Index Investors Will Not Benefit From Today’s Disruptors | Sam Hassan, Managing Director, Capital Wealth Advisors | Q&A
Sam Hassan is the managing director at Capital Wealth Advisors, an independent financial advisory firm serving families and entrepreneurs through wealth advisory, estate planning and family office. In this interview, he discusses the key differences between working at sovereign wealth funds versus a wealth management firm; his article covering missed opportunities in the private market (Index Investors Beware of the Sucker Punch); and cutting through the noise in hot sectors and being extremely selective with those investments.Previously, he served as principal of global special situations at Abu Dhabi Investment Council, where he was responsible for private investments in technology, healthcare, consumer, banks and regulatory capital in addition to publicly traded securities globally.
Sam Hassan was named on Trusted Insight's 2018 Top 30 Private Equity, Venture Capital Investors. This interview has been edited and condensed.
Trusted Insight: What was the transition like from sovereign wealth funds (ADIC and Anwaar Majan) to your new role as managing director at an advisory firm?
Sam Hassan: One of the most rewarding things about being in the wealth management business is being face-to-face, front lines with the true beneficiaries of your work and effort. At a sovereign wealth fund or traditional asset manager, you could be up to five layers removed from the owners and beneficiaries of the capital you manage. In any business or industry, I believe that removing layers and cutting out middle-persons and intermediaries is beneficial for the ecosystem and in the end for the client and investment advisor. In that regard, the transition has been very rewarding. Here, I can look the client straight in the eye and say, "Hey, this is what we are doing and here is how we believe it may perform,” and then they see and feel the results. These are some of the intangible differences and differentiators that are out there.
Trusted Insight: How do you plan to impact the firm’s allocation approach in private equity and venture capital?
Sam Hassan: I am very lucky to have experience in both the public and private markets. I believe this is unique and an advantage in a world of single-asset or industry specialists. The private market has grown and evolved quite dramatically. Companies are staying private for longer and I don’t think this is going to change anytime soon. I wrote a note titled “Index Investors Beware of the Sucker Punch” as the introductory piece of my periodic thoughts in “Market Caviar.” The first issue highlighted the potential impact of missed gains in the private market at the expense of publicly traded companies.
"I think the days of opportunities being only available to a select few are over. It is logical that over time high-net-worth investors may gravitate towards an endowment approach to asset allocation."
Think about Uber now valued at around $70 billion in the private market. By the time it becomes publicly traded, a good chunk of performance has already been captured. In my opinion, there is no reason that our clients need to be confined to a single asset class or industry. There's no reason why multi-asset class investing cannot be brought to the forefront of the family office or the individual investor. I would expect that the wealth management industry will ultimately develop an endowment approach to asset allocation, where all opportunities are available. Why should good opportunities only be available to a few institutional players if those investments also make sense for high net worth clients? When and where appropriate, I can foresee a future where high net worth investors will want to have exposure to listed securities, private equity investments, venture capital, fixed income and other credit opportunities as well. I think the days of opportunities being only available to a select few are over. It is logical that over time high net-worth-investors may gravitate towards an endowment approach to asset allocation.
Trusted Insight: There is a lot of capital in markets today, both private and public. We are nine years into a bull market, valuations are high and interest rates are low. How do you see the private equity market performing over the next 5-10 years?
Sam Hassan: I think in any market and at any given point in time in the cycle, opportunities are going to present themselves in both the public and private markets. The key is to have the ability and the flexibility to see and execute when those opportunities present themselves. For example, not too long ago, investors looking at the energy markets boldly predicted that oil was left for dead and there was going to be a ton of bankruptcies. Some really smart people declared oil was heading to $10 as equity and bond prices collapsed. If you had the conviction and had done the work, there was a lot of money to be made. Fast forward two years later and oil is well above $70 a barrel, bonds and equities have largely recovered and folks are now asking when oil will break $100.
"The days of 'spray and pray' approach into venture capital, private equity and listed securities are behind us. I think where we are in the cycle now, you have to really be selective with whatever investment you're going to make."
The opposite end of the spectrum was when pundits pointed out that Square was listed well below its last capital raise. They even calculated how much those who participated in that round would lose. That created headwinds for all privately held companies and some ended up selling at low prices. The reality was those who participated in that round benefited dramatically from the lower IPO price due to the “ratchet.” This feature gave those investors additional shares if the IPO price did not reach a certain level. For those keeping score, shares are now above $50 up from an IPO price of $9. Markets tend to give people opportunities for the prepared.
Trusted Insight: What sectors of the market interest you most in today’s macroeconomic climate?
