Life After a Liquidity Event
Entrepreneurs prefer to diversify their wealth across multiple asset classes, as we learned in "Diversification Reaps Dividends", but what would Elite Entrepreneurs do with their money were they to sell up?
Asset diversification is widely practiced by successful business owners to ensure they won't face financial ruin should their companies flounder, but such a strategy is tough to pull off for fledgling entrepreneurs.
Most likely, entrepreneurs' wealth was heavily concentrated in their own businesses when their entrepreneurial career was in its infancy, before they steadily diverted money into safer long-term investments, far removed from their day-to-day work.
"It's not so simple to diversify."
Sramana Mitra, Chief Executive and Founder of One Million by One Million
"If you have a small business that drives most of your net worth, it's not necessarily easy to diversify out of that without selling that business," says Sramana Mitra, chief executive and founder of Californian virtual incubator and accelerator One Million by One Million (1M/1M).
"Say you're running a $5-10 million private company, it's not so simple to diversify and start selling equity to outsiders. What you could be doing is issuing dividends and taking out some of the profits to invest elsewhere in low-risk areas. If you're investing all your profits into growing your business, then that strategy doesn't always work.”
BNP Paribas Wealth Management put such a question to 2,650 Elite entrepreneurs in its 2017 BNP Paribas Entrepreneur Report, asking them what they would do were they to enjoy a "liquidity event" and cash out of their businesses.
Much like with their current asset allocations, respondents thought similarly across entrepreneur types, which for the study were grouped by age and net worth. The answers of three entrepreneurial types - Ultrapreneurs (business owners with more than $25 million in investable wealth), Serialpreneurs (entrepreneurs who have launched more than four companies) and Millennipreneurs (those born between 1980 and 2000) – were also analysed.
Those with the lowest net worth and the oldest age group were the only entrepreneurial classes who would opt against allocating 10% of their windfall into each of cash and private equity.
The older entrepreneurs would prefer traditional investments, theoretically going overweight in real estate (14% vs 10% average) and fixed income (16% vs 13%), also hedge funds (15% vs 13%). But they seem less civically minded, with underweight allocations to philanthropy, angel and socially responsible investments.
Fixed income drew near-identical allocation, with only Serialpreneurs (10%) markedly underweight. Allocations to new businesses and stocks were all within 1 percentage point of the mean.
Respondents on average they said would spend 7% of their windfall; only Serialpreneurs planned to be markedly more flash at 9%.
"After a company sale," the report adds. "The instinctive position of the entrepreneur is relatively defensive."