Ownership in your AM Firm
I work in a privately owned AM shop and own shares in the company, buying more every year. They pay fat dividends, but their value is based on AUM, meaning I have something similar to market downside. Over time, I'll be sold so many shares in the firm that they will eventually represent 100%+ of my net worth.
For anyone who's worked in AM long enough, you know it's a fragile business. Asset managers can underperform for a long time, go out of style, lose big clients, etc. With that in mind, i'm wondering:
1) Who else here is an owner in their firm, and
2) How do you deal with the extreme concentration of wealth? Are you comfortable with it? Do you do anything to offset or mitigate the risk?
bump - curious, at what valuation do they offer you ownership? wonder if anyones had experience with how folks react when aum starts declining (its super hard to turnaround an am)
I own a LP interest in my firm. Keep in mind every partnership does it differently. Some make you buy in, which is generally an approach used by the big 4 accounting firms, while others "recycle" capital. Under the recycling model that we use, the firm buys units from partners that are selling or leaving the firm and grants those units back to newer partners. Partners can also sell units to other partners with the permission of the board. The advantage to this approach is I don't have to take out debt or use all of my bonus to buy units. The firm's valuation is set annually by a simple P/E ratio.
Unless you're using a buy in model I'm not sure what this means. Personally I would not take out a bunch of debt to buy into an AM partnership. It's not like accounting: the industry is just too volatile and the LP interest could easily be worth zero someday.
If the firm isn't using a buy in model, you need to be saving money outside of your partnership interest so that you're net worth is never 100% tied up in the firm. I fully fund my Roth 401k, Roth IRA, and plus we have a profit share program which sets aside another $40k annually in a 401k style vehicle, so most of my net worth is not tied up in the firm.
Personally, I don't treat the LP interest as part of my net worth for several reasons:
1) As you indicated, AuM and thus profitability can swing wildly and that LP interest could ultimately be worth a fraction of the grant value.
2) Selling the units is not easy. The partnership docs set out under what circumstances you can sell them. Selling as a young partner would look really bad unless there is a compelling reason i.e. divorce. Even if I retire early, I am at least two decades from retirement, so who knows what the value will be by then.
3) I do receive quarterly partnership distributions which count towards my net worth. I have to set these aside for taxes when the partnership units vest though.
It is indeed a buy-in model. Outgoing partners sell equity to younger individuals at a low fixed P/E multiple, and the equity basically pays a very fat dividend yield as a result of that multiple.
Don't get me wrong, I fully fund non-taxable accounts and save well. The reason it would approach 100% is because you generally get sold more than your bonus. People lever up with cheap debt to buy the shares. It sounds crazy to you and even to me, but this is standard practice for private firms where I'm based and it's how everyone with serious wealth here made it - not in salary and bonus.
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