Recently, I was having a discussion with a Single Family Office executive who said “we don’t invest in funds because our clients don’t want to pay the fees charged.” He was referring to the management fee and percentage of profits charged by firms who manage investments.
Although I was able to move the conversation along, and see a very interesting future with this potential client, I missed an opportunity to create a distinction about how, even though we operate a fund, we’re eliminating the layer he was concerned about. Articulating this point would have allayed his concerns (that we are different) and made his initial comment about not investing in funds a moot point.
I should have been focused on layers. He was focused on layers. His mandate was and is to eliminate as many layers as possible as to maximize the return on invested capital. I didn’t take advantage of the opportunity.
After our phone call, I got to thinking about the different layers of an investment, like ours, and it’s led me to what I’m going to call the “5 Layered Investment.”
The “5 layered investment” helps me understand how profits and investment returns are layered but more importantly affected by the various people, firms, and groups attempting to attract investment dollars.
With what we’re doing here at CEA, we find this especially applicable for accredited investors, family offices, pensions, endowments, foundations, and high net worth individuals all of whom are our potential clients.
My objective here is to help identify the possible benefits and challenges of participating in each layer.
As a rule, Layer 1 represents arguably the highest possible profit and investment return. Layer 5 represents the smallest profit and return available.
The 5 Layers of investing:
LAYER 1: Company Ownership
You own the company.
LAYER 2: Inside Investor to Funds, Projects, and Direct Investments
- Benefit: All profits go directly to you.
- Challenge: Day-to- day management
Investments you get access to where you can invest directly with the owners or into a fund managed directly by the company.
LAYER 3: Investment Team, Consultants, etc.
- Benefit: Management is in place. Larger profits/returns because you’re investing directly.
- Challenge: You must vet the investment
People hired directly by you to source investments where you can invest directly…like in layer #2.
LAYER 4: Managers
- Benefit: Person or people manage your investments, are on the payroll, and you’re in control.
- Challenge: Expenses, management, and other costs of maintaining a dedicated investment team.
Asset managers, Hedge funds, and others who work on management fees and success fees.
LAYER 5: Outside Investor
- Benefit: Experience, oversight and deal vetting
- Challenge: Fees these firms charge for giving you access to their deal flow.
A person who makes, in contrast to the above, what might be considered “passive” investments into public equities because there is little or no access to direct investments.
- Benefit: The least amount of “work”
- Challenge: The returns are watered down in contrast to being an investor in one of the top 4 layers.
For the people with large pools of capital and for those who control these pools of capital, the goal should be to invest in the layer that makes the most sense. As more meaningful investment opportunities become available, especially at Layer 2, the more likely investments will generate better returns without an increased level of risk and/or expense.
About Clean Energy Advisors
Clean Energy Advisors, LLC, provides asset management and financial advisory services to impact investors in the sustainable energy sector. We are focused on creating opportunities for investors to participate in the exceptional returns and positive social and environment impact provided by renewable energy projects.