Taking stock of the stock market
Elite Entrepreneurs are driving into equities like never before, while direct investment is their vehicle of choice to support new start-ups.
Elite Entrepreneurs have responded to soaring global markets to go overweight on stocks, making equities the largest component of their diversified portfolios, according to the new 2019 BNP Paribas Entrepreneur Report.
20% of the world most successful entrepreneurs drove their private wealth into the asset class to maximise gains from the record-breaking bull runs on Wall Street and beyond.
The news is just one of the telling insights to emerge from the report, which surveyed 2,763 business owners in 23 countries across the globe and paints a fascinating picture of the agility of the world’s wealth generators.
The study also sheds light on how entrepreneurs choose their portfolio allocation, in addition to their evolving assessment of socially responsible investments and the role of ROI as a metric of their success.
Unsurprisingly, the tech-led charge of U.S. stocks has convinced Stateside entrepreneurs to opt for even greater exposure, with American respondents putting 28% of their wealth in equities, while more muted sentiment in Europe and Asia has led to smaller allocations by company founders in those locations.
“I don’t believe in doing technical analysis of the market at a whole. Instead, I look at individual companies. I absolutely don't believe that tech stocks are ‘all burned out’. There are often bubbles, with people rushing in to join the bandwagon, and investors need to be sure that they are not being swayed by current fads and rushes. But on a fundamental basis, companies like Amazon and Apple, Google and Netflix, and so on, are all absolutely deserving of their valuations and have really bright futures.”
David S. Rose
A New York-based serial entrepreneur, super angel investor, best-selling author who has founded or funded more than 100 pioneering companies.
SPREADING YOUR PORTFOLIO RISK
So, aside from equities, where else are Elite Entrepreneurs putting their money? With a total wealth worth of $16 billion, respondents remain heavily invested in their own businesses, which represent 17% of their net worth, while the same percentage is parked in fixed income. Cash – a sensible refuge during bouts of market volatility – accounts for 14%.
Interestingly, there is geographical divergence when it comes to portfolio liquidity, with U.S. entrepreneurs on average deploying just 38% of their wealth to illiquid assets such as real estate and hedge funds. Their European counterparts, in contrast, are happy to have 46% of their portfolio tied up in such assets, mainly due to greater allocation to property and their own businesses.
Private equity is the fifth-most popular asset class, representing 10% of a typical entrepreneur’s portfolio, and is also the most popular means to directly invest in privately-held, unlisted companies, with 52% of entrepreneurs having done so. Their motivations are varied, although most are founded upon a desire for outsized gains in the long term – 26% of respondents seek to benefit from higher investment returns, 22% want to improve the value of a business before selling it at a profit and 17% cited gaining exposure to businesses with high growth potential.
Elite Entrepreneurs understand that earning market-beating profits through private equity is no easy task and so rely on professional expertise to identify the best investment opportunities. To decide which private companies to directly invest in, 26% of respondents use consultants and 29% turn to their financial advisors and wealth managers. Only 24% do the necessary research themselves, with remainder either leaning on their co-investment partners or a family office.
"There is a common view that Private Equity is risky, but I disagree because it offers important diversification. Investors lose money only when they subscribe to under-performing teams. That’s why we are very concerned with track record and only work with managers who demonstrate that even during the last recession they created value for investors.”
Claire Roborel de Climens
Global Head of Private and Alternative Investments
BNP Paribas Wealth Management
IMPACT AND ROI COMBINED
Today’s entrepreneurs know their own achievements are not divorced from wider society.
Impact priorities vary by region, with job creation most valued in the United States and GCC, while environmental concerns dominate the thinking of entrepreneurs in Asia and Europe.
Yet simply doing good is no longer enough, with 49% of entrepreneurs using the returns achieved as a means to gauge the impact of their Socially Responsible Investments (SRIs).
Why? Well, Mr Rose warns that start-ups established to do social good are likely to fail unless run along for-profit lines, and that impact investors need to expect competitive returns when buying stakes in such companies. To his mind, companies without a primary profit-making focus are more likely to fail.
“When companies say ‘we are going to devote 10% of our profits to help kids in Africa’, that's great. Make the money first, then give it away,” he added.