The 3 Pillars Podcast: Wealth Management – A Liquidity Event is Just an Acceleration of Cashflow
In this week’s episode, our two special guests – Mr. Joshua Luff and Mr. Alex Thompson – discuss liquidity events, cash flow, and the importance of data when strategizing an investment with our host Peter Harper.
Click the link below or just press play to listen to the full episode:
Peter Harper: So today’s topic for the Three Pillars podcast. Is on liquidity events and how they are simply an acceleration of cash flow. So for those entrepreneurs are listening in that are preparing for a significant life changing liquidity event for the very first time, it can be hard for folks to hear this, but for most people, you’re likely going to get to experience this once. Statistically, that’s what the data shows. And the thing that we always like to talk about within our own business is that a liquidity event is simply an acceleration of cash flow, right. So thinking through how capital post a liquidity event is managed and subsequently invested is a really, really critical focal point. So today I’m joined by Josh Luff and Alex Thompson.
Peter Harper: Josh is a portfolio manager for a number of significant family offices and has been a wealth manager in the ultra-high networth space for many years. And Alex is a partner of mine and is the managing partner of Woodpoint Capital. So, Josh and Alex, thanks for being with us today.
Alex Thompson: Thanks man.
Josh Luff: Great to be here.
Peter Harper: Just as a kickoff, if each of you can separately introduce yourselves and give us a bit of an understanding of your background and what it is that you do.
Alex Thompson: I’ll kickoff so thanks Peter. I lead Woodpoint capital, which has been set up as a private market investment platform for our family office and private investor clients. So when we were launching the business a few years ago, we really set out to build the business as an institutional grade co-investment platform. And so what really what that means is providing investment grade opportunities through to families that families otherwise wouldn’t be sitting in a structure that is appropriate for how they manage their portfolios. And I think that was the piece that we felt was missing previously: is that the feedback from a lot of our families was there was a real preference to avoid commingled funds, to avoid blind pool structures and really a preference to see single asset deals, to see really strong, high quality. And that’s really what we like to do. Woodpoint’s responsible for assets right across private markets, private equity, real estate, real assets, but across everything we do, we do have a focus around cash flow and we do have a focus around around capital protection. And we aim to do that through understanding the underlying asset base that each of our investments hold, so happy to sort of jump in to that in more detail later. But hopefully that gives a bit of a flavor
Peter Harper: That’s great. And Josh?
Josh Luff: Yeah, so I get my start in the business with a large multinational bank, started in their associate program and quickly found a love for working with business owners in particular and found that I was able to connect with them, started developing a nice group of clients and partnered up with the commercial bank at this large multinational institution. A lot of the commercial bankers subsequently left to go to a regional bank. And I followed. I followed along with them, along with the clients, which was which was nice.
Josh Luff: From there, that business continued to grow and grow significantly and working with these ultra-high networth individuals over a period of years, a few of them came to me and asked and said, hey, you know, we like what you’re doing for us. Would you would you be willing to come and do this directly and work for just our families?
Josh Luff: And so it was interesting. We tried to see if we could set it up as a single family office structure two business partners. Unfortunately, they were not related out to 10 generations. So we have to set up as a multifamily office, which also meant then that we could bring in other families to the mix as well. So I’m very fortunate in the sense that I work with a very small group of families and look over their entire investment portfolios, making sure that we’re tying together the investments, the estate planning, managing and overseeing the cash flow, but bringing everything in from stocks and bonds and mutual funds and ETFs to the private investments, much like with Alex at Woodpoint. And we partner up with them and last but not least tie in that cash flow planning and the estate planning, in particular, to make sure it’s all being done efficient a manner as possible.
