D.I.Y. Private Equity Is Luring Small Investors
Amateur investors are setting up high-risk, high-return deals on their own, but the key to success varies.
Keith Wright, a dermatologist in Atlanta, is part of a group of lawyers and entrepreneurs who have pooled their money to make private equity investments. CreditCreditMelissa Golden for The New York Times
Paul Sullivan, July 19th 2019
Private equity funds have performed well in the last few years, returning 10 percent in 2018 alone, beating all other indexes.
That rate of return is attracting amateur investors who are setting up high-risk, high-return deals on their own.
These investors do not want to hand over millions to professional managers. In most cases, they are successful professionals who have adopted a do-it-yourself approach to private equity investing.
Dr. Keith Wright, a dermatologist in Atlanta, is part of a group of lawyers and businesspeople in the city who have been pooling their money for about six years in search of the outsize returns of private equity legend.
“It came from the boredom everyone felt with mutual funds,” Dr. Wright said. “When we started off, all we were looking for was a home run.”
Some investors seek to cast a wide net across several industries.Donald Prophete, a labor relations lawyer, is president of Omega Investment Partners, a group of eight investors in Kansas City, Mo., with money in several sectors, including autos, health care and real estate.
“Five years ago, I realized I was in the wrong job,” Mr. Prophete said. “My calling was to be an entrepreneur.”
Professional private equity investors scoff at such weekend warriors.
“This is a sign of a hot market all around us,” said Matt Glaser, head of equity, nontraditional investments and research at Wilmington Trust. And that market is drawing armchair experts out of the woodwork.
Mr. Glaser said private equity investing took time and analysis for it to succeed. His team has been taking longer to make investments, fearful of overpaying for a private equity opportunity that may not perform well. His team is about to present a deal to clients, for example, that it had been researching for more than a year; typically, it would spend several months performing due diligence.
These amateur investor groups are another iteration of investment clubs that have popped up around the country for decades. Most of those clubs have sought to channel the collective wisdom of their members to do something that professional investors struggle to do full time.
When putting money into public equities, investors have an out if things go wrong: They sell their shares on the stock market.
Private equity, by design, provides no such escape hatch. An investment in a start-up means investors get their money back only if the company goes public or is bought by someone else.
So do these do-it-yourself private equity investors stand a chance? They might, though a lot of work will go into it.
“I think all of these investors get that if it was easy, everyone else would be doing it,” said Alfred W. Coleman, a corporate partner at Saul Ewing Arnstein & Lehr in Minneapolis, who helped set up the funds created by Dr. Wright and Mr. Prophete. “But a good portion of what was driving this was access and control. They didn’t have access to these pools and investments, so they had to create it on their own.”
The key to success varies.
It starts with how they hear about deals, known as sourcing. Mr. Glaser said Wilmington Trust saw a lot of deals, given the size of its investment capital — $92 billion. But of the hundreds it looks at in any given year, the firm invests in about three. It puts $50 million to $100 million in each one.
Palm Drive Capital, a venture capital firm in New York, has invested in six unicorns, or companies with valuations of a billion dollars or more, since its founding in 2014, said Seamon Chan, managing partner at the firm. Palm Drive sometimes looks at hundreds of deals a week, all in the software industry, and passes on most of them, he said.
“When we are interested in moving forward with a company, it’s gone through a big filtering process,” Mr. Chan said. Even then, the group tries to negotiate the best terms for its investment. “We’re pretty valuation sensitive,” he said.
In this sense, individuals focused on private equity are at a disadvantage. Their groups are not going to see the best deals, but even if they did, they would not have the capital to invest at that level.
Mr. Prophete, the corporate lawyer, said the eight members in his group each put in $125,000 a year. With $1 million on hand, the group has access to a lot of deals, he said. The group has been active for about seven years.
The members relies on their contacts to find opportunities. “We have never not had a pipeline of deals,” he said. These deals are small, though, the type that large private equity funds would not consider.
