Risk, Return & Purpose

Traditional market theories state that one cannot achieve returns without bearing risks, the level of risk defining the level of expected returns. This conception is missing another fundamental aspect: the Purpose. No risk, no return ; no Purpose, no return. I will try to address the Risk and Purpose Returns model from an private equity investor perspective.

Jean-Marc Legrand, TheClubDeal

A luxury in my life is that of being constantly exposed to more-knowledgeable in certain matters.

Recently I have been exposed to hyper knowledgeable referent of the financial risk sector.

Conclusions of these meetings were quite striking for me, bearer of risks…

Indeed, since 2016, TheClubDeal has specialized in accepting measured risk so to foster greater return.

Obviously, it would be more politically correct to express our risk-acceptance model.

To those who discuss with us risks, we answer returns ! There are no returns anymore in these worlds to be accepted without risks associated to those. The “Risk-free” benchmark is impersonated by negative yielding debt issued by over-indebted, and often with a questionable management, governments… This is what is commonly accepted as a risk-free investment, of which one may question the true underlying and tangible value!?

There are no returns justified without risks, and more and more, without a Purpose. Here is the new cycle: no risk, no purpose, no return . The Purpose will more and more be defined by the immaterial contribution brought by the investment to the wider society. Do we believe that lending or investing into objects without Purpose will be at the same conditions for the same accepted risk? We don’t believe so.

The equation becomes one of a definition: understood risk, searched return, achievable purpose.

This balance is, in our opinion a quintessential one.

Private Equity and Risk – Investment thesis

The Private Equity perspective is the reflexion of the balance between the owner’s and founder’s objectives and the financial investors. Both aim at the same goal of recognition by growth. Not both can easily agree on an horizon for value translation.

The skill of the people we federated at @TheClubDeal is of selecting, structuring and accompanying the governance of promising companies and entrepreneur.

Recently, in several forums, I have been exposed to some expert people in risk management.

A recent tangible example: while I should have been freezing at the evocation of the fatal fate promised, for instance, for a venture in the hospitality sector (given the pandemic state), we had only to congratulate ourselves of the resilience of the business model we had subscribed to Yust, where the bottom line is protected by the long term residential stays, while the return pick up is offered by the short stay and the food. That was our initial investment thesis. We are also very proud to have achieved a Purpose, by combining several hospitality models under one roof, thereby offering a “place for living” vs the traditional concepts of “places for sleeping”, and therefore becoming a component of the “smart city concept”.

This short introduction to state that improvement without accepted risk is impossible.

Return without risk is therefore not a possibility.Be it, as a banking intermediary or an investor.

Life, and capital, will only evolve if you integrate a risk dimension.

The second level, nowadays, of understanding of the value of money is… Purpose.

Private Equity and Purpose

How can you mitigate risk so to achieve return and Purpose, is obviously the second part of the question.

While many will prevail themselves of the ESG criteria to motivate their decision, we believe that an Investment Thesis not encompassing those criteria should not pass the screening, and, furthermore, that an Investment without Purpose is worth much less than any purpose-full investment. This is where the notion of intangible or immaterial capital comes into play.

Have you ever felt a sense of pride and contribution when entering the premises, and meeting staff of a company you support financially ? This is part of this Purpose, where the feeling of achievement is way greater than any kind of satisfaction extracted from an investment in … bitcoin, for giving an extreme other example…

This is also why we like investing locally, where proximity enable better alliance, under a solid governance facilitation process.

Private Equity and risk mitigation

How to mitigate risk?

Firstly, at TheClubDeal, we strongly believe that a sound governance is the sine qua non basis for managing properly risks. Governance is the maximisation of the alliance between all stakeholders so to have a common understanding of the dynamics of the company, its competitive positioning and a Darwinian strategy.

Secondly,  you may also mitigate risks on a portfolio basis with sectorial and regional diversification, being active in three regions (Flanders of Belgium and France, French-speaking Belgium (Wallonia and BXL), while looking for growth companies in three sectors (Life Sciences, Smart Living and tech), offering risk patterns of a different nature. This is the overarching rule of diversification.

Thirdly, we mitigate risk by entrusting the entrepreneurs with minority growth capital. In the scale up phase, building an alliance with daring entrepreneurs without stripping them of their founder’s rights is also a methodology to keep them motivated, and in return mitigating risks.

Finally, the price you agree upon is the final risk barometer. And a balancing act in searching a greatest alignment possible with the Entrepreneur in forging a true alliance for the better of all stakeholders.

Risk is a notion we should accept if we want to give impetus to our eco systems, give a chance to our economies for the longer term, create value while respecting Values.

Is it me or is there a rise in risk avoidance that is eventually fatal for the long term development of our eco-system ?

Is the health crisis management not over sensitive to the acceptance of risk, for instance ?

We love risks, and want to achieve greater Purpose !

Jean-Marc Legrand
Founder
TheClubDeal

“Intuition is necessary, Processes are compulsory”

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