Finding funding plays an important role in business growth and expansion.
Securing an external investor can help you achieve that growth, but you need to ensure your business is attractive to those with money to invest in scalable products and services.
This guide outlines some of the key steps you can consider taking to attract potential investors to your business.
Ways to attract investors
The key to attracting investors is targeting those likely to be interested in the product and service you provide.
It’s a good idea to research potential investors in order to understand their background and which businesses they’ve previously invested in to ensure they are a good match.
Knowing the criteria they use when making investment decisions can also be a good idea.
Investors have various reasons for why they provide funding and varying expectations for their involvement in a business.
The type of investor will often dictate whether they suit your business.
For example, angel investor network and angel capital association (ACA) angel investors typically back early-stage local businesses, whereas venture capitalists look for firms with a track record of success and potential for rapid growth.
Investors can be hard to track down but finding them and building relationships is important.
Many investors only back businesses they have discovered via personal referrals, so build connections with people who can do that for you.
Ask other entrepreneurs and advisers, such as accountants and lawyers, if they can make introductions, and check if your contacts on networking sites such as LinkedIn have valuable connections.
Keep your emails to investors concise and avoid sending the same standard message to each investor.
It can be a good idea to make any emails tailor-made and show that you’ve done your homework.
A strong business plan is often a crucial requirement for getting investment as it will help an investor to decide whether to fund a business.
The plan could include the following sections:
It’s a good idea to include a detailed cash flow forecast that estimates the money you expect to bring in and pay out over time.
If an investor invites you to pitch, a pitch deck is key to winning investment.
The deck is essentially a shortened version of your business plan as a slide presentation that concisely communicates information such as:
The deck needs to be clear and compelling to excite and engage the investor about your business.
Investors may expect to see a passionate and determined management team with the skills and experience to make the business a success.
If your team lacks some of the necessary skills and experience, it might be worth addressing before pitching to investors.
This might require recruiting new people as paid employees or finding external advisers and mentors with a relevant background.
You need to convey to an investor what makes your product or service stand out and demonstrate the problem you are solving or the need you are meeting.
It might not be entirely new, but investors will want to know how your product or service is better than those of your competitors.
Investors need to know that there is a big enough market for your offering and that your business has strong potential.
To demonstrate this you have many market research options, including:
Investors will want to know how your business will make money, and how and when they will make a return on their investment.
They have to understand your growth potential and how you will reach profitability and beyond.
You’ll need a cash flow forecast, a profit and loss statement, and a balance sheet.
It’s not just about numbers on a spreadsheet; investors also need to understand the assumptions behind your projections.
Using private credit to finance a project has many advantages including speed, confidentiality and certainty – features that are not as common in other forms of funding, including traditional bank loans, or public capital raisings.
Private investors, whether major corporates, such as hedge or pension funds, family offices or high-net-worth individuals, are looking for opportunities that are flexible, innovative, reward varying levels of risk with a combination of income and yield, and, as the name suggests, are private.
Private investors or lenders are increasingly willing to provide credit to some of the world’s largest projects – across infrastructure, resources, energy, food production, technology, property, healthcare, education – you name it, and across borders.
What exactly is private credit and what are its advantages?
What is private credit?
The most common form of traditional private debt is the corporate bond or debenture. A company wishing to raise funds would issue debt, in the form of a debenture or bond, to willing investors in return for regular income (interest) payments and the promise to return the original capital investment at a designated maturity date. The higher the level of risk, the higher the investor’s expectation that their regular income payments would be at a more attractive rate than what’s on offer from, for instance, a bank term deposit.
The issuer of the bond or debenture had the use of the capital invested for the duration of the investment period but must have had the cashflow to manage the regular interest payments and a timeframe for completion of their project that ensured the return of capital to investors at the maturity of the bond or debenture.
Within the constantly evolving world of global finances, the definition of private credit is expanding. The best definition is offered by the International Monetary Fund (IMF): “specialized non-bank financial institutions such as investment funds lend to corporate borrowers”.
The IMF says the global private credit market topped $2.1 trillion globally last year in assets and committed capital. About three-quarters of this was in the United States.
According to the IMF, “This market emerged about three decades ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets. In the past few years, it has grown rapidly as features such as speed, flexibility, and attentiveness have proved valuable to borrowers. Institutional investors such as pension funds and insurance companies have eagerly invested in funds that, though illiquid, offered higher returns and less volatility.
JPMorgan argues that the IMF may be underestimating the true size of the industry, the bank estimates the size of the global credit market at $3.14 trillion.
Advantages
The growth in the availability of private credit gives private companies greater access to funding, particularly for large-scale and cross-border projects. Private credit providers, including Acuity Funding, are able to offer more flexible terms than conventional banks, and can structure of tailor a funding package to the needs of the borrower.
