We Do Not Commit Investors for the Duration


Our belief is we can (dramatically) lower our cost of capital by making it easier for investors to come and go. We set prices for buy-sell transactions that are steady and predictable. This provides investors with assurances of a ready market when they are ready to sell.

We do not commit investors for the duration. We prefer long-term investors, consistent with our aim of providing long-term predictable funding for unpredictable R&D+. We provide many sweeteners to retain the business of each investor. But we leave it to the investor to decide how long they want to stay.

We could ask investors to provide funding until success happens (the venture capital model). It could be 5, 10 or 15 years. In exchange for such lengthy commitments investors would demand exorbitant returns, would meddle in the affairs of our investees, and would come up with unreasonable demands on the timing of returns. The Investee Bill of Rights and Obligations would be under constant assault, risking returns for all investors. We practice instead voluntary retention.

Our approach provides steady share pricing over decades. We make-a-market in a perpetual fund+. Share price is independent of mood swings in the larger public markets. The value of assets underpinning our share price doesn’t change much from period-to-period. Events causing large changes in valuation for underlying assets+ are infrequent (e.g., advancements+, exits, IPO’s). The negative impact of any one event on the portfolio is minimal. Large positive impacts are muted from distribution of these windfalls+ to many agency wealth-creation activities. Our belief is steady share pricing leads to steady investors.

Steady share pricing allows for just-in-time capital acquisition. We trade shares each open season+. We control half the investment transaction for every trade (we’re a private fund); we command premium pricing as best we can. We attract and pay only for capital needed for the upcoming investment season (with a moderate cushion). We do not waste investor wealth by acquiring, paying for, and holding expensive capital not needed for use by our high-return investments, as is often the case in corporate IPOs.

Steady share pricing eliminates buy-low, sell-high investors. Investors can exit but they know steady share pricing means they will almost always pay more to re-enter (and they miss out on windfalls during their absence). Technical traders (the charters) will not see their favorite patterns (e.g., head and shoulders, cup and handle). Instead they see steadily increasing share prices, punctuated by unexpected dividends. Sometimes share price growth is anemic, sometimes accelerated. We strive to ensure it is always increasing, making it much easier for investors to buy and stay put.

We allow investors to buy and sell during each open season. We believe this liberal exit policy will lead to a lower cost of capital for the funding agency+. This belief will be affirmed by our ability to attract sufficient funding based on the promise of steady share pricing in our perpetual fund, sweetened by an occasional windfall. Much depends on our success at recruiting, educating and retaining investors. If we find we’re having high investor churn+ (excessive buying and selling) then we may decide to tighten the exit policy, for example, reducing the number of open season events.

Our funding approach has never been tried, so we keep an open mind as to the best way to minimize the cost of capital (i.e., what it costs to find and retain an invested dollar). Our hope is we can retain Joe-investor at a reasonable cost for maintaining our retention programs. If we cannot, we may be forced to move more toward an institutional investor base, adjusting our tactics to take into account their meddlesome personalities.

Editor's Picks for September, 2011

Further Reading
Reba Tull
Joined: 03/30/2011
Your investors will not reward you for this convenience

Brokerage firms have spent decades building up their client lists and procedures. And even more challenging, you’re not selling commodity investment vehicles – it takes a very sophisticated clientele to purchase ‘derivative investment vehicles’ (i.e., what you call the perpetual fund+). They will demand a very high return on their investment and won’t give much of a discount simply because you allow them to come and go.

JIT acquisition? Seems much more ‘effective’ to grab as much cheap capital as you can when the larger markets tank. That's what GM did after the 2008 economic crisis. Recessions may be a good time to start a new fund.

I must admit this approach, allowing investors to come and go at will, does somewhat allay my fears of being caught up in a Ponzi+ scheme.