Tag Archives: banking

Assymetrical Access to Wealth Creating Opportunities


 

The older I get the more convinced I am that the real game changer in life – or the battle of life – is really the battle for access. There is no doubt that we do not have equal access to opportunities and/or resources. That assymetrical access makes a difference as to whether you will create massive wealth or struggle.

 

When I served on the Board of a financial institution some years ago I was shocked to discover that people do not have equal access to financing. For example some people because of their character, connections or networth are not required to put up collateral for any borrowings. Some may just make a call to the bank and within days they have a significant financial facility rolled out to them. While the average person struggles to even be entertained by the bank manager let alone be approved for a simple loan facility. That is assymetrical access!

 

Dr Francis Myles tells of access to the table of opportunity through invitation from powerful insiders. He gives the example of Mark Zuckerburg the founder of Facebook who had a brilliant idea and made lots of money through his innovation. Dr Myles then explains that Mark did invite some of his friends onto the table of opportunity and those who accepted his invitation to partner him in Facebook are now massively wealthy. While most people could only get access to this by buying the shares of Facebook publicly, these friends bought the shares privately and could negotiate the price and terms. Those who bought publicly paid a significant premium which reduces their profit margin while those who bought privately had massive gains. The difference was due to both timing and access to opportunity. This and similar stories led me to understand that those who have better access to financial tools privately have significant chances of winning big.

 

Actually one of the major sources of access asymmetry is based on whether you access financial instruments publicly or privately. The super wealthy or those on their journey to wealth prefer private access to public access. Unfortunately the average person believes wrongly that whatever is accessed privately has to be immoral, wrong or illegal. This perception has blocked more people from wealth creating opportunities. Let me deal with this public–private perception because it is critical to your wealth creating strategies. Remember that most astute investors prefer private transactions to public ones.

 

A private company is not illegal as compared to a public company. The main difference is that there is limited access to owning shares in a private company. Access is only by invitation. There are also less onerous regulations on private companies as compared to public companies. Public transactions are heavily regulated to protect the common person. The number of shareholders in a private company are normally prescribed to remain few. Access to its shares and its financial records is restricted. Restricted access to information does not mean or imply illegal. It simply means greater confidentiality.

 

When a company wants to go public it goes through a very transparent and open process called a listing on the stock exchange. It is called an initial public offering (IPO). The process is very regulated to protect the average investor who want to invest. Because of this regulation information has to be disclosed as publicly and transparently as possible. The process is also very expensive. But it allows for fair and open access. However the price of the stock that is publicly traded is fairly high when you purchase it unless there is a significant recession. But not everyone buys this company’s shares this way. The first and major players are given an opportunity to buy these shares in a private placement deal. A private placement deal happens when the insiders invite a person or corporate they like to join the party mostly before the public offering. These invited parties have faster access and can negotiate the terms and value of their purchase. They normally get very good discounts and deals at this point. The process is privately negotiated and minimal information about the transaction is provided to the public. The deal is governed by confidential agreements. The fact that it is a private transaction does not make it illegal. It is still regulated. But access is limited to those invited by insiders.

 

Similarly when one has insiders in the real estate market one can purchase well prized properties at very good discounts before they are opened to the public. Once a real estate opportunity is advertised and open to the public the price is often difficult to negotiate and discounts hard to come by. So access by invitation is critical to a good real estate opportunity.

 

I have discovered that assymetrical access to private placement opportunities is one of the major disadvantages in wealth creation. This is often increased by the perception that private transactions are illegal and public ones are legal. Significant bargains are accessed through accessing private transactions through invitation from powerful insiders.

 

One of the most powerful wealth creators are hedge fund managers. However these and their financial instruments are not easily accessible to the general public. In the US most powerful wealth creating strategies are restricted only to sophisticated investors. This regulatory requirement often gives the impression that private placement deals are illegal when they are not.

 

May you by God’s grace win the battle for access to the premium wealth creating tools that are often hidden from the average investor. May you be invited to the table of opportunity. Meet you at the top.

Understanding Your Operating Environment


Entrepreneurial Principles extracted from Entrepreneurship On Trial Dr T. A. Makoni

Entrepreneurs build their business within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the environment. Within the environment are forces that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment within which they operate so as to exploit emerging opportunities and mitigate against potential threats.
There is critical need for entrepreneurs to appreciate and understand the salient issues in the operating environment. It also demonstrates how the regulatory environment opened an opportunity for entrepreneurs. Some banks failed because they did not recognise the potential impact of the changes in the environment. This underlines the susceptibility of entrepreneurs in volatile environments to policy changes and reversals. The effect of the macro-environment on banking was highlighted. The underlying forces in the industry were revealed by the industry analysis.
The change in the regulatory environment brought in by the new governor resulted in the collapse of about ten financial institutions. Some of these had been deemed to be strong and thriving. In one year the financial services moved from the greatest growth industry in Zimbabwe to a virtual collapse.
The lesson learnt is that entrepreneurs need to scan the environment regularly and position their businesses appropriately. Entrepreneurs should to understand that the environment is always in a state of flux and hence has to be monitored to enable their businesses to exploit opportunities while mitigating against potential threats.
It is critical for entrepreneurs to recognise that the rules of the game in business are not cast in stone, these can change dramatically overnight to the detriment of the entrepreneurial venture. It is therefore imperative for entrepreneurs in volatile environments to maintain strategic flexibility.
Within each industry there are differing market penetration strategies open to entrepreneurs.
Another important principle is the need to analyse and understand the underlying forces driving the industry in which one does business. Banking entrepreneurs could have benefited from this analysis. In high flux environments it is important to recognise the presence of key uncertainties both “known unknowns” (things we know that we do not know) and “unknown unknowns” (things we do not know that we do not know)24.

Ensure that you seek to understand the underlying forces at work in the environment in which your business will operate. The environment can provide either great opportunities or send some threats to your survival. Continue scanning your environment. Entrepreneurs become astute at managing their environment to exploit opportunities and reduce risks. Entrepreneurs learn to handle what ever hand they are dealt with by the environment. Manage your environment. Stop crying foul. Entrepreneurs are not cry babies.