Lending periods, caveats and contract conditions can be varied for the specific circumstances of each borrower and processing times can be fast tracked.
Private credit also has advantages for investors including the opportunity to diversify away from more traditional asset classes, and higher yields than many mainstream investments. This means growing investor demand for private credit opportunities and that is good news for borrowers as more funds are available for projects.
Many businesses are looking to reduce energy costs given the volatility of energy prices. A Power Purchase Agreement (PPA) is one potential solution to the problem.
With a PPA, a third-party developer will install, own and operate a renewable energy system on your property. Your business will then purchase the system’s electrical output for a specific period of time. As a result, your business may receive stable, low-cost electricity with no upfront cost. A PPA may be especially beneficial if your business is unable to take direct advantage of renewable energy tax incentives.
Traditional vs. PPA Framework
Under a traditional renewable energy project development framework, a project site is first identified and the project is approved and funded via appropriations, an Energy Services Performance Contract (ESPC) or some other mechanism. A request for proposal is then initiated and a developer or Engineering, Procurement and Construction (EPC) contractor is selected and the project is installed. Ownership of the project resides with the property owner-operator, also known as the host agency.
Using a PPA, a request for proposal is initiated for a PPA provider. Once a provider is chosen, a license, easement or other land use agreement is signed. Third-party investors fund the project and a developer manages construction. Ownership of the project resides with the investors, and they subcontract the operations and maintenance to specialists. The property owner-operator, or host agency, then purchases electricity from the project owner at a fixed price for the first year, with annual escalators and end-of-term options.
The developer creates a project company, with contract documents either signed with the project company or novated to them. The project company, usually referred to as an SPV or SPE, is the legal owner of the project and assumes limited liability. There are a number of significant contracts and assets at the project company level including project assets/cash flow, equity investments, insurance, warrantees and reviews.
PPA Project Finance Structures
There are three main project finance structures with a Power Purchase Agreement:
1. Partnership Flip — The equity investor is in place before the project is placed in service. Initially the majority owner, the equity investor will flip ownership to a minority owner. After the flip, the developer has the option of buying out the investor. The flip can be either time-based or yield-based. A partnership flip represents a relatively straightforward exit for the equity investor.
2. Sale Leaseback — Project assets are sold and leased back to the project company (or lessee), rather than the company itself. The equity investor has 90 days after the project is placed in service to enter into the transaction. The PPA and site relationship remain with the project company during the lease. A sale leaseback exit is less straightforward for equity investors since the lessee must repurchase the assets.
3. Inverted Lease — The renewable energy tax credits are separated from depreciation and passed through from the owner/lessor to the project company/lessee. Like with a partnership flip, the equity investor is in place before the project is placed in service. This structure also represents a relatively easy exit for the equity investor at the end of the lease term.
Choosing the right structure can be like a tug-of-war between developers and equity investors. Developers seek access to capital, the ability to monetize depreciation and the right timing of their return on investment, all at an acceptable risk level. Investors, meanwhile, seek a target return, depreciation benefits, familiarity with the structure ease of exit.
Complexity Requires Expert Assistance
Complex financial structures are involved when using PPA renewable energy projects, with legal ownership of the project and assets usually changing throughout the life of the project. Financing structures may influence the terms of the PPA with the host agency.
The experts at Firstrust can help you structure a Power Purchase Agreement and take advantage of the potential benefits. Visit us online or contact your relationship manager to learn more.
High-growth and seasonal businesses often face unique financial challenges. As sales grow, more cash must be invested in receivables, inventory and staff needed to support the increased level of sales. As a result, these businesses can become cash-strapped and have trouble meeting their current financial obligations. Similarly, businesses that generate most of their sales and revenue during certain seasons (like the holidays or during the summertime) can also experience financial challenges due to severe cash flow fluctuations.
One Solution: Asset-Based Lending
A potential solution to this dilemma is a unique type of business financing known as asset-based lending, or ABL. Unlike traditional commercial loans that are based primarily on financial ratios and credit history, ABL can also rely on the value of a company’s assets that can serve as collateral. These typically include inventory and accounts receivable, and to a lesser extent, machinery, equipment and real estate.
Most asset-based loans take the form of a revolving line of credit. The credit line is based on a borrowing base of the value of the assets serving as collateral and an advance rate that’s based on the type of collateral being pledged. When a financing request is approved, funds are deposited into the business’ bank account and the transaction settles once the assets are converted to cash (i.e., when invoice payments are made to a lockbox or specially designated account).
