Glimmers of Hope?

 
 

 

The Sunday Seattle Times offers a page full of graphs to support a rather grim view of the state's economic future. But that pessimistic view isn't necessarily supported by the graphs on the page. Economics is all about trends, and if you look at the trendlines over the past year, conditions look substantially brighter. We are clearly beginning to emerge from that deep hole in which the financial crisis buried us.

  1. Leading economic indicators for Washington have climbed to 116.3 by September, up solidly from 110.3 a year ago, suggesting we should expect slow but steady economic growth ahead.
  2. There are 4.27 online adds for every 100 workers in our labor force. That's up about 30% from 3.26 jobs per 100 workers a year ago. Maybe not enough to quickly bring down state unemployment which remains stubbornly high at 9 percent. But unemployment in the state is significantly lower than that national rate of 9.6%. And the jobs available are much higher than the 2.79 average for the nation as a whole.
  3. Boeing employment has been on a steady climb since hitting a bottom in May. Recent increases are small, but with the new 787 beginning delivery in the first quarter of 2011 and the 747-8 soon afterward, hiring should start to pick up.  
  4. The purchasing managers' index is 59.2, up solidly from 52.6 a year ago, and substantially higher than 54.4 for the nation as a whole..
  5. Retail sales showed a year-to-year gain of 4.2% compared to a 6% decline the year before.
  6. Cargo volumes at the Port of Seattle were up about 20 percent.

The stubbornly persistent bad news is in housinig, where sales are down and inventories remain high. Housing problems are likely to plague us for a long time. But even here there is a glimmer of hope. Net new drivers licenses granted, which tends to be a good proxy for migration into the state, shot up to 12,100 in September, nearly twice the level of last September. New arrivals in the state help to create new demand for all that excess housing we built during the boom years.

Looking for high investment returns? Consider investing in a family business.

Looking for high investment returns? Consider investing in a family business.

 
 

Investors do not lack opportunities to deploy their capital, but being able to generate respectable returns is much more difficult. Part of the problem is finding unique investment opportunities with significant upside in a crowded market. The best option may be to put money to work in a privately-held company.

But private companies pose challenges when it comes to understanding their business, and analysis of the company may be fraught with pitfalls. Or it may be that investors are simply not aware of the opportunity in the first place.

There is, however, an important trend that is clearly discernable in relation to family-held businesses. Wealthy families and individuals are increasingly attracted to the idea of providing capital directly to family businesses as part of their overall investing strategy. And the attraction is reciprocated – family-owned businesses are increasingly open to the idea of wealthy families and individuals providing capital.

At Cascadia Capital, we are seeing a rapid increase in the practice of families investing in families, which can be a highly effective solution for both businesses and investors. Family businesses can be attractive investments, particularly for other family businesses, private companies, individuals, or family offices, which are wealth management companies investing on behalf of a single family or individual. Family run businesses often employ management styles that these investors understand well and can offer portfolio diversification without the hefty fees charged by private equity funds and investment firms; fees that, over time, can add up to millions of dollars.

According to a recent survey by the Family Office Exchange, about 70 percent of family offices now pursue this strategy of direct investing. This may be, in part, due to a shift by family offices seeking to bypass layers of fees and a lack of transparency and control that are inherent to the private equity fund model. Instead, many family offices now prefer to invest directly on a deal-by-deal basis offering more direct control, additional flexibility for longer-term holds, and lower fees. 

From the perspective of family businesses, a significant number are considering alternative solutions to meet their strategic objectives. In the event of a sale, an acquisition by another family can be a compelling solution compared to a private equity or strategic buyer transaction. And when seeking financing for business activities, direct investments from family offices can offer significantly more flexibility than funding from private equity firms that are beholden to rigid criteria and fixed investment periods.

 

The benefits for family businesses of having a direct relationship with their investors or buyers can be numerous. For example, if a family is looking to sell its business, family office buyers can provide liquidity and the opportunity for owners to exit without having to sell to a competitor. If a family is looking for additional financing to fund growth, direct family office investments can offer more favorable terms than other traditional sources of financing.

 Importantly, wealthy families and individuals are more likely to take a long-term view of their investment and are not constrained by exit strategies devised to maximize value within a given time period. Further, these investors often made their money owning and operating successful companies and, as a result, are more likely to understand the nuances and unique challenges of family run businesses. 

This investment trend, while also being experienced in other parts of the country, is gaining momentum in the Pacific Northwest. We are increasingly finding private direct investments to be an effective solution for our family-owned business clients and our family office clients.

Choosing the right investment partner is one of the most challenging decisions a family business can make. We have worked with many private, family run businesses to design long-term, flexible capital solutions and introduce our clients to suitable family office and private investors with common objectives.

 For family offices, like any investment opportunity, buying into family businesses can be very attractive, but it is not without risk. Prior to investing, proper analysis calls for extensive financial due diligence to ensure interests and incentives are well aligned in the transaction. Success depends on ensuring both a structural and cultural fit. We actively encourage family business owners and family investors to work with experienced advisors to carefully explore every available option before determining the best course of action.

Christian Schiller is a managing director at Cascadia Capital, specializing in advising family businesses. Cascadia Capital is a Seattle-based investment bank serving middle market clients, globally.