Marques Colston was a wide receiver for the New Orleans Saints for 10 seasons. He now focuses on investments in sports-related vehicles. CreditJonathan Bachman/Associated Press
Successful groups have members with deep expertise in their fields. Whereas a private equity fund can have scores of analysts who cover a wide swath of industries, small private investors cannot afford to take a scattershot approach.
Marques Colston, who played in the National Football League for a decade, is part of the Players’ Impact, a venture that draws on the knowledge of professional and elite athletes across many sports.
Mr. Colston has focused his investments on sports-related companies, including sports technology, performance and online gaming. “It was the industry I knew and could have a real understanding of it,” he said.
“We’re trying create opportunities around players transitioning out of sports,” Mr. Colston said. Members can invest $5,000 to $100,000 in qualified deals. “It’s an investment vehicle with the thesis that we’re looking to invest in companies where we can move the needle.”
This strategy has long been practiced by private investors at the next level up: the family office that manages money for high-net-worth individuals and typically has tens of millions of dollars to work with.
McNally Capital, a private investment firm based in Chicago, has been investing money for wealthy families for more than a decade. Its investments range from $20 million to $75 million in companies with values of $60 million to $200 million.
Ward McNally, managing partner at the firm, said he would not make an investment unless someone at the firm understood a company’s business firsthand.
“The whole thing revolves around improving your odds of success,” he said. “People are so focused on finding the next social media website to create value. You should invest your capital in a way you understand and really leverage who you are with what you know to create value.”
In these smaller funds, group dynamics matter. Personalities clash, and the more individuals who have a say, the harder the investment decisions can be to make.
John Rompon, managing partner of Marjo Investments, which makes private equity investments for wealthy families, said it was essential for one person to be in charge.
“The people not in charge are just making the decision to invest money in the fund,” he said. “It’s not a collective decision.”
Well-conceived documents can put guidelines for the fund in place. But what can seem logical and necessary at the start can have unintended consequences.
Dr. Wright said three people had left his group since it started, including the fraternity brother who had brought him in, but their money stayed behind. That was written into the fund documents up front.
“If you leave anytime before the 10-year horizon, you redeem nothing and you lose everything,” he said. “It’s painful, but it’s there to encourage you to stick this out.”
If members depart and an investment performs well, they still get nothing.
Mr. Coleman, the lawyer who has helped organize several small funds, said people really needed to consider the emotional component of investing in such high-risk, illiquid investments. The investments are relatively small, but the stakes are often high.
“It’s the difference between spending $30,000 on a new boat or car that’s tangible or an investment like this that you hope will pay off but could evaporate in a year,” he said. “They’re not seasoned money managers, and it’s money they don’t want to lose.”
When investments turn out well, there is a feeling of satisfaction from having helped a company that would have been overlooked by larger private equity funds.
“You move from the fanciful exit number and you start looking at the companies you’ve invested in and start caring for their mission,” Dr. Wright said. “You want them to have a viable company, and you look at the monetary return less.”
A version of this article appears in print on July 20, 2019, Section B, Page 6 of the New York edition with the headline: Jumping Into the Pool of D.I.Y. Private Equity.
The Players' Impact announces new Partner, NFL vet Marques Colston and formation of Athlete Advisory board. Advisors, Garrett Klugh and Maurice Evans, announced.
BOSTON - March 19, 2019 - PRLog -- The Players' Impact (TPI), the leading early-stage investment and entrepreneurial platform for professional athletes, is excited to announce that 10-year NFL veteran and Super Bowl champion, Marques Colston, has joined as a Partner.