Accounts receivable tends to be the most common type of asset pledged as security for asset-based loans since it’s easy to measure the value of AR. Asset-based loans of up to 85% of the value of accounts receivable are common. Advance rates on other types of assets like inventory and equipment tend to be lower (typically around 50%) due to their lack of liquidity. Some lenders will consider other asset classes based on additional due diligence and their expertise, including without limitation, litigation finance, medical liens, structured settlements and private mortgage notes.
Pros and Cons of Asset-Based Loans
Could your business benefit from an asset-based loan? Consider the potential advantages and disadvantages of ABL. On the positive side, asset-based lending:
However, there are some potential drawbacks to ABL. For example:
Asset-based loans are sometimes a temporary financing solution, providing much-needed working capital until a company makes it through a start-up or transitional phase and may qualify for a traditional bank loan or line of credit. They can also provide additional financing in addition to a bank loan or line to help businesses take advantage of unexpected opportunities, like an unexpected large order or an opportunity to purchase inventory at fire-sale prices. Many clients find that the discipline associated with an asset-based lending facility aids in the prudent management of their business and its cash flows.
Choose Your Asset-Based Lender Carefully
When applying for an asset-based loan, it’s important to work with a specialty lender with deep knowledge of this unique type of financing. Firstrust’s Specialty Financing Services department features experienced asset-based lenders who have the flexibility to develop creative loan structures. All credit decisions are made and loan servicing is done locally so you don’t have to work with out-of-town bankers who don’t understand your business.Visit Firstrust Bank online to learn more about our Specialty Financing Services, including asset-based loans. Or contact your Relationship Manager.
Regardless of the size a business, succession planning is not only to replace a business owner, but it protects a business if a key employee should resign, is fired, becomes ill, or passes away. Having a plan is part of business continuity. It provides security for your business, your employees and your customers.
Protecting Your Business
Small businesses are generally more vulnerable when it comes to succession planning because there are fewer people involved in the business. This means there may be less skilled people who may not be ready to fulfill a larger roll. Identify people who have potential and take them under your wing. If anything should happen, they should be ready to take over in a case of an emergency.
In larger companies, there is a lot at stake when there is a sudden loss with no succession plan, sometimes causing a lot of chaos. Like any size business, people could be without jobs, and customers who rely on your goods and/or services may experience a ripple effect, possibly impacting their plans and/or customers. A large company can greatly benefit by putting in place a training program that gives high potential employees the ability to learn more about different groups. In the end, having experienced and capable employees ready and willing to take on new leadership roles is vital to an organization.
Motivate Employees to Learn
Once you identify individuals who have potential, you should put training in place to help that person build skills and gain the experience necessary to take on a specific role. While in training, business owners and managers should recognize possible competency gaps in employees. Once these gaps are identified, and you still see great potential, you can focus the training on building up the weak areas.
A big budget isn’t always needed to prepare employees to step into a larger role. For smaller businesses, you could implement a shadowing program or hands-on training. Larger companies may implement the same, but they also have the budget to do more in-depth training, hiring professional job coaches, or mentors. There are also programs where employees are required to look into a crystal ball and ask themselves, what else do I want to learn in this company? It becomes a requirement that each employee sets a goal to train, shadow or work on a project in a different department. This is a great way to retain employees should a department close, or it’s also a pathway for them to move up in the company.
Business owners should recognize that without a strong succession plan in place, your business may not continue once you are not able to run it yourself. When you do take the time to pick a successor carefully, it ensures your business will keep on operating and your employees won’t be left unemployed.
Owner Succession Planning
Estate planning and how your business is handled after you die is an effective way to prepare for end-of-life issues. Having a clear plan that is communicated to your leadership team and family will prevent any confusion as to who will carry on your business should you pass away. Planning ahead can result in a smooth transition between owners and successors.
You’ve spent years building a business, and without a succession plan, the brand and reputation you’ve personally created may be at stake. Having someone stepping in your shoes, who is not familiar with your company could risk everything you’ve worked for. The person may not understand your vision, mission and values, potentially harming your company’s brand in the long-term. This is true for both small and large businesses.
No matter how long you have been in business or whether you operate a large company or you’re a mom and pop shop, having a business succession plan is vital. Everything you’ve worked for may die with you without a plan in place. Contact a Firstrust Bank Relationship Manager who can help you with your business succession plans.
The journey of business partnerships is dynamic and ever evolving. Partners might choose to pursue different paths or unforeseen circumstances could change the direction of their professional commitments. It is in these instances that careful planning becomes invaluable. One effective way to ensure business continuity, despite changes in partnership, is the establishment of a buy-sell agreement. This strategic tool facilitates the smooth transition of ownership shares from a departing partner to the remaining ones.
