Corporate investing usually serves two purposes – safeguarding funds for employee compensation and generating additional profit. Investing for profit can be an elusive goal that taunts corporate executives. But with some sound strategy and understanding of risk, sound investments can greatly increase the corporate profit margin and even help create industry allies.
Why build wealth in a company?
Since the early 2000s, the global economic climate has fluctuated with wild ups and downs occurring on a semi-regular basis. Particularly for those companies looking to expand internationally or into Africa, profitability can become highly volatile in line with currency and political risk. Many companies are therefore looking to maintain maximum profitability by passive income in the form of investments, very much like a short-term insurer will invest its premium income and earn the bulk of its profit that way.
However, like a retirement portfolio (which, incidentally is one of the most common forms of corporate wealth, even though it belongs to the members) such investments cannot be speculative or high risk. Typically, one would follow the same process as with retirement planning – calculating cash flow needs and matching assets with liabilities.
Consider real estate
The biggest mistake companies make in investing (if you can call it that) is to buy depreciating equipment such as a fleet of executive cars and think it’s an asset – and then rent their premises.
Corporate portfolios are typically light in real estate holdings, and many corporate officers consider real estate a separate line of business so far removed from the company’s purpose that it seemingly does not warrant the organisation’s rands. However, just as private investors can produce aggressive returns by devoting considerable portions of their portfolios to real estate based investments, many corporate investors may realise higher profits by incorporating real estate holdings. Some companies invest directly in real estate by buying properties, using them as business premises or lodging for travelling employees, and then selling them at a higher price when the property increases in value.
There are other means of investing in property other than physical holdings, such as property syndicates and listed property. But these should never distract the company from its core business. Real estate offers the potential for significant profits using either vehicle, and currently low housing prices stemming from the 2008 market crash allow many aggressive corporate investors to pick up distressed properties at reduced prices.
Strategic Alliance Investments
In the retail investment space, equities are typically the most common asset class. The same should apply in the corporate environment – with one crucial twist. Business managers will typically have unique insight into their own business and industry, so it makes sense to buy not just random equities, but to make strategic alliance investments into businesses that are well known and understood by the manager, and whose performance could possibly be influenced through the alliance.
This is already commonly done in South Africa by big business under the heading ‘enterprise development’. This social investment activity can also be highly profitable. The practice is similarly commonplace in other jurisdictions, such as the US, where aggressive, highly profitable companies routinely invest in entrepreneurs and their new businesses, and they often reap the rewards of inter-company profit sharing. This is similar in practice to private equity investing, and their above-average profitability is one reason why many high net worth individuals invest in their own name. Of course, high failure rates among SMEs can make start-up investments exceptionally risky. However, for well-researched and closely managed investments, the profit potential is virtually unlimited.
What about your employees?
Employees are integral stakeholders in any organisation, and their interests cannot be ignored entirely in favour of shareholders. Often, management takes little interest in the activities of the company’s group pension fund, but there are means of increasing corporate wealth here too.
South Africa suffers from a bias that favours high-cost active fund management, whereas elsewhere in the world there is a move to lower-cost passive management, called the core-satellite strategy. The argument is that the majority of active fund managers do not, and in fact cannot, outperform their index – so why try?
The core-satellite approach involves having the bulk of one’s portfolio in various exchange-traded funds (ETFs) which track the index, with a smaller proportion of the fund being available for selective active management. This can improve performance and reduce the costs of investing – a true win-win. But another aspect of corporate wealth management is to leverage the skills the company develops in managing wealth together with its IT capability, and to offer it directly to staff, enabling them to manage their own wealth needs via a web-based financial planning tool.