Family offices have always searched for investing across a range of different asset classes. With the technological march, accelerated by the Covid-19 pandemic, the TMT (Technology, Media and Telecommunications) sector is looking even more attractive than before.
Why TMT over other sectors?
The fundamental assets base of TMT companies is Intellectual Property. Its creation, development, improvement and commercial exploitation. Whether it is an artificial intelligence, internet publishing, television production, media outlet or communication company, all are highly dependent on the value of the IP assets on their balance sheets.
In the past three decades, TMT enterprises have achieved a substantial ascent in the value of their IP assets and market cap.The value of intelligible assets versus tangible assets for S&P 500 companies in 1975 was $122 billion intangible versus $594 billion tangible. In sharp contrast in 2018, it transformed to $21.03 trillion intangible versus $4 trillion tangible.
The outbreak of the Covid-19 pandemic and its global consequences condensed a decade of natural digital evolution into a few months. Although we cannot fully assess the consequences, it is clear that IP intangible assets will form even a bigger part of the economy and on companies’ balance sheet.
Nowadays, the opportunities that TMT businesses are seeking to exploit only expand with the development of new technologies, think Zoom and Apple products. In turn, this provides renewed opportunities for family offices.
Family offices TMT investment tips
Many family offices are not comfortable to invest in areas that are outside their founders’ core business experience. Therefore, they may shy away from developing a strategy of investment directly into TMT enterprises. There are a few principles we recommend family offices to consider when they evaluate investment in the TMT sector
1. Diversification is essential
Family offices should look at TMT investment as a portfolio approach. Building a viable TMT investment portfolio takes time and research. The family office must assemble a team in order to source scan and filter the dynamic TMT market and its players for the right deals. This can be a laborious process of evaluating many dozens of potential opportunities in order to zoom in on the right deal.
2. Dilution factor
Never assume your first investment into an early stage TMT business is going to be the last one! It is highly likely you will need to deploy further capital to prevent dilution of your holdings. Reserving enough cash for further financing rounds is essential as later financiers who put up cash can overshadow the earlier investors’ shareholding and control power over the company. The significance of this factor may be amplified when companies are in dire need of funding. Which leads me to my next point.
3. Check who is investing along-side you
What are their investment motives financial resources and track record? Are there significant disparities in the financial standing of the businesses shareholders?
4. Management commitment is paramount
Early-stage TMT companies, in particular, will make or break on the basis of their management’s commitment and capabilities. If it is the wrong, management stay away! The right management can turn average technology into a successful business. Management remuneration and shareholdings can play a crucial part in incentivising and remunerating the right talent.
5. Tax planning should be part and parcel of any TMT strategy
With the right planning and structure, a family office can benefit from various tax incentive available in various jurisdictions. The flexible nature of IP requires diligent family offices to conduct their TMT investment in a tax-efficient way.
So, what are the risks and rewards?
The inherent dependency of TMT companies on R&D of IP assets attaches significant risk to TMT capital deployed. There is no magic trick to overcome these risks. However, a simple, clear and consistent methodology can significantly increase the chances of success.
Often family offices handle these risks by investing in TMT companies that operate in their founders’ core areas of expertise. They invest in TMT companies that operate in an industry they understand. They look for TMT companies that propose a new way to deliver an old service they know.
Another way to mitigate the risks is exposure to all forms of securities and investment ticket sizes. for example, family offices who specialised in providing mezzanine finance can look for similar opportunities in TMT businesses. Family offices may have a different appetite to various securities ranging from private/public equity to debt, convertibles, factoring and other off-balance sheet structures. This adds another layer of diversification. With a simple and methodical approach, family offices can reap the benefits of this exciting leading sector.