Decoding the Mechanism of Buy-Sell Agreements
At the heart of a buy-sell agreement is the 'right of first refusal,' which allows existing owners or the business itself the first chance to acquire the exiting partner's stake before it becomes available to a third party. This provision safeguards the business from potential disputes or conflicting interests that an unknown outsider might introduce.
In the absence of a buy-sell agreement, the remaining partners could face challenges or legal complications with the family members of a deceased or incapacitated partner. For instance, the spouse of a deceased partner might inadvertently become a partner, without having the necessary understanding or interest in the business.
A well-drafted buy-sell agreement ensures that the business remains under the stewardship of the original partners while providing an organized framework for buying out the shares of a departing partner. The agreement delineates the circumstances under which a partner can sell or transfer business interests, requires the remaining partners or the company to buy this interest, and sets a fair purchase price and other sale terms.
Buy-sell agreements might also include restrictions on the departing partner to prevent them from starting a competing business within a certain geographic area or timeframe, or to deter them from soliciting the company’s clients. Moreover, these agreements can be tailored to discourage partners from leaving the business solely for financial gains.
Financing a Buy-Sell Agreement
Often, remaining partners may not have sufficient immediate cash reserves to buy out the exiting partner's shares. Hence, buy-sell agreements usually incorporate a financing option, allowing the partners to make a down payment and pay the remaining amount over an agreed period.
Alternatively, life or disability insurance can fund buy-sell agreements, smoothing the transfer of shares from a deceased or disabled partner. Two types of agreements commonly facilitate this:
Valuing the Business Interest
The valuation of the business plays a pivotal role in buy-sell agreements. Therefore, all partners must agree on a fair value for the business before drafting the agreement.
Several valuation methods can be used, such as the market approach, which takes into account the value of similar businesses, or the asset-based approach, which deducts liabilities from the fair market value of the business's assets to arrive at an adjusted net asset value.
It's advisable to engage a professional for a formal business valuation before formulating the buy-sell agreement. This valuation should be regularly reviewed and updated to reflect changing conditions that might affect the business's value.
Furthermore, the buy-sell agreement should be periodically reviewed to ensure its relevance to the evolving business landscape and the macroeconomic environment. A well-structured agreement should be flexible enough to accommodate these changes as they arise.
Be Proactive, Be Prepared
Partners may decide to exit the business for various reasons, and life events such as death or disability are unpredictable. Therefore, proactively creating a buy-sell agreement ensures you and your business remain prepared for any eventualities.
Each type of funder has its own unique requirements and preferences, so it's important to research and target the right funders for your organization's needs.
Let's start with Government/Public:
Government grants (like from USAID or the EU) or funding from public development agencies like the IDB, GEF or GCF can be a good source of funding for organizations that align with government priorities and objectives AND that are able to receive large sums of money.
The proposal development process for government grants can be complex and time-consuming. There are exceptions, of course, so it's worth diving into this bucket to see where you best fit. Additionally, piggy-backing off a partner that has relationships with government funders is a great way to learn about requirements, opportunities, and how to position your organization to receive these larger tranches of funding.
Keep an eye on LinkedIn pages like WorkWithUSAID and consider where your partnerships can help you get more involved in government funded programs. Be prepared to educate yourself on process, rules, and regulations if you don't already know them.
The payoff can be high, but restriction can also be high (i.e. government funders are NOT the ones to look to for unrestricted, flexible funding).
Next is Foundation/Philanthropic:
Private foundation grants, compared to government funds, are more flexible and accessible. They aren't always unrestricted, but requirements are often less onerous.
Foundations often lay out priorities for their giving, with specific areas of focus or geographic restrictions. We always advise our members to study the foundation's website thoroughly to identify the best potential alignment before applying for a foundation grant. The Venn diagram of priorities must be pretty large for you to be a consideration.
Funding levels can be in the multi-million dollar range (and increasingly so with the trends towards big bets) but on average tend to be in the low six figures. Foundation grants are a great opportunity to test out a new program, pilot test a new idea, or help add resources to a program that needs a refresh.
Government grants budgets are detailed and reviewed with a fine-tooth comb; for foundation grants you will need a strong budget that can be easily explained. But priorities are around realistic, transparent, and aligned priorities.
For funders that don't accept unsolicited proposals, utilize our 4 Step Guide to help you navigate this path. There are ways to be seen, and having a facilitated intro is often a great way to get more information on whether you have alignment or not.
If questioning whether to submit a concept note, or letter of inquiry to a foundation, ask yourself first whether you see complete alignment of mission and ideas. If the answer is yes, do send, and see how we can help you move that concept to proposal with the right intro. This is a people business in the end, especially for foundations/philanthropies.
