Turning the investment corner? Featured

7:00pm EDT November 25, 2009

After a long and tumultuous 2009, many investors are breathing a collective sigh of relief. The recession is (seemingly) behind us and things are slowly starting to make a turn for the better.

The upturn is naturally leading to more investment opportunities, but nevertheless, people are still somewhat wary of making a major investment. This type of thinking needs to change, says Syd Saperstein, a senior vice president and the division manager of Special Corporate Financial Services with Comerica Bank.

“Investment opportunities exist, even in down economies,” Saperstein says. “Even if you’re not ready to invest right now, it’s a great time to put your money in a position to get ready to invest.”

Smart Business spoke with Saperstein about today’s investment opportunities and how to properly take advantage of them.

Why are we seeing increased interest in investment opportunities?

During the economic downturn — and the subsequent and lingering credit crunch — reasonable opportunities for investing slowed significantly. But, now we’re seeing a byproduct of the downturn: new investment opportunities at reduced enough prices to be interesting. Take, for example, uncompleted real estate development projects. They have sat stagnant and lost value, creating an opportunity for investors and developers who are well backed to take advantage of the lower prices. These projects are worth finishing, which can lead to a healthy profit, even in today’s market. I’ve seen a growing demand for such opportunities in the last six months.

Also, this concept is not limited to just real estate. There are many companies that make good acquisition targets. Many such companies relied heavily on credit and, with the availability of credit deeply curtailed, also lack the ability to raise capital. This creates other opportunities to take advantage of, because those internal and external funding sources have dried up. With the credit environment being what it is, venture capital leaning on bank lines isn’t what it used to be either; so private equity fund-raising has become the viable alternative.

How can a business or an individual take advantage of these opportunities?

Bottom line, money talks. Having money set aside that you can point to when negotiating a purchase puts you in a very powerful position. Given the low interest rates that people have to accept today, the opportunity cost on the investment set-aside funds sitting at the ready does not make for a difficult decision. Having cash in a pooled investment-ready bank account will deliver the same return as if it were left sitting in an investor’s own individual bank account. There’s not a lot of opportunity cost downside in today’s cash investments, so you’re probably not losing interest by putting your money into an investor’s pooled opportunity ready bank account that has a good chance of future investment success.

How do you know your money is safe while pooled?

That is always a difficult part of any transaction. First of all, go with what and whom you know. Commercial banks of reasonable size with adequate liquidity and capital are always better bets. They are the reliable source of the interest income during the cash on deposit phase of the potential investment. Also, you want the financial institution or the consolidator or holder of the funds to have a lot of experience with these types of transactions.

The tenor or the nature of the deposit that is held is also extremely important. For example, just having money in the hands of the promoters of an investment fund or pool and relying upon them to hold the money for you in their deposit account where they control the funds is not as desirable as having money in the hands of a trusted third party, such as a qualified escrow holder. You have to have certain conditions attached to the money: how it is collected, held, invested and disbursed. The best scenario of all is when the escrow holder is also the depository bank.

What roles do funds aggregators play?

Aggregators are really the people who are consolidating all the investment funds in one place. They could be the promoters, developers, general partners or leading members of an LLC that see the opportunity. The aggregators’ mission is to recruit or solicit investments from other people, usually through a private placement or similar offering document. So, on one hand, you have the aggregators and, on the other, you have the bank involved as a depository. The bank is the one that really consolidates all the funds that are being pooled into one place. It’s worth mentioning that it’s not necessary that these pools are single-purpose; they can also be multipurpose to take advantage of several opportunities as they arise over time out of one fund.

When the money is held by a third party, the funds will be deposited with a bank acting as the depository for the investment promoter, ideally, under the terms of an escrow agreement that protects the individual investors. So, if they do not go forward into the investment, the funds are returned to the investors, with interest and without any hassles or delay.

Remember, each deal and each opportunity is different, so custom drafting of controlling documents that say how the funds will be received, held, invested and disbursed needs to be addressed. Make sure the documentation of the financial institution that is going to hold the funds and that of the promoters and the lawyers negotiating the terms are compatible. The deposit has to be in sync with what the offering memorandum says will happen, and that’s where a good depository consolidator/escrow holder is so important. You don’t have to go back too many months to read about how nonbank investment intermediaries acting as funds holders proved disastrous for the investors.

Syd Saperstein is a senior vice president and the division manager of Special Corporate Financial Services with Comerica Bank. Reach him at (415) 477-3246 or ssaperstein@comerica.com.