Sam Hassan: In this environment, investment selection is key. The days of “spray and pray” approach into venture capital, private equity and listed securities are behind us. I think where we are in the cycle now, you have to really be selective with whatever investment you're going to make. I don't think you're going to be rewarded for taking an index approach to invest. I think you're going to be rewarded for making these selections on an individual basis. In my opinion, this is the time to be more prudent and cautious. In the public markets, select consumer staples and consumer discretionary companies look good to me. As Warren Buffett pointed out, the internet will not change the way people chew gum. In addition, I think there are some good opportunities in specialty lending and in particular those providing bank solutions. Lastly, within venture, I believe there could be opportunities in blockchain and AI where intermediaries are displaced.
Trusted Insight: Many are talking about artificial intelligence, but if you really look at the history of AI it's been around since the 70s. People don't realize that the meaning of that word has changed so many times that it's hard to know what someone means when they say they are an AI company. What does AI mean to you and your business?
Sam Hassan: You could draw the same analogy to big data back when it was the hottest buzzword. I read an article recently, I am not certain if it's true, that said information about me buying a pizza is sold for more than the cost of the pizza. We have to differentiate and try to figure out what's real value-add and what's just noise. That is the hardest part. There are always hot sectors but it is important to cut through the noise to understand the underlying value-add or application.
I mentioned earlier how I think the best companies to own are those that help facilitate and eliminate layers of intermediaries. Blockchain by definition is the ultimate intermediary purging machine. I also think that we're at a point right now where artificial intelligence has gotten good enough that you're going to start seeing exponential growth and improvement in the industries that they're affecting. Not too long ago autonomous driving was viewed as something that would be nearly impossible to reach. Some folks had projections that by 2030 you could start to see autonomous vehicles on the road. Yet here we are less than two years later with autonomous vehicles on the road. It's a lot more pervasive than people think. These innovations are happening more quickly than ever.
I think the things that had worked in the past, particularly in venture capital, the social media and social networking type applications, will not provide as many good opportunities in those subsegments. I think what you're going to find is in the blockchain and artificial intelligence niches within the market that you'll find good opportunities.
Trusted Insight: How will your firm advise private equity and venture investors to hedge their investments in anticipation of an inevitable market correction?
Sam Hassan: We are currently building out our private investment strategy using a broader endowment based approach to capital allocation for individuals, but have not fully launched that program as of today. In my opinion, there's no reason that these investment opportunities should only be afforded to sovereign wealth funds or very sophisticated investors. The future is a bigger world than that! Our goal is to broaden the spectrum of assets classes available. We believe that will help individual investors perform better in all markets, regardless of the point in the cycle.
Trusted Insight: What differentiates Capital Wealth Advisors from other top wealth advisory firms?
Sam Hassan: One of the things that I think makes this place different from other wealth managers is we give our clients transparency on the individual securities that are being bought and sold in their accounts. We're typically not investing our clients’ assets into an ETF, because we do our own research; on the contrary, we're investing in individual stocks and bonds. I believe that's the main differentiator. The other differentiator is that clients talk to us face-to-face about those investment recommendations and decisions. We provide an end to end solution for clients that covers them from planning through to execution. I strongly believe that our advisors and research team are world class, with a pedigree from some of the most well-known managers out there. We've got that sort of pedigree and we're bringing it right to high net worth clients at their front doorstep. The evolution will be to broaden and further diversify clients and introduce them to innovative and new investment opportunities.
Trusted Insight: The tech IPO market has not seen as much activity since the underwhelming IPOs of SNAP and Blue Apron. What are your thoughts on the best liquidity option for entrepreneurs in the current market in terms of M&A and IPO? Do you think Spotify and Dropbox have ‘reopened the doors’ for tech IPOs?
Sam Hassan: Yes, absolutely. This is like a convergence of many secular themes all coming to a head at once. Spotify probably created the template for cash-rich technology companies that in all fairness have remained private for way too long. I think you'll probably see more companies use that template of direct listing as opposed to the traditional investment bank IPO. The amount of money that flows into these private technology companies today is mind-boggling. Broadly speaking in the late 90s, there was one merger for every seven IPOs and more recently the numbers are reversed with one IPO for every 7 or 8 M&A exits.
Over the past few years, it's seven companies that have been taken private for every one taken public. So, you had this reversal of the way companies exit. If companies are remaining private for longer and are raising larger pools of capital, would it have made sense for Spotify with $1.5-2 billion in cash to raise more cash? I don't think it would. If they don’t need more cash, the direct listing makes sense and I think we will see more follow this template.
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