Corporate:
Corporate funding can come in many forms to nonprofits, although most organizations look for CSR or cause marketing as a way to augment unrestricted funds. Some also look for employee engagement funding.
Instead of seeing the philanthropic dollars as the way in, try and understand a corporate’s business model. Where do they source product from? Where are their operations? What are their impact goals? Do they have an interesting program underway in a geography where you also work that supports local communities? Is there a way your work would help support a tenant of a corporate’s investment strategy in the Global South?
You want to see corporates as collaborators — and understand how their investment in themes or geographies match yours. How can your efforts help the corporate improve their business model, work better in regions where they are operating, source more efficiently or provide more opportunities for its workforce, communities or broader network? CSR and how a business functions are essentially one and the same these days (hallelujah!).
Consider how an outside investment from a corporate can augment an existing funded program you have, and approach the corporate as a leverage partner—not just for a donation.
Corporate funding can be a great unrestricted, flexible funding source, but it takes a good amount of patience, due diligence, and consideration to find the right match for your work.
The last category of funding is impact investment funding (or funding that is invested in an enterprise with the expectation of a financial return on that investment).
Impact investment capital is used by an investor looking to make money off of his/her investment in an organization that is designed to deliver a product or service for a profit of some sort. While impact investors can work with nonprofits, they can do so only if the program they are investing in has some sort of financial churn. This is obviously quite different from a funder that is just investing for a social or environmental outcome.
Most impact investors investing in the Global South do seek to improve on a social or environmental outcome, but seeing a financial return is a priority.
Why? Because investors are priming the development landscape to be more market-driven and to incentivize an economic system that is driven by business creation, not pure philanthropy. The expectation is that these enterprises, when funded properly, can help support local development for the longer term and be self-sustaining, create jobs, and strengthen a local system better than philanthropy can.
Some impact investors will provide venture philanthropy, which is grant funding followed by debt or equity. Others may invest with forgivable debt (i.e. it doesn’t have to be repaid). But most do invest with traditional or blended finance tools like loans, equity, and other forms of debt.
Investments can be small or large depending on the recipient.
As you evolve your fundraising strategy, understanding the full funding landscape gives you a much more focused approach to considering which funders and funder types are most likely to support your organization's work so you can target them effectively. Ask us how we can help you engage funders for a more effective outcome!
Post-war Europe was in dire straits: Millions of its citizens had been killed or seriously wounded in World War II, and in related atrocities such as the Holocaust.
Many cities—including the industrial and cultural centers of London, Dresden, Berlin, Cologne, Liverpool, Birmingham and Hamburg—had been partly or wholly destroyed. Reports provided to Marshall suggested that some regions of the continent were on the brink of famine because agricultural and other food production had been disrupted by the fighting.
In addition, the region’s transportation infrastructure—railways, electric utilities, port facilities, roads, bridges and airports—had suffered extensive damage during airstrikes and artillery attacks, and the shipping fleets of many countries had been sunk. In fact, it could be argued that the only world power not structurally damaged by the conflict had been the United States.
The reconstruction coordinated under the Marshall Plan was formulated following a meeting of the participating European states in the latter half of 1947. Notably, invitations were extended to the Soviet Union and its satellite states.
However, they refused to join the effort, allegedly fearing U.S. involvement in their respective national affairs.
Truman Approves the Marshall Plan
President Harry Truman signed the Marshall Plan on April 3, 1948, and aid was distributed to 16 European nations, including Britain, France, Belgium, the Netherlands, West Germany and Norway.
To highlight the significance of America’s largesse, the billions committed in aid effectively amounted to a generous 5 percent of U.S. gross domestic product at the time.
What Was the Marshall Plan?
The Marshall Plan provided aid to the recipients essentially on a per capita basis, with larger amounts given to major industrial powers, such as West Germany, France and Great Britain. This was based on the belief of Marshall and his advisors that recovery in these larger nations was essential to overall European recovery.
Still, not all participating nations benefitted equally. Nations such as Italy, who had fought with the Axis powers alongside Nazi Germany, and those who remained neutral (e.g., Switzerland) received less assistance per capita than those countries who fought with the United States and the other Allied powers.
The notable exception was West Germany: Though all of Germany was damaged significantly toward the end of World War II, a viable and revitalized West Germany was seen as essential to economic stability in the region, and as a not-so-subtle rebuke of the communist government and economic system on the other side of the “Iron Curtain” in East Germany.
In all, Great Britain received roughly one-quarter of the total aid provided under the Marshall Plan, while France was given less than one fifth of the funds.
Cold War
In addition to economic redevelopment, one of the stated goals of the Marshall Plan was to halt the spread of communism on the European continent.