Peter Harper: Yeah. And this is the reason why I wanted to have two gents on here together. I mean, any portfolio that should be the right balance of public securities and private market investments, and so I think that having – and particularly for entrepreneurs that might might have had a concentrated investment framework which is the case most first in entrepreneurs – even if they’ve had substantial cash flow in their business. They might have predominantly had a substantial concentration in their operating business, right. So this notion of diversifying and spreading risk across public markets and private markets can be a major mind shift. I I think there’s two things that. That’s kind of struck out to me listening to your introductions, I think both of you guys have a heavy focus around not only growing a capital base through capital appreciation, but cash flow. And I think that that is a critical thing for folks to understand when they’ve gone through a liquidity event and they’re focusing on how do we want to position ourselves on a go forward basis.
Peter Harper: So. Gents, the title of today’s session was around liquidity events and liquidity events being an acceleration of cash flow. It’s been my experience and a lot of entrepreneurs do not actually think like that, I mean, the the the pushing of business to the point where it’s big enough to sell may even just be a mechanical mindshift, a mechanical mindset, right, as to the reason behind why they’re driving a business the way in which they are.
Peter Harper: Why is it important for entrepreneurs, particularly first gen entrepreneurs, to get their heads around the liquidity event being an acceleration of cash flow.
Josh Luff: Well, I can jump in there. The first generation – it’s been the people I’ve worked with the most and again, they think as business owners should and very pragmatically in many respects. But oftentimes I think that they understand their business so well that they look at that as their one asset that they have, rather than saying, hey, if I were to sell, I can accelerate those cash flows and then reinvest those in a different manner. And I’ve seen all sorts of pitfalls along the years to going off and then trying to think you’re going to double down and buy another business and go all in on that one business. And at the same time, I’ve seen lots of success stories, too, where they say, hey, you know what, I don’t need to keep working and I can live a more fulfilling life in whatever terms they deem that to be appropriate. And the simple example is this is a let’s say it’s a business owner, that the business is doing well. It’s throwing off a million dollars in an income to them every year. They say when you add back the depreciation and amortization and say it’s million, a half, they’re able to take and turn and sell that business for, call it seven and a half million dollars so that no large business, no small business, just a nice medium sized business.
Josh Luff: And they say, hey, we can sell it for seven and a half million dollars and have that today rather than waiting year in and year out for that million dollars. It’s like, yeah, that’s an annuity stream of a million dollars that’s coming in. But at the same time, it could take that seven and a half million dollars and we can use it to invest in multiple assets, not just in one and make a decent return. Might not be making a million dollars every single year and into perpetuity, but we can make a significant return and the clients can then live off of that just depends on each situation. I’ve had businesses that have sold for hundreds of millions of dollars and I’ve seen businesses that have sold for five to ten million dollars.
Josh Luff: And each family is very, very different. A quick example here as well as is you have families that they sell their business for seven and a half million dollars and they’re going to have enough cash flow to survive their lifestyle for the rest of their lives and their next generation, in all likelihood, depending on how their kids spend the money. Flipside is, I had a gentleman that sold his business for one hundred and fifty million dollars and we had to have a very uncomfortable discussion of, hey, you’re spending through this cash at such a rate you will be out of money in the next 10 years and you’re 50 years old. So I saw it was a very interesting conversation in that regard. So long story short, with acceleration of cash flows is there are many, many things to consider, everything from the family dynamics to what can be done, what they want to do. But the bottom line is this is the quickest way to accreting wealth is through a concentrated position, their business. And I could tell them all the time the fastest way to eroding wealth is through a concentrated position. And I have seen in many instances where a business owner takes and then takes that cash flow, tries to reinvest in another business that they don’t truly understand, and they go all in. And suddenly that nest egg that they had that was quite substantial is been eroded to a fraction of what it was initially because they bought into a business that they really didn’t understand.
Peter Harper: And I think that’s a really amazing point, because, as I was talking about this notion of being a serial entrepreneur. The reason a lot of folks are successful in the first business is because they’ve got their 10000 hours right there. They’ve done the work. They understand the business. They’ve made some gains. Maybe they’ve had a bit of luck. Right. But it is a very specific skill to be able to roll in again and again and again and do it successfully. So, Josh, really appreciate those stories. Alex?
