The author of this article shouts out the case for an active holding company (AHC) as an attractive alternative to private equity or long-term business investments.
Family offices and other investors which are able to take a long view have been big investors in private equity for many years. This is regularly reported here. A question which arises is whether the conventional private equity fund remains the best route for executing such investments. There are always challengers and innovators. To address this idea is Christophe Reech, founder of Reech Corporations Group. He explores the extent of the opportunity, what it means to be a long-term investor in disruptive growth, and the relative benefits of an active holding company (“AHC”) model compared with conventional private equity.
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The powerful forces of technology and innovation are reshaping society. New operating models are emerging, consumer behaviours are evolving, and disruptive market entrants are seizing the opportunities created by a changing set of business and societal needs.
COVID-19 has accelerated these drivers, but when it comes to advances in areas such as artificial intelligence, quantum computing and the internet of things, we are only in the foothills of unlocking the potential to not just build the next generation of market leaders, but to reimagine entire sectors.
Take retail for example. Despite a global pandemic and the impact of national lockdowns, e-commerce represented just 18 per cent in aggregate of total global retail sales last year. Sectors such as real estate and financial services remain largely characterised by manual processes and legacy technology infrastructure, and there are many years of structural change ahead.
This backdrop raises an important question. How can investors effectively harness the power of transformational change given the wide and long innovation runway?
For sovereign wealth communities and family offices, private equity is a well-trodden path – but the reality is, it often jars with a long-term investor perspective. While there are many smart, well-connected PE managers playing in the disruptive growth space, there are other investment structures which combine a long-term investment horizon with the ability to be agile and responsive to both opportunities and challenges as they arise. One of these is the Active Holding Company.
Investing for the long term in order to harness the power
of transformational change
It’s one thing to dive in with short-term realisation; riding the wave to capture the latest innovative trend. It is quite another to gear investment decisions towards long-term operating success, helping to create businesses and solutions that will be truly game-changing – and benefiting from the dividends.
An AHC structure is the operating model implemented by, yes, Berkshire Hathaway, but equally Canada’s Power Corporation, France’s Arnaud group and a host of others including many family offices founded on entrepreneurial wealth. It’s a nuanced area, but here is a simplified take on what we perceive as the relative benefits of this AHC structure versus our experience with private equity.
-- Realising full potential vs leaving value on the table: If you have created competitive edge, why stop at IPO or “pass the parcel” when the realisation timeframes kick in or ahead of fundraising? The nature of transformative innovation is that, handled correctly, it gives on giving. Why check that investment potential in at the door? AHCs have the time and space to make the right investments at the right time to see them through to the fullest extent of their potential and with the optionality to be on that journey across both private and public markets.
-- Operational vs transactional: PE tends to be managed with a fundamentally “transactional” mindset rather than the “long-term operational” perspective of AHCs. While the transactional mindset can clearly energise some investee company leadership teams towards an IPO or other exit, it also risks shrinking the investable pool of potential portfolio companies. We regularly engage with founder-led and family-owned businesses, some of whom see the PE model as at odds with their culture, values and time horizons.
-- Right time vs clock ticking: The conventional private equity “out in 4, back in 4, 2 to tidy up” set-up can foster forced selling and buying. Add in around $2 trillion of current PE industry dry powder and it is no surprise that deal multiples are close to all-time highs. The AHC is not time-bound or “cornered” in the same way. The same applies to investor distributions. Arguably, PE IRR-centricity incentivises the acceleration of cash back to limited partners through realisation and/or IRR “management” through subscription line credit or other funding. A significant swathe of investors want their capital continually deployed on a long-term basis and do not want the headache and cost of receipt and redeployment. AHCs can accommodate liquidity options and other capital distributions in a manner which can be more tailored to the needs and preferences of individual investors, but preserves long-term value creation momentum.
-- Evergreen innovation platform vs static fixed term: By its nature, an AHC is an evergreen platform, well-suited to creating permanent capital vehicles or similar participation structures for like-minded long-term investors, alongside or at various levels within the group structure. Importantly, it also provides a clear and established governance framework that fosters close-knit ongoing collaboration with co-investors and capitalises on their expertise, relationships and pipelines. PE with more diverse investor bases, expiry date fund structures and looser co-investment club arrangements is less suited for this.
An approach matching the scale of the
Finally, investment structures will not make a bad deal good or a good deal bad.
They may, however, set you up better for success. Everyone investing in the disruptive growth space should be asking whether they have the right long-term investment approach and a business builder way of working which matches and fully capitalises on the scale of the opportunity.
About the firm:
Reech Corp is a long-term investor and business builder working at the intersection between real estate, finance and technology, where it deployed over $1 billion last year.