Extreme Investing: Rare Gems, Plane Parts and Ex-Prisoners
"Innovation" was once a point of pride for financial firms. Now the word mostly just makes people nervous. It's hard to push the envelope with new products when so many investors are playing it safe, banking big gains from U.S. government bonds that have existed in one form or another for 223 years.
Sticking with the same old same old is not where Wall Street has made big money, however, or how it adapts to changing market dynamics. So Bloomberg surveyed wealth managers, legal experts and academics that follow or advise the financial services industry to find out what new financial twists investors will hear more about in 2013.
Many recent innovations sidestep traditional securities markets. The category of alternative investments is well-established, but now, along with the usual fare, such as timber and gold, there are funds that hold rare colored diamonds, such as the one Eli Butnaru, U.S. chief executive officer of Mora Wealth Management, uses for a small part of some clients’ assets.
There are also private equity funds that invest in airplane parts. A fund offered by Sciens Capital Management, which Butnaru also invests in, buys up aircraft and dismantles them for valuable parts. The idea behind these funds is to trust specialists to make money in "extremely eclectic" asset classes largely unaffected by the economy, says Butnaru.
The JOBS Act allows wider access to investments previously restricted to wealthy "accredited investors."
The U.S. Congress is offering investors other new options. The Jumpstart Our Business Startups Act -- the JOBS Act -- allows wider access to investments previously restricted to wealthy private entrepreneurs, private equity firms and venture capital firms. Until now, many of the riskiest investments were restricted to “accredited investors” with net worth, not including their homes, of $1 million or more. The JOBS Act lets people who earn less than $100,000 annually invest up to 5 percent of their income a year in more speculative ventures. Those who earn more than $100,000 can contribute 10 percent. No matter how little you earn, you can pitch in $2,000 a year.
This change would give less sophisticated investors access to “crowdfunding” through the Internet, similar to how people donate money to projects through sites like Kickstarter. Just how creative these investments could get isn’t clear – the rules won’t be final until well into 2013. Theoretically, small-business owners could raise money from strangers or potential customers, says Clifford Holekamp, director of the Entrepreneurship Platform at Washington University's Olin Business School. A hundred people might each pitch in $100 to help keep a local coffee shop in business. Or college students might try to raise funds by promising 10 percent of future earnings to people who pay their tuition, he says.
Who’s going to vet crowdfunding projects to make sure they're not terrible investments or, at the very least, not scams? That's not at all clear, and it worries Matthew Patsky, chief executive officer at Trillium Asset Management. "I'm more nervous than excited about crowdfunding," he says.
The Act also widens the potential pool of initial public offerings, or IPOs, available to investors. It does that by making it easier for companies with less than $1 billion in revenues to launch IPOs without all the regulations and disclosure required of bigger companies. There are many small successful companies, often in the technology sector, for which a traditional IPO is too much of a hassle, says Thomas Voekler, a managing partner at law firm Kaplan Voekler Cunningham & Frank. More of these companies may now opt to go public.
Goldman Sachs is investing $9.6 million in an effort to keep formerly imprisoned young adults from returning to jail.
In August, New York City announced the nation's first "social impact bond." Goldman Sachs is investing $9.6 million in an effort to keep formerly imprisoned young adults from returning to jail. The city pays -- and Goldman profits -- only if the program is successful. (New York Mayor Michael Bloomberg is founder and majority owner of Bloomberg LP, the parent company of Bloomberg.com.)
Massachusetts enacted a Social Innovation Financing Trust Fund this year that follows a similar approach. Other state and other local governments, including Connecticut and Cleveland's Cuyahoga County, are considering following suit. "If this kind of social programming is accepted, it's going to revolutionize the not-for-profit world," says Hildy Richelson, president of the Scarsdale Investment Group.
The goal of 'impact investing' is to make investments that can have positive effects in and of themselves.
While the goal of many socially responsible investment funds is to avoid companies in industries such as defense or tobacco, the goal of “impact investing” is to make investments that can have positive effects in and of themselves. Patsky, an expert on socially responsible investing, says impact investing has existed for centuries. What’s new is that firms are working on ways that retail investors can participate -- perhaps through closed-end mutual funds, he says.
It’s clear that these investments of the future could offer small businesses, growing companies and non-profit organizations new sources of capital. What remains to be seen is whether they will make investors any richer.
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