Long-Term Investing In Innovation: Beyond Private Equity

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The author of this article shouts out the case for an active holding company (AHC) as an attractive alternative to private equity or long-term business investments.


Family offices and other investors which are able to take a
long view have been big investors in private equity for many
years. This is regularly reported here. A question which arises
is whether the conventional private equity fund remains the best
route for executing such investments. There are always
challengers and innovators. To address this idea
is Christophe Reech, founder of Reech
Corporations Group
. He explores the extent of the
opportunity, what it means to be a long-term investor in
disruptive growth, and the relative benefits of an active holding
company (“AHC”) model compared with conventional private
equity.


The editors are pleased to share these views; we invite
readers to enter the conversation. Email tom.burroughes@wealthbriefing.com
and jackie.bennion@clearviewpublishing.com.
The usual editorial disclaimers apply when it comes to guest
contributors. 


The powerful forces of technology and innovation are reshaping
society. New operating models are emerging, consumer behaviours
are evolving, and disruptive market entrants are seizing the
opportunities created by a changing set of business and societal
needs. 


COVID-19 has accelerated these drivers, but when it comes to
advances in areas such as artificial intelligence, quantum
computing and the internet of things, we are only in the
foothills of unlocking the potential to not just build the next
generation of market leaders, but to reimagine entire
sectors. 


Take retail for example. Despite a global pandemic and the impact
of national lockdowns, e-commerce represented just 18 per
cent in aggregate of total global retail sales last year.
Sectors such as real estate and financial services remain largely
characterised by manual processes and legacy technology
infrastructure, and there are many years of structural change
ahead.


This backdrop raises an important question. How can investors
effectively harness the power of transformational change given
the wide and long innovation runway? 


For sovereign wealth communities and family offices, private
equity is a well-trodden path – but the reality is, it often jars
with a long-term investor perspective. While there are many
smart, well-connected PE managers playing in the disruptive
growth space, there are other investment structures which combine
a long-term investment horizon with the ability to be agile and
responsive to both opportunities and challenges as they arise.
One of these is the Active Holding Company. 


Investing for the long term in order to harness the power
of transformational change 


It’s one thing to dive in with short-term realisation; riding the
wave to capture the latest innovative trend. It is quite another
to gear investment decisions towards long-term operating success,
helping to create businesses and solutions that will be truly
game-changing – and benefiting from the dividends.  


An AHC structure is the operating model implemented by, yes,
Berkshire Hathaway, but equally Canada’s Power Corporation,
France’s Arnaud group and a host of others including many family
offices founded on entrepreneurial wealth. It’s a nuanced area,
but here is a simplified take on what we perceive as the relative
benefits of this AHC structure versus our experience with private
equity. 


— Realising full potential vs leaving value on the
table
: If you have created competitive edge, why stop at IPO
or “pass the parcel” when the realisation timeframes kick in or
ahead of fundraising? The nature of transformative innovation is
that, handled correctly, it gives on giving. Why check that
investment potential in at the door? AHCs have the time and space
to make the right investments at the right time to see them
through to the fullest extent of their potential and with the
optionality to be on that journey across both private and public
markets.


— Operational vs transactional: PE tends to be
managed with a fundamentally “transactional” mindset rather than
the “long-term operational” perspective of AHCs. While the
transactional mindset can clearly energise some investee company
leadership teams towards an IPO or other exit, it also risks
shrinking the investable pool of potential portfolio companies.
We regularly engage with founder-led and family-owned businesses,
some of whom see the PE model as at odds with their culture,
values and time horizons. 


 Right time vs clock ticking: The conventional
private equity “out in 4, back in 4, 2 to tidy up” set-up
can foster forced selling and buying. Add in around $2 trillion
of current PE industry dry powder and it is no surprise that deal
multiples are close to all-time highs. The AHC is not time-bound
or “cornered” in the same way. The same applies to investor
distributions. Arguably, PE IRR-centricity incentivises the
acceleration of cash back to limited partners through realisation
and/or IRR “management” through subscription line credit or other
funding. A significant swathe of investors want their capital
continually deployed on a long-term basis and do not want the
headache and cost of receipt and redeployment. AHCs can
accommodate liquidity options and other capital distributions in
a manner which can be more tailored to the needs and preferences
of individual investors, but preserves long-term value creation
momentum.


— Evergreen innovation platform vs static fixed
term:
By its nature, an AHC is an evergreen platform,
well-suited to creating permanent capital vehicles or similar
participation structures for like-minded long-term investors,
alongside or at various levels within the group structure.
Importantly, it also provides a clear and established governance
framework that fosters close-knit ongoing collaboration with
co-investors and capitalises on their expertise, relationships
and pipelines. PE with more diverse investor bases, expiry date
fund structures and looser co-investment club arrangements is
less suited for this. 


An approach matching the scale of the
opportunity


Finally, investment structures will not make a bad deal good or a
good deal bad. 


They may, however, set you up better for success. Everyone
investing in the disruptive growth space should be asking whether
they have the right long-term investment approach and a business
builder way of working which matches and fully capitalises on the
scale of the opportunity. 


About the firm:

Reech Corp is a long-term investor and business builder working
at the intersection between real estate, finance and technology,
where it deployed over $1 billion last year.

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