their professional network. This creates more exposure to the uncertain timing of capital calls. The funding source of capital calls should depend on the individual’s balance sheet, risk definitions, risk tolerance, tax planning, cash drag and financing alternatives.
Financing – access to capital call financing programs through their firms offer unique risk and reward opportunities for Alt Managers. With regard to tax planning, their total balance sheet can also direct more borrowing towards investment financing to avoid caps and gaps in deductibility of primary mortgages and other potential borrowing. Mix of floating vs fixed, asset liability matching, and of course relative cost may also come into play.
Carry – carried interest payouts may create opportunities in areas like tax planning, estate planning and other surprising implications. For example, if total payouts are certain to exceed a meaningful level then a Manager may have less need for life and disability insurance.
Concentrations – Managers are often both investors and carried interest holders in their own funds. Those funds may concentrate holdings in one industry executing on a few hypotheses. Funds, especially venture funds often have just a few big winners. All of these risk concentrating factors have implications on long term financial planning projections and total portfolio investment management.
Estate Planning – the potential for explosive growth in net worth creates opportunity for long term estate planning to protect assets and minimize taxes across generation. For controlling partners, carried interest may present an especially attractive long term opportunity.
Investment compliance management – while it’s not the sexiest opportunity, Alt Managers often want to avoid potential pitfalls in investment compliance and optics by delegating decisions to an advisor. This might involve monitoring restricted lists or having the Advisor qualify as discretionary investment manager – depending on the Manager’s preferences and her firm’s policies.
Private equity, venture capital, and other alternative investment professionals face many unique personal wealth opportunities with little time to take full advantage these large planning opportunities. The right wealth advisor can add value across these complex balance sheets through prudent planning and management at the highest level of service.