Implementation of the Marshall Plan has been cited as the beginning of the Cold War between the United States, its European allies and the Soviet Union, which had effectively taken control of much of central and eastern Europe and established its satellite republics as communist nations.
The Marshall Plan is also considered a key catalyst for the formation of the North Atlantic Treaty Organization (NATO), a military alliance between North American and European countries established in 1949.
Impact of the Marshall Plan
Interestingly, in the decades since its implementation, the true economic benefit of the Marshall Plan has been the subject of much debate. Indeed, reports at the time suggest that, by the time the plan took effect, Western Europe was already well on the road to recovery.
And, despite the significant investment on the part of the United States, the funds provided under the Marshall Plan accounted for less than 3 percent of the combined national incomes of the countries that received them. This led to relatively modest growth of GDP in these countries during the four-year period the plan was in effect.
That said, by the time of the plan’s final year, 1952, economic growth in the countries that had received funds had surpassed pre-war levels, a strong indicator of the program’s positive impact, at least economically.
Political Legacy of the Marshall Plan
Politically, however, the legacy of the Marshall Plan arguably tells a different story. Given the refusal to participate on the part of the so-called Eastern Bloc of Soviet states, the initiative certainly reinforced divisions that were already beginning to take root on the continent.
It’s worth noting, too, that the Central Intelligence Agency (CIA), the secret service agency of the United States, received 5 percent of the funds allocated under the Marshall Plan. The CIA used these funds to establish “front” businesses in several European countries that were designed to further U.S. interests in the region.
The agency also allegedly financed an anti-communist insurgency in Ukraine, which at the time was a Soviet satellite state.
By and large, though, the Marshall Plan was generally lauded for the desperately needed boost it gave America’s European allies. As the designer of the plan, George C. Marshall himself said, “Our policy is not directed against any country, but against hunger, poverty, desperation and chaos.”
Still, efforts to extend the Marshall Plan beyond its initial four-year period stalled with the beginning of the Korean War in 1950. The countries that received funds under the plan didn’t have to repay the United States, as the monies were awarded in the form of grants. However, the countries did return roughly 5 percent of the money to cover the administrative costs of the plan’s implementation.
Sources
Department of State. Office of the Historian. Marshall Plan, 1948. History.state.gov. The Marshall Plan. The George C. Marshall Foundation. Truman and the Marshall Plan. Harry S. Truman Library and Museum.
When you think about a bank, perhaps the first thing that pops into your mind is the place where you manage your finances through services and products like deposits and loans. However, there is a financial institution that doesn't have a commercial focus but that plays a key role in the economy and that is also called a bank: a central bank.
A central bank is a public institution that is responsible for implementing monetary policy, managing the currency of a country, or group of countries, and controlling the money supply. Some of the main responsibilities central banks have are:
Central banks do all of this independently of the political group in power in any given country, as they aim to ensure the stability of the financial system. Their decisions are directly dependent on the supervisory body that composes the financial institution.
What central banks are there?
Central banks represent a country's financial institution but they can also represent a group of them. The eurozone is an example of a financial institution made up of a group of countries. In this case, the power falls under the Eurosystem, which is made up of two fundamental parts: the European Central Bank (ECB) and the national central banks of the eurozone's member states that have the euro as their official currency. The Bank of Spain, the Deutsche Bundesbank and the National Bank of Poland (Narodowy Bank Polski, NBP) are some examples.
As there are some countries that are part of the European Union but not part of the eurozone, in addition to the Eurosystem there is also another organisation called the European System of Central Banks (ESCB). This is made up of both the European Central Bank and all the national central banks of the countries that make up the European Union, whether they have the euro as their official currency or not.
In the United States, the Federal Reserve System is the central banking system there. Known simply as the Fed, it is responsible for carrying out the aforementioned tasks to watch over the country's economy and currency – in this case the dollar.
Also in the Americas, other examples of central banks are Banxico, for Mexico and Banco Central do Brasil for Brazil.
When a country needs its currency to lose value, it will resort to various monetary policy strategies. Sometimes, this can have a direct influence on personal finance. Here we’ll tell you why and how devaluation happens and what consequences it brings.
When money used to be gold, silver or bronze coins, it was worth the value of the metal it was made of. But as those precious metals became scarce, money needed to be made from paper, copper, aluminum, tin and other cheaper materials. Because money no longer had the same worth as precious metals, it derived its value from the wealth of the country that issued it. In other words, a euro, dollar or peso is a certificate of ownership of some of the wealth stored in a central bank.
Because that wealth can be affected by economic behaviours and trends, countries can take mitigating measures related to the value of money. One such measure is devaluation. It means the value of one currency is reduced against another.