Alex Thompson: Yeah, I mean, I know a lot of what Josh said, I think with the families that we typically deal with tend to fall into one of two buckets. I think the first point is this category we’re talking about families or first generation entrepreneurs who have been through a liquidity event and are now faced with a lump sum and a range of questions and no doubt a range of different ambitions and goals for what to what to do next. But ultimately, when we sit down to chat through with them, how should an investment strategy look for them? It really centers around two things. It’s a direct risk and start to provide and grow a steady cash flow stream.
Alex Thompson: I mean, we the second bucket of families, we deal with second, third and beyond gen families who may be faced with a similar problem where they have a lump sum. But the outcome from an investment strategy perspective is not dissimilar. I mean, it’s the risk and it’s got to be a cash flow that that cash flow is going to afford them flexibility with living expenses, flexibility with future ventures. And so it really is the critical piece, I think, just to to to circle back to this emphasis around cash flow.
Peter Harper: And I mean, Josh, the story you were telling before about the client who had major liquidity event and you thought he was going through one hundred and fifty million in ten years. I mean, I think anyone that’s in this business had some experience with a client like that. I mean, we we’ve gotten to the position where when we’re going through a process and trying to pitch for work with my client, it’s a two way interview And the strong view that we have is if we don’t feel like a client buys into these issues and understands that there is a material change to the life circumstances, i.e. they might have sold the golden goose. And so they have to change their attitudes to how they spend it because they’re spending the capital they have now possibly on cash flow. We won’t necessarily represent them because it might not be a good fit. How do you think about that as well? I mean, if you don’t if you have a client that you think doesn’t have the right headspace when it comes to expense management, would that be your attitude?
Josh Luff: Yes, it’s an interesting thought, you know, it depends on what part of my career I was in first. When you’re younger, the saying goes first, you survive and then you thrive. So you did anything you could for anybody just to stay afloat. But as you get further along in your career, you quickly realize that there are people that fit better and you don’t want to spend all your time putting out fires of messes that you didn’t create.
Josh Luff: So what I found was over the years that the further that somebody deviates from from the way that finances should be managed to a certain degree, again, there’s oftentimes, for ultra-high networth individuals a lot of latitude. That’s that’s what wealth has done for them, is they’ve created lots of options that are available to them and which is fantastic.
Josh Luff: So I try to always take a step back and look at it and say, OK, is this somebody I can work with that will be also coachable and teachable? Even if they don’t fully subscribe right away? Is that somebody that we could get there over time, through time and education? Again, if it’s a spectrum and we need to be within here and there, way out here, well, then usually we can figure it out pretty quickly that we’re both not a good fit for each other. And in the few circumstances where they’ve still wanted to work with me, you do get to that point, Peter, where you politely turned down to say, hey, this is not going to be the right fit. You know, you’re going to be best served by finding somebody that meets the philosophy and style.
Josh Luff: One last quick story there. It was very interesting. I had a client about five years ago now, six years ago, something like that. He had sold for forty two million dollars. I had a very different investment philosophy, one that I was just like, hey, that’s just not realistic. They had other advisors that were throwing out some unrealistic expectations, or at least in my opinion, were very unrealistic. Some a year later at a holiday party and he was talking to an attorney and he said to the attorney, hey, this is the only guy that was honest. He did this and that. And he said this. And he goes, Oh, so you’re one of his clients. He goes, No, I went with the other guys. He goes how that work out for you. He goes, it hasn’t worked out well. And so it’s interesting because a couple of years after that, he became a client of ours because it took him some time. He had to unfortunately take the more difficult path. But at the same time, that’s sometimes what it takes. So it’s I think that people do have the ability to change over time, but sometimes it is just not best to take them on right away.
Peter Harper: If a client’s coming to this for the first time, they’ve got to really understand risk-adjusted return. Right? I mean, like it’s very easy to quote a big number – it’s all relative to the risk you’re taking. So that’s a great story. Alex, do you have anything else you want to add to that?
Alex Thompson: No, no, that’s all for me.
