If “The Graduate” were to be filmed today, the pic’s most famous verbal exchange might go something like this:
Mr. McGuire: I just want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Technology.
In the 1967 movie, of course, the word was plastics, and companies like Dupont and Dow Chemical were riding high. But today it’s the high-tech
Googles and Apples of the world that are building staggering market caps.
And while no investment is without risk, as the recent Facebook IPO has painfully shown, many of the business managers
who handle the financial affairs of Hollywood’s stars and execs have often steered their clients to advisors who’ve placed a significant portion of their portfolios in the tech sector — often with very favorable results.
Indeed, digital media companies have historically seen industryites as a natural constituency from which to raise money, and those who were early investors in such companies as Netflix, Instagram and Amazon — in addition to Google and Apple — pocketed massive returns.
Now the next generation of bellwether tech companies beckons investors by seducing them with the possibility of similarly huge returns, in the range of three to 10 times initial investments. That’s where investment experts weigh in.
“If a client has a desire to invest in the technology sector, they are best served by connecting with an investment professional in the venture capital space,” says Brian Werdesheim, managing director of Summa Group, a division of Oppenheimer & Co. that counts studio heads, top-rung actors, directors and producers among its ultra-high net worth clients. “These people are experts in their respective fields, and evaluate opportunities in the space 24/7.”
Taken together, the tech sectors are an $8 trillion market, growing three times as fast as the broad economy, per Michael Walsh, m.d. and California region head of J.P. Morgan’s Private Bank.
“We look at tech as compelling because it’s cheaper but growing more quickly,” says Walsh. “We ask our clients to be aware if there is rapid adoption, there is massive risk, with very clear winners and losers. You can be Apple one day and Microsoft the next.”
Walsh adds that he’s bullish on mobility companies — a category that includes Google, Apple and Qualcomm — as well as big data players like Oracle and Splunk — which are in a sector expected to grow 45% a year — and the e-commerce and online advertising sector, predicted to grow 10%-15% a year.
“We really like to be in private markets as well,” Walsh says. “We generally partner with VCs in Menlo Park or craft our own fund, using our client’s money to invest in companies pre-IPO, even as angels. If we’re early enough, we have the opportunity to make a lot of money.”
Buying into a VC fund typically costs $5 million-$10 million and often clients’ money is aggregated and then tied up for three to seven years before liquidity is kicked back to the limited partners.
Walsh says the best equipped firms and advisers to make forecasts are out of Silicon Valley, because they have access to information and the next wave of technologies.
His clients have invested in Twitter, which has not gone public, and Priceline
, which is up 600% over five years, while once favored Hewlett-Packard and Research in Motion
are down 72% and 94%, respectively, during that time period.
“The results can be dramatic,” says Walsh. “The important thing about great returns is being nimble, because it changes so quickly.”
Facebook is a case in point, and its public stock performance has become a cautionary tale on how not to manage a high-profile tech IPO. Yet despite the shabby performance, investors who got into the stock on the secondary market before it went public in May are still in the black.
“You have to ask yourself if it’s a great business, if it’s a business that’s going to be around for awhile, and at what valuation you’re willing to pay,” says Jason Helfstein, managing director and senior internet analyst, Oppenheimer & Co., which covers Yelp, Facebook, Google, Angie’s List, Open Table, IAC, Zipcar, Netflix and Amazon, most of which had zero profitability at the outset.
“Talk about landmines; there is huge obsolescence in the tech business,” Helfstein says. “The next technology could totally change someone’s business. Facebook is the dominant social network now, but who’s to say Apple or someone else doesn’t come up with something that replaces it? We help clients understand what’s happening and what the trends are.”
In addition to analysts at the major brokerages and private bankers, many business managers and investment advisers look to tech entrepreneurs with proven track records for guidance on investing in nascent tech companies.
“The tech sector market in Los Angeles is really heating up, and clients are coming to us about companies they think are promising so that we can structure an investment,” says Stephen Prough
, co-founder and managing director of Salem Partners
, a boutique wealth management firm that handles investments for 25 families, about a third of them in the industry.
Prough says his firm invests with tech entrepreneurs Randy Saaf and Octavio Herrera, who started a hedge fund after selling several companies they founded — among the most profitable of exit strategies. “Our strategy is to invest in those who have a proven track record of making money for investors, and we test that with the firm’s money first, usually about three years, before putting clients in,” says Prough.
He also looks to Clark Landry, the executive chairman of social media marketing company GraphEffect as an expert in tech investments.
One of the takeaways here is the synergystic relationship between business managers and investment advisers. “Business managers (need) to have a wealth advisors like us because we have the accountability and ownership of the results on our shoulders,” says Jim Miles, managing director of investments at the Summa Group. “We let our clients know we should be held accountable, and that makes for a healthy, collaborative relationship with the artists, athletes and executives we serve. It allows the business managers the objective oversight to review our results and to quarterback the business affairs of their clients”
Business Managers Elite Report 2012
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