personal finance

Why entrepreneurs find diversifying their investments a challenge


Entrepreneurs do not generally like other people telling them what to do. But while this drive and self-confidence typically makes them good businesspeople, it can also make them tricky investment clients.

Wealth managers say entrepreneurs often arrive at their doors with investment portfolios that are too specialised, resulting from years of business owners investing or reinvesting in the sectors they “know best”.

“So much of an entrepreneur’s time is devoted to building up their businesses in the early years that dedicating time to their own personal finances is rare,” says David Miller, investment director at Quilter Cheviot.

“Often these people are so used to putting every penny of their own money back into the business it is a novelty to actually have money to invest. But there comes a point that, as people get wealthier and more successful, they have to trust someone else with their money — and it’s not something that many entrepreneurs are used to doing.”

Many entrepreneurs, Miller says, have locked a large amount of their personal wealth within their business so often their personal assets consist of shares in their own company. Some entrepreneurs have spent many years resisting investing in anything other than their own stock, he says, and this can result in an investment portfolio that is too risky.

Chris Ivey, head of the European private client practice at Cambridge Associates, agrees.

“We see families who have made their money through having all their eggs in one basket and the temptation is to do the same with their personal investment portfolio,” he says.

“This can work with, say, repeat entrepreneurs who are returning to the same sector and buying another business within the same industry, but when it comes to investing personal money it’s different. Here, it is very important that these personal investment portfolios are diversified,” Ivey adds.

The problem is that business owners are often not used to having disposable income to invest, so when entrepreneurs sell their company and come into a large amount of money, they could be starting from scratch in terms of knowledge about investing.

“The sale of a company is a major milestone for any business owner. But what happens next?” says James Fleming, chief executive at Sandaire, a multi-family office. “There is a bit of seller’s remorse that sometimes occurs. The business owner has spent years building their business and it’s everything they know: it’s hard to figure out what to do next.”

David Miller, investment director at Quilter Cheviot

He likens the process of selling a business to a bereavement. “Often when an entrepreneur sells their company it results in a massive period of adjustment,” says Fleming. “The entrepreneur can go on a round-the-world cruise but when they come back they tend to want to go back into the same sector in some form or other.”

Some form of reinvestment in the sector they have spent their lives working in is fine, say experts, but many advise that this type of investment should only be part of a client’s portfolio. It should be considered alongside that individual or family’s long-term goals when planning their investment portfolios.

“Some entrepreneurs who come to us don’t have enough capital set aside to provide for long-term personal lifetime goals, which could include retirement plans and school fees,” says Jonathan Bell, chief investment officer at Stanhope Capital.

“Once a sale has taken place entrepreneurs can have a large amount of money that they need to invest. That’s when we need to make individuals aware that their business is only one piece of the larger investment picture and by not diversifying they would inadvertently be taking more risk than necessary.”

According to traditional portfolio management theory, entrepreneurs, just like all investors, should diversify their assets. “It may feel like common sense to invest in a sector and…stocks that you know and have a business interest in, but investing solely in one sector and also one asset class is a high concentrated risk,” says Wayne Berry, investment manager at Brewin Dolphin. “Taking a multi-asset approach and ensuring a portfolio is not too concentrated in any one area can reduce a great deal of the risk and volatility of investing in global markets.”

Diversification, he says, can also create counterbalancing effects across different assets, which can outperform during volatile periods. It also creates the opportunity to invest in riskier asset classes or geographies, such as emerging markets.

“They are either heroes or zeroes, their performance can fluctuate greatly, but, by spreading money around different regions and assets, the overall portfolio returns are smoothed out,” says Berry.

“Investing in a diversified portfolio will ultimately give you a more levelled return, which makes it more predictable and, crucially, less stressful — knowing your investments won’t swing too wildly in value”.

Entrepreneurs looking to diversify their portfolio often turn to alternative assets such as private equity, wealth advisers say. Loughlin Magowan, head of investment advisory UK at Julius Baer International Limited, says many of his clients are interested in learning more about the benefits of investing in alternatives.

“The first thing we consider is the diverse range of alternatives available such as hedge funds, real estate, commodities or private equity and how different risk-adjusted returns can play out in a diversified portfolio,” he says.

He adds that it can often be difficult for clients to access such investments themselves.

“Private equity is a prime example, as some large private equity managers require a minimum commitment of $10m. Alternatives are seldom an asset class that clients are most familiar with, but they can be a useful way of diversifying a portfolio, reducing overall investment risk and ultimately preserving and growing a client’s wealth.”

Mohamed Mansour, head of the Mansour Group and chair of his family office Man Capital, says that, as a serial entrepreneur, his approach is to spread his risk across sectors and geographies. His primary focus has traditionally been in emerging markets but he has grown the operations globally and is a strong advocate of a balanced portfolio.

He suggests that the key thing for an entrepreneur to do is to surround himself with qualified people who can support him when he wants to invest but also with people who have the confidence to tell him why something won’t work within his portfolio.

In general, wealth managers say that, while there are clear attractions to investing in what you know, entrepreneurs need to be honest with themselves about how long they will have the requisite edge in the sector and appetite for risk.

In particular, entrepreneurs should think about whether they are about to retire from the sector and slowly lose expertise, or whether they need the greater security that comes with a more balanced approach.

Siena Gold, senior associate in the private capital group at Harbottle & Lewis, says: “This can be a difficult discussion to have, especially if the entrepreneur is managing assets to benefit their family, or is seeking to influence trustees who hold trust assets for a wider class of beneficiaries or the next generation.”



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