Peter Harper: Shifting gears slightly, for anyone who’s going through a liquidity event for the first time, maybe they’ve only had a modest amount of money invested in the market, and so let’s say that they’re transitioning from a position where they’ve had seven million to now putting know ten, twenty, fifty million in the market. What would you say to someone who’s interviewing a manager, financial adviser for the first time as they’re going through the process?
Josh Luff: Yeah, so I feel like the best advisers are the ones that a) you know well and you’ve known for a while. If you’re just starting to have interviews with investment managers at the time of sale, often you’re already starting behind the proverbial eight ball. It’s usually good to have those conversations, you know, a year or two in advance and start getting to know they. Folks, if you know you’re going to be in that 50 to 100 million dollars base, you should have at least a person or two or somebody that, you know, that works with those sorts of clients as well. You don’t want to go to a guy that primarily works with one to five million dollar clients. They’re just not going to be able to serve you.
Josh Luff: And then again, depends on the size of an asset base. But if you’re in the – call it – five to twenty five million dollars space, if you go to somebody that’s a one hundred million dollar person, you’re probably not going to get the time and attention that you’re really going to demand. So it’s also important to get the right type of advice and the type of advisor. And just knowing their clients and the type of person that they work with is important, you don’t want them to be learning on you.
Josh Luff: If I work with hundred million clients all day long, am I willing to go and try to help somebody to the best of my ability that has two or three million dollars? Sure. But the product set is completely different. The advice set is completely different. The things to focus on are completely different. And so while I might be able to do it, I’m not going to be an expert in it. And that’s really a disservice to those sorts of clients. I think too many advisers try to be all things to all people.
Josh Luff: So I’d say, number one, you don’t want them to be learning on you. Another thing is obviously that you want them to be trustworthy. There’s a lot of nice people out there, there’s no question about it. But making sure that they’re also trustworthy. And then I think the last part is somebody that’s truly passionate. Again, I struggle with this because I think there’s passionate people at all in all groups of advisors. But I think there’s a lot of folks that aren’t truly passionate that that can just they watch CNBC a little bit more than their client and therefore they’ll use all the quips that they hear on TV or someplace else, rather than it’s truly passionate and doing the research and trying to find new ways to benefit their clients. I think that bar none is somebody that you’d want to at least seriously considering partnering up with.
Peter Harper: You know, I think you cover off on a lot of really good points. I mean, I think for anyone is coming to this, right. For the first time, getting to know the industry and understand the economic factors that sit under advisors that at the lower end of the market, they’re very heavily commodities and product-driven. Because quite frankly, there’s just not the revenue to sustain highly customized product offerings. Whereas as you go up the J-curve, like in any advisory business, comparing this back to corporate attorneys, you wouldn’t get the guy that’s advising on the Sprint T-Mobile merger to come in and help out with the sale of the five million dollar gas station down the road. Right. It’s like so I think there’s very practical elements of what you’re saying that might make a lot of sense. I love the trust factor is a critical thing. I agree with you as far as timing is when we talk to clients, we were trying to engage with them probably two to three years out from a liquidity event where we’re starting a process with them, getting them to think about if we sell, what is what are the numbers like? What’s my net going to be? What’s going to drive this decision making? And I think any of the guys that are any good in this business, in the business you’re in, are more than happy to spend the time to open the bonnet on what they do in a sort of pony show leading up to a liquidity event. People should absolutely go through that process.
Peter Harper: And the one thing that I think things supercritical is references. Right. Is asking for a number of client references. So if you want to verify and say, OK, listen, how many clients do you have that have this amount of liquidity? I mean, as you said, no one wants to be the largest fish. If someone is used to dealing with five million accounts and you’re walking in and giving someone a 50 million account, you’re going to have challenges, so understanding that that’s critical. Alex, do you have any other comment to make on that?