We mustn’t confuse it with depreciation, even though both mean one currency loses value against another. On the one hand, devaluation happens when a government makes monetary policy to reduce a currency’s value; on the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market.
Causes and types of devaluation
Devaluation is a decision that makes a currency lose value. Let’s look at the most common types of devaluation and what makes governments implement them.
Other ways to devalue a currency include purposefully printing more money, as more paper and coin money in circulation reduces its value because it isn't backed by enough national wealth. Issuing more money has high economic risks because it causes inflation and can add great pressure to increase salaries and interest rates drastically, while causing a country's external debt to be more expensive and creating doubt about its financial stability.
How does devaluation affect me?
It’s impossible to tell if devaluation has a positive or negative effect on everyone (in absolute terms) because it depends on a country's economy and the targets it aims to achieve.
In general, when a currency loses value, people's purchasing power declines as well because products — especially imported ones — cost more money. And when that causes a general rise in prices, it’s called inflation.
We can also feel the effect of devaluation when travelling to another country with a stronger currency because we need more of our local currency to match it. Some types of devaluation can cause salaries and savings to be worth less, which is certainly not good.
Still, in a country whose economy is mainly based on tourism, the exchange rate attracts visitors. The same goes for remittances, which increase in value and mean more money arriving from other countries with a stronger currency. Also, devaluation can cause people who produce and sell things abroad or earn money in a different currency to make more money because of the better exchange rate with their local currency.
A recent report published by investment-data firm Preqin revealed that the global number of family offices surged by more than 21 percent last year to reach 4,592 and had also tripled since 2019. North America led the way with easily the largest share of family offices located across the continent, at 1,682, while also being home to more than half of all the assets held in family offices worldwide. Such trends underline the spectacular boom that the family-office sector is now enjoying. And with private-equity firms clamouring to catch the attention of this once-overlooked segment of the wealth-management industry, that boom could well continue for some time to come.
As the private-investing arms of wealthy individuals and families, family offices worldwide have thrived in recent years for a number of crucial reasons, the most glaring of which being the ballooning personal fortunes and sheer proliferation of high-net-worth individuals (HNWIs) across the world. Indeed, Forbes described 2024 as “a record year” for 10-figure wealth, elevating the billionaire class to register record amounts of riches. “There are now more billionaires than ever: 2,781 in all, 141 more than last year and 26 more than the record set in 2021,” the publication noted when publishing its annual “World’s Billionaires List” for this year. “They’re richer than ever, worth $14.2 trillion in aggregate, up by $2 trillion from 2023 and $1.1 trillion above the previous record, also set in 2021.”
To manage all this wealth, family offices are fast becoming the solution of choice for affluent individuals and families, with some estimates suggesting that this particular structure manages more than $6 trillion in combined assets. And with a key attribute of family offices being succession planning—that is, the process of preparing for transferring wealth to the next generation—wealthy families are keener than ever to use family-office services for this often complex undertaking.
“One phenomenon impacting both the creation of new family offices and their investment strategies is the great wealth transfer, which is expected to make Millennials the richest generation in American history,” according to Alex Murray, Preqin’s head of real assets and research insights. “An aging population means more family offices are transferred to the next generation—and this demographic shift is happening across the world. With this demographic change comes a shift in focus for family offices, from wealth creation to wealth retention.”
Accompanying this astronomical growth, moreover, are family offices’ rapidly evolving investment preferences, largely evidenced by the pronounced interest in alternative assets today, thus marking a clear departure from the simple stocks-and-bonds portfolio model that had previously satisfied investors. Instead, adventurous strategies are being pursued to generate consistently higher returns, suggesting that family offices are more open to alternative illiquid markets such as private equity, venture capital (VC), hedge funds, infrastructure and real estate. For instance, Preqin noted that among institutional investors, the family-office segment has the highest allocation to hedge funds.
J.P. Morgan Private Bank’s “2024 Global Family Office Report”, meanwhile, calculated the average family-office portfolio allocation to alternative assets at a not-insignificant 45 percent. “This represents a shift we are seeing among many family offices, where greater portions of their allocations are able to take illiquidity risk, in order to achieve greater potential long-term returns,” the report noted, citing private equity, real estate, venture capital and hedge funds among the most sought-after alternative investments among family offices. “Despite healthy allocations to alternatives, family offices are still consistently building out core, liquid portfolios with an average public equity allocation of 26 percent, and an average fixed income and cash allocation of 20 percent. Cash allocations still appear relatively high relative to history.”
