Our clients frequently ask, “When is the market turning, and how should I plan for the inevitable downturn?”
To answer their question, we advise our clients to assess their tolerance for risk, their short- and long-term investment horizons, their competitive positioning, and their capital structure, and to do it in writing to help their entire team get on board. We have found that our clients typically fall into one of three risk categories:
- Long-term investors. Clients with patient money who are chasing a long-term rate of return and have managed their debt levels are more comfortable with the ebbs and flows in the market. While they may not like the daily fluctuations in their stock price if they are publicly-traded, we help them focus on diversifying their portfolio without deviating from their core competences. They can wait for demographics or long-term demand/supply conditions to play out. In a recent client poll, 55% told us they believe that entitling land is the worst risk-adjusted return, but 12% are making the contrarian play to buy the right land, hire the right entitlement team, and position themselves well when the market tides shift back in their favor. Appetites for risk vary. Contact us for the rest of our poll results.
- Short-term investors. These clients are focused on the next twelve months. Some are selling their companies. Some have private equity backers breathing down their necks. The industry’s investment bankers have been very busy, and we have been fortunate to work with many of them by assisting with seller packages, as well as buyer due diligence that includes market research, cash flow analysis, and valuations. Sellers are finding three primary types of buyers:
- Well-capitalized companies, like several of Berkshire Hathaway’s housing subsidiaries, who tend to be looking for smoothly run operations that need capital to push growth and expansion to the next level.
- Foreign Investors. Many foreign companies see a better long-term future in America than in their own countries. These buyers have a long-term outlook and often low return requirements. They will put capital in land (entitled or unentitled), builders, completed assets, or building products with great U.S. brands.
- Pac-Men. Private equity-backed consolidators as well as publicly-traded companies who need to fill their pipeline and add a good management team will also compete on acquisitions.
- Medium-term investors. Most of our clients are not ready to sell but aren’t planning for succession either. We are working with these clients more and more to formulate their strategic plans, recapitalize in line with their risk, and stay hyper-focused on the local competitive market for every community and product.
When the winds shift, which started happening nine months ago and accelerated in the last few months, entire portfolios and strategies need to be reevaluated. Write down the following four answers:
- What is our tolerance for risk?
- What is our investment horizon before we sell or pass management on to others?
- What makes us unique among our competitors, and how will that help or hurt us?
- How well can our balance sheet handle a slowdown?
Once you have these answers, give us a call.