Alex Thompson: Yeah, I think probably the one thing that we see quite a lot within our, client base is, Josh had touched on it, understanding your thoughts and specialization. So a lot of the families we work with, cross-border private clients, you have families that may be foreign nationals either running a business here in the US or running a business abroad with your family here in the US. So understanding what needs to happen from a structuring taxation perspective can make a meaningful impact to outcomes. And the reality is that cross-border advice in particular, it is highly specialized and it’s chronically underserved. So finding the right advisor, if you do have a specialist situation is critical.
Peter Harper: Yeah, yeah, I agree with that. I mean, the impact on getting the tax base, structure piece wrong can have a completely wipe out the benefits of the portfolio that’s been recommended and can press yields. So having a good team of peoples is absolutely critical. I think that’s one of the amazing things about the US market. There is it is such a large and dynamic market that there is enough business for highly specialized folks to really concentrate their expertise.
Peter Harper: Ok, we’re cracking down to the end of today’s session. One sort of final area that I wanted to talk with you today is about your interaction with your data and your clients. Again, let’s assume a first-gen is going through this process has been through this interview process and has said, Josh and Alex, we want to hire you as a team. Josh, on portfolio management. Alex, we want you to come in and help on building out a portfolio of alternative investments. How important is data to the way in which that you develop and manage investments, which obviously is critical, and then the interaction with the management and presentation of that data back to your client.
Josh Luff: Quick, quick phrase, garbage in, garbage out, right. Better the better the data you have, the better the decision you can make as an adviser to those clients. So, I mean, dovetailing into the conversation that we just had, even about people having liquidity events, that one of the primary reasons why you want to be engaged early as an adviser is to understand what is changing and what all the moving pieces are. I’ve heard business owners say, hey, I don’t want to engage somebody because I don’t want to jinx it or I don’t want to count my chickens before they hatch. And it’s like, well, no, you know, things do change. We understand that. But the more we can understand all the pieces, whether it’s spending, whether it’s lifestyle, whether it’s preferences, whether it is just finances – like the just the pure bank accounts, numbers, assets – the better we can advise, the better we can structure, the better we can say, hey, you know what, let’s take our time, let’s move some of this outside the estate now to freeze it and preserve it, maximize exemptions, gain tax benefits. I mean, there’s so many different reasons, but data is really the key there without good data. You know, I can say, hey, this is the greatest investment in the world. But if you need all this cash flow and I’m going to lock it up through this greatest investment in the world for the next 10 years, what do we do in between there and all? If I’m saying, hey, you’re going to get this great return, but you’ve got to lock it up over 10 years and you’re saying, hey, I need that cash in the next 10 years? Well, it’s not such a great investment anymore. So, again, data data is incredibly important. And then being able to turn that around and and then report on it properly is also extremely important to be able to make future decisions.
Peter Harper: Yeah, that’s one of the biggest things that we try and start an early dialogue with these with our clients that we think could be good multifamily office candidates is thinking through family reporting. And again, going back to the earlier sort of dollar we were having about compression of cash flow, when there’s a lot of money around, a lot of these folks might roughly know how much money they’re spending, but they haven’t ever really thought it through and manage that in a way that’s impactful. And that’s the biggest thing that we and change now, I think for folks who are in the ultra category, where it’s that next level of wealth, where it’s I won’t say there is enough money that you could never spend it, because when there’s a will, there’s a way that it’s more challenging. Right. So, Alex, do you have any thoughts on this?
Alex Thompson: I think that’s right. I mean, particularly for business owners, it’s quite common, they understand the importance of data and the importance of a regular reporting and to quote another throw away, if you can measure it, you can manage it. So in their operating businesses, we find that there are very sharp clients. But when it comes to reporting at the family level and on the personal balance balance sheet, that rigor is just not there necessarily as much.
Peter Harper: Yeah. That’s brilliant. Well, gentlemen, I want to thank you both for joining. This has been a great discussion. I really appreciated the feedback and your thoughts and look forward to catching up with you both next time.
Alex Thompson: Great, thanks.
Peter Harper: Thanks, guys
Josh Luff: Thanks, Peter.