"Marques brings a wealth of expertise and knowledge to TPI. His experience with early-stage startups along with his accomplishments as an athlete give him insight and perspective that will be of great value. I am excited to be working with him." –Tracy Deforge, Co-Founder, TPI
"TPI has always had the athlete's best interest in mind. I have seen the quality of TPI's work firsthand and I am excited to help the organization grow, evolve and continue to serve athletes at a high level." –Marques Colston
TPI is also proud to announce the addition of nine-year NBA veteran, Maurice "Mo" Evans, and Olympian Garrett Klugh to the TPI Athlete Advisory Board.
"As one of the first athletes to join TPI as an investor, I have seen the amazing work that this organization has done. I look forward to adding value as an advisor as the company enters its next phase of growth." –Mo Evans
"I am passionate about helping athletes make better decisions as it relates to being entrepreneurs and investors. TPI provides the platform to accomplish these objectives." –Garrett Klugh
As the TPI team grows, so too will the resources that athletes can find at TPI. TPI is currently developing a digital "Locker Room" for "all things startup," which will provide all the tools members need as they embark on their entrepreneurial and angel investing journeys. In addition to these offerings, TPI has recently launched "Beyond the Game" event series, which brings together athletes and industry executives to discuss and impart the foundations of entrepreneurship, investing and transitioning beyond professional sports. The next event will be at the NFL Draft in Nashville next month.
Tracy Deforge, TPI's Co-Founder, summarizes, "We are thrilled to add the expertise of Marques and look forward to the guidance from Mo and Garrett. With our new team, upcoming events and soon-to-be-released digital Locker Room, we are positioned to meaningfully impact the way athletes approach entrepreneurship and how they invest in startups."
About The Players Impact (TPI)
Founded in 2017, TPI is a organization built for entrepreneurially-minded athletes. Comprised of over 150 professional athlete-members, TPI offers to its extensive network of multi-sport athletes foundational support in the form of connections with industry experts, with early-stage business resources, and with investment opportunities. It is these core resources that TPI believes every athlete entrepreneur and investor need access to in order to be successful.
For more information, visit www.theplayersimpact.com
Follow TPI on social @playersimpact.
What if you knew your career would be over in just a few years and there was nothing you could do about it? This is exactly the future every athlete faces, and whilst many of us believe that athletes stay in the sporting system post retirement in either a coaching capacity or sports journalism role, the fact is less than 20% of athletes end up choosing this route. Instead, entrepreneurship is by far the most popular route for an athletes career post-retirement, yet entrepreneurship training is rare. A special Beyond The Game event (presented by The Players Impact) on January 9, 2019 in Las Vegas is seeking to improve this training.
Beyond The Game is a peer-to-peer based event centered on the Athlete Investor, the Athlete Entrepreneur and the Athlete in Transition. Athletes, more than ever, are doing business off the field, executing their ideas and investing in others. Participants will have the opportunity to engage in structured meaningful conversation with former athletes and executives who are experts in their respective post-athletic fields. The event will be co-hosted by NFL veteran and Co-Founder, Fan Controlled, Football League Ray Austin and Bonnie Bernstein, ESPN/CBS veteran and Founder, Walk Swiftly Productions. Featured speakers and Huddle hosts include Isaiah Kacyvenski, NFL Veteran, Investor and, Will Ventures Founder, Marques Colston, NFL veteran, Entrepreneur, Founder, Dynasty Innovation and Amobi Okugo, MLS player and author of Frugal Athlete.
The Beyond The Game concept was developed by The Players Impact (www.theplayersimpact.com), a group of 100+ investment and entrepreneurial minded professional athletes investing in and building business together led by Tracy Deforge
The event will also see a first of its kind startup pitch competition for current and former athletes who have founded a startup. They will pitch in front of an audience of their peers. The winner of the competition will win coaching from Journey Partners, a guaranteed pitch for capital to The Players’ Impact community as well as a spot to present at the NYC Huddle (a group of sports industry executives who help startups via one intense half-day session).
The companies selected to pitch in Las Vegas are:
Special thanks to the sponsors Beck Bode Wealth Management and Pepper Hamilton LLP as well as the hosts the Fan Controlled Football League.