Strategy

Exclusive Investor Clubs Attract Self-Directed Wealthy

Emma Rees, 29 May 2007

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With 12,000 investment clubs across the UK and many more in the US, getting together to share knowledge and invest collectively is nothing new. Increasingly, though, it is a concept that is attracting high net worth individuals.

With 12,000 investment clubs across the UK and many more in the US, getting together to share knowledge and invest collectively is nothing new. Increasingly, though, it is a concept that is attracting high net worth individuals.

“MMC was born out of a group of individuals investing for our own account”, says Bruce Macfarlane, co-founder and director of MMC Ventures, a firm that invests in fast-growing young companies. “However, we were all busy with our daytime jobs and did not have enough time to do proper due diligence and documentation and deals depended on haphazard connections.”

MMC has a professional, full-time team that ensures quality deal flow. It provides members with a more structured, institutional approach, including thorough due diligence, rigorous documentation and post-investment support and, where possible, Enterprise Investment Scheme tax reliefs.

“Demand for clubs like ours has come from a desire by members to have a direct route to alternative investment and retain responsibility for investment decisions. They don’t want to leave the decision to a fund manager,” says Claire Madden, client director at Hotbed which has 500 members and charges one off membership of £495 ($976).

Ms Madden points to the BVCA Private Equity and Venture Capital Performance Measurement Survey 2006, which shows that private equity and commercial property funds returned an average of 18.7 per cent and 13.9 per cent per annum respectively during the decade ending in 2006, compared with 7.3 per cent for the FTSE 100.

“Hotbed might be making an investment of £2 million ($3.9 million) into a company, but we enable investors to participate in a standard unit size of £25,000 ($49,000). We underwrite risks, such as costs of aborting the deal,” says Ms Madden.

David Giampaolo, chief executive of Pi Capital, a private equity firm investing in profitable UK-centric companies, which has 280 members and charges £4,000 ($7,886) a year, believes that what is important is that Pi’s members have the right, but not the obligation to invest.

“Members get to participate in interesting and unique opportunities, sourced and diligenced professionally, combined with the opportunity to learn, exchange ideas and make contacts with other hugely successful people. There is usually a minimum of around £25,000, but investors can invest as much as they wish or not at all. Recent speakers at Pi events include Richard Branson, the head of Goldman Sachs and Greg Dyke.”

The members of these clubs have success in common and include entrepreneurs, high earning professionals, hedge fund managers or board members of PLCs:

“One particularly prominent demographic is those who have done very well in business, the City or the professions and have retired early, but don’t want to spend their retirement on the golf course,” says Mr Macfarlane. “Of the fifty MMC Syndicate members, nine currently sit on boards of our companies, six as chairmen.”

Notable examples include a former finance director of pharmaceutical company Wellcome, who sits on the board of an HIV research company and a former chief executive of Slough Estates who is on the board of a property services company.

“Our average member is not a household name but has been successful at some endeavour and has the mindset to invest in high risk, high return business in the UK,” says Mr Giampaolo. “They are savvy and like the fact that we don’t invest their money, they do.”

MMC Ventures, Hotbed and Pi Capital all emphasise that members can take either an active or a passive role and the amount of time provided by members varies right across the spectrum. MMC has a fund which enables investors who don’t have the time or inclination to take an active role to participate in all their deals. Hotbed says that around 20 per cent of members take a truly active role with more having a less formal input.

At US-based TIGER 21, however, participation is not optional. Founder Michael Sonnenfeldt explains:

“Members must be willing to give up a full day each month for eleven months of the year. We have a curriculum department, trained facilitators and the discussions are very specific.”

TIGER 21 exists not to provide investment opportunities, but to furnish its members with professionally facilitated forums to expand their wealth and broaden their investment intelligence. It is part serious study group, part social club and, at times, a group therapy session.

TIGER 21’s 130 members must have investable assets of at least $10 million. According to Mr Sonnenfeldt this is not about exclusivity, but because at this level of wealth individuals face unique challenges. They have to start thinking more like institutions in terms of the investment decisions they make, but do not have sufficient wealth to form family offices:

“Members participate in portfolio defense sessions where they critique one another's investments and goals. Members are challenged on their investment decisions and presented with alternative viewpoints, giving each member an opportunity to see his or her strategy in a new light.”

Mr Sonnenfeldt makes the point that this is sometimes the one day a month on which members can focus on their own, rather than other people’s, wealth. In addition to providing members with increased performance on their investments, perhaps more importantly TIGER 21 provides them with a like-minded community:

“Entrepreneurs in particular can be isolated as the sole owner of a company. We provide a forum for a whole set of issues that they would rather not explore with social friends, who might not be of similar wealth.”

With private equity and entrepreneurship having seen phenomenal growth in the last decade, high net worth investor clubs look set to see continued growth in years ahead. According to Mr Giampaolo, successful people will always want to invest time and money to make more money, but it is not all motivated by personal gain:

“Importantly, they want to help others through investing and mentoring. There is a gap in the market and if firms like Pi didn’t exist, many companies would find it hard to get funding as banks don’t tend to invest below £5 million ($9.9 million). Whilst what we do is very commercial and profit driven, we are also filling a real need in the market place.”

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