However, the surging interest in private equity has mostly captured the headlines in the family-office world, recently surpassing public equity as the top asset class for family-office investment. According to Deloitte Private’s 2024 “Family Office Insights Series – Global Edition” report, private equity (including direct, funds and private debt/direct lending) represented some 30 percent of the average family-office portfolio last year, up from 22 percent in 2021, while public equities accounted for 25 percent, down from 34 percent in 2021.
Some of the biggest investment managers in the alternative-asset and private-equity spaces are now courting family offices as an increasingly pivotal source of funds, with the likes of Blackstone, KKR (Kohlberg Kravis Roberts & Co.) and Carlyle all expanding their operations in recent years to serve this segment and increase their investor bases. “The larger private equity managers are trying to compete there by putting in resources and time,” according to Rachel Dabora, research insights analyst at Preqin, who spoke with CNBC on March 11. “Ultra-high-net-worth investors and family offices are really on their radar.”
S&P Global Market Intelligence, for instance, found that KKR had raised around $75 billion from non-institutional private wealth by the end of last year, accounting for 13.6 percent of the firm’s $553 billion assets under management (AUM). California-based wealth manager Align Impact’s chief investment officer, Matthew Weatherley-White, moreover, acknowledged to S&P in early April that the firm’s clients—individuals, families, foundations, institutions and advisers—”continue to express the desire to have increased exposure to private equity and private credit”. KKR’s “2023 Family Capital Survey”, meanwhile, disclosed that family-office chief investment officers largely expected to boost their exposures to alternative assets in 2024, especially private credit, infrastructure and private equity.
What’s more, a recent survey of 189 family offices globally by BNY Mellon Wealth Management found that in the 12 months to June 2024, a comfortable majority of family offices (62 percent) made at least six direct investments into private companies—a growing sign that they prefer to operate as their own private-equity funds and thus directly capture more of the unlisted space themselves. According to the report, this direct investment presents exciting opportunities for family offices to leverage their unique competencies. “There is a clearly defined value proposition that sets out where the family office believes its strengths lie—for example, adding operating expertise, or having exceptional access to opportunities by leveraging connections,” the report also noted. “The process is well-defined, with a strong understanding of what has—and has not—added value in the past, and a strategy for realizing gains and exiting investments.”
It should also be acknowledged, however, that not all alternative investments are enjoying the same degrees of interest from family offices. According to William Marr, senior managing director of the wealth management group at hedge fund Welton Investment Partners LLC, asset allocation for several assets under this segment may already have peaked. “What we’re seeing actually is a bit of a shift away from adding more illiquids,” Marr told S&P, adding that while the previous decade saw a big wave of investments in illiquid assets such as private equity, private debt and private real estate, many family offices subsequently reached their allocation limit for these investments in their portfolios. Marr did also note, however, that family-office demand remained buoyant for specific illiquid segments, such as private debt and private-equity secondaries, for which “there’s a tremendous amount of demand, including from family offices”.
This robust demand is reflective of the typical family-office investment strategy of patient capital over longer time horizons. Indeed, assets can be held for decades to ultimately benefit from handsome liquidity premiums being realised in the end. The gradual changes in the valuations of such assets stand in stark contrast to stocks, which tend to exhibit pronounced price swings on a daily basis. “These clients are taking a multi-decade view of their wealth, and they can take the illiquidity,” William Sinclair, head of the U.S. Family Office Practice at J.P. Morgan Private Bank, told CNBC in April. “Many of them are seeing opportunities outside of public markets.”
That’s not to say that short-term opportunities are entirely disregarded. On the contrary, cryptocurrencies have also made a surprising appearance in family-office investment portfolios, with the BNY Mellon report recording a 5-percent allocation for this volatile asset class. “Among family offices who report exploring cryptocurrencies, there are diverse motivations for investing,” according to the report. “Over half mention keeping up with new investment trends and investment opportunities. Thirty percent or more cite interest from current leadership or the next generation of the family office.” Nonetheless, a hefty 38 percent of those surveyed confirmed that they had no interest in crypto, citing such factors as market volatility, the threats of hacking and cybercrime and the lack of regulatory maturity for digital assets.
Looking forward, it appears that the family-office boom will continue throughout this year at least. According to Deloitte, 70 percent of family offices expect to see their AUMs rise in 2024, while 79 percent expect their families’ total wealth to increase. The report surveyed 354 single family offices worldwide between September and December 2023 that oversaw an average of $2.0 billion in AUM, while the associated families possessed an average wealth of $3.8 billion.
Should the global economy experience a “soft landing” this year, the report also noted that family offices are well positioned to withstand economic currents. “With many accustomed to navigating fluctuating economic cycles, family offices aim to hold on to their long-term, yet nimble approach to investing, which—given their patient capital and cash reserves—puts them in a unique position to ride the economic waves while seizing opportunistic deals along the way.”
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