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Sunday, 10 November 2013 22:00

New wave of capital? Boomers seek out alternative investments to stay connected to business world

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Jason Brinks has set up more than a few retirement portfolios for baby boomer business owners who’ve sold their companies.    

Brinks, managing director of Oxford Financial’s Grand Rapids office, often sets up the newly liquid, former business owners with a mix of traditional investments such as stocks, bonds and mutual funds to support their lifestyles as they head into their golden years.  

Lately, though, a number of his clients have voiced interest in mixing in a few alternatives such as private equity, venture capital and even direct investment in local startups and closely held companies, Brinks said.  

He and other local wealth managers are seeing an increase these days in clients who fit the same profile: They have been successful in business, came to a point in life where they decided to sell, and want to put part of their new wealth that was previously tied up in the business to work elsewhere.

“There’s a ton of interest in those types of investments, and quite likely if our experiences are similar to the rest of the investing public, you could see a whole new lineup of investors and pooled capital,” Brinks said. “You invest in what you know, and if you know business, you’re not going to be happy not investing in businesses. The access, as a result, has to continue to increase for those types of investments.”

In a survey earlier this year by the International Business Brokers Association, 61 percent of respondents said that baby boomers are now beginning to exit their businesses in larger numbers than in the previous five years, and they’re driving a larger share of activity.

Small business transactions were also up in the third quarter compared to a year ago, according to a report from BizBuySell.com. The web-based business marketplace reported that the transactions for 1,685 small businesses nationwide closed in the third quarter of this year, up from 1,189 in the same period in 2012.

While no one knows for sure how much money could come into play in the years ahead as an entire generation of entrepreneurs exit their businesses, experts in the field say it could potentially create a new wave of investors with significant nest eggs, some of which can go to alternative investments.

“There are a huge number of small businesses owned by baby boomers and they are going to need to transition in the next 10 to 15 years. It’s a staggering number,” said Jonathan Siebers, an M&A attorney at Smith Haughey Rice & Roegge PC in Grand Rapids.

And when the owners do sell, “they want to do more with their money than just put it into the stock market,” Siebers said.

Those alternative investment vehicles allow them to stay active and become involved in businesses at strategic levels, perhaps as a director of a company or acting as a mentor or adviser to the entrepreneur behind the business in which they invest.

“They want to work on the business, instead of in the business,” said Mike Brown, vice president of the M&A and investment firm The Charter Group in Grand Rapids. “They are used to making things and selling things. They can look at a new company and add value that way, even though they are not managing a business anymore.”

Brown estimates that about half of the business owners selling for $10 million or more, and who previously had most of their net worth tied up in their business, now seek to put some of their money into alternative investments.

The generational transfer of businesses and wealth will alter the M&A sector by leading to the creation of more family offices that buy and hold multiple businesses for an extended period, Brown said. He also sees more individual buyers for companies as entrepreneurs sell their business and then acquire another, probably smaller company that they will oversee but not manage day to day.

“It’s just going to be a continually increasing phenomenon,” he said. “You’re going to see more small, privately-owned companies and family office-owned companies.”

That’s because many boomers, even if they are at what is generally considered a time to retire and relax, simply can’t completely leave behind what they enjoy doing. They need to have some kind of involvement in a business, and alternative investments provide that outlet, experts say.

“They’re almost looking for the phase two of their working career,” said Larry Jones, a wealth adviser with JPMorgan Private Bank in Michigan. “They’re not going to run a business, but they are going to be involved at a high level. They have something to do, but it doesn’t require the commitment of their previous level.”

The retirement of the baby boomer population has been coming down the track for years. For many that own a business, the recession forced them to hold off retirement or selling. Even if they wanted to sell a few years ago, they couldn’t because they were unable to get what they thought their business was worth or what they believed they needed to maintain their lifestyle.

Now that the economy has rebounded and business valuations have improved, boomer entrepreneurs are back in the market and ready to move on. In the process, they will continue to drive M&A activity for the foreseeable future.

“There’s going to be just a glut of companies on the market here in the next two or three years,” Brown said.

One result is that small businesses will have “more professional” boards to steer them strategically, he said.

The unfolding trend also provides sellers more options in the future when they look to exit a business, Brown said.

“It’s been around but it’s becoming more important from my point of view of selling a company. There are more individuals now and there is going to continue to be more individuals that are buyers. (Sellers are) not just going to private equity and strategics anymore,” he said. “Now, it’s finding that network of high-net worth buyers and going to them also. It’s a whole other group of buyers.”

While the emerging phenomenon could create a new generation of business investors and a new capital pool, there are limitations in how many sellers will actually put their proceeds to work in alternative investments, sources said.

Boomers selling their business for $500,000 or $1 million may not have a large enough nest egg to start investing in companies or become involved in a private equity fund or an angel network. M&A and wealth management professionals say a seller typically needs to net at least $5 million or more from a business sale to have the ability to become a regular, active investor.

“It’s the higher tier of our client base who has the capacity to do that,” said Bill Walker, president and CEO of Legacy Trust in Grand Rapids. “They have the capacity to take on the time horizon, they have the risk tolerance, and if that business venture does not work out, it does not affect their lifestyle or their future wealth plans.”

And not every boomer who sells a business these days wants to get involved in alternative investments. A majority of Walker’s clients remain satisfied with directing their money toward traditional investments. Or in some instances, the seller needs to take a period of time before considering or deciding whether to invest in other companies or re-deploying the capital amassed through an exit.

That’s particularly true for a family-owned business that lacks a next generation to take over the company.

“It’s a process that they all have to go through in order to know what the next 10 to 20 years of their life is going to be all about,” Walker said.

How the boomers who sell a business handle their newly acquired wealth is different than how a 40-year-old may proceed after an exit, he said. The younger generation is apt to immediately put the money back into another business, either through a startup or acquisition, because “he’s wired that way,” Walker said.

A person who’s 55 or older typically takes a more cautious approach because they are at a different stage of life.

“That wealth has been earned and made, and so the question would be whether to continue building wealth through more private or speculative type of investments,” he said. “That’s the question – what does the family want to do and what does the individual want to do with the wealth now that the business has been liquefied?”

Still, Legacy Trust in the last two years has begun exploring more alternative investment options for clients who exited a business and want something other than stocks, bonds, money markets or mutual funds. Legacy Trust now sponsors Grand Angels and has connected with private equity firms in Michigan and nationwide to learn the nuances of those types of investments so it can better advise clients who are interested in them.

“If you truly want to go into these kinds of investments, you have to have a well-thought-out, disciplined plan,” Walker said.

The phenomenon of the boomers selling their businesses plays directly into angel investing, where investors not only put their money into a startup business but also dedicate their time and talent to support the entrepreneur behind it.

A typical angel investor is someone who owned and ran a successful business for years, reached the point where it was time to sell, and they then became part of an angel group to keep active, said Jody Vanderwel, president of the Holland-based Grand Angels.

Vanderwel considers the baby boomers, as they sell, as a source to grow the ranks of angel investors in the years ahead. Vanderwel and others say the growing interest they see in alternative investments by boomers exiting a business stems from them wanting to keep their hands in business, and maybe even provide a hand up to the next generation of entrepreneurs.

“They love what they’re doing. They’re looking for ways to stay engaged and use their skills and the wisdom they have,” Vanderwel said.

For angel networks, the result is a deeper bench to put money into businesses and wider experiences to provide counsel to their owners.

“It only expands the breadth that we have and the kinds of deals we look at,” she said.

Read 3763 times Last modified on Sunday, 10 November 2013 22:35

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