Playing Offense and Defense: Financial Planning Strategies for Private Equity Partners

As a private equity partner, you no doubt have a tremendous amount on your plate. You spend countless hours taking care of your team, your limited partners, your portfolio companies. You recognize the opportunities that the upheaval of this pandemic has presented and are aggressively hunting for new deals. Add in the broader environment of economic uncertainty, political turmoil, and social upheaval, and private equity partners have more demands on them than ever.

What tends to fall on the back burner? Your own personal financial planning needs. I know. I’ve been there. Before I co-founded Cresset, I spent more than 30 years leading Sterling Partners, a value-added, growth private equity firm that raised eight funds with more than $5.7 billion of capital. As focused as I was on growing Sterling, I couldn’t dedicate as much time as I would have liked on my own family’s financial planning. Despite a great career, there were a number of missed opportunities around diversification and planning. As the saying goes, “The cobbler’s children have no shoes.”

So, what’s the solution?

Based on my experience, stop trying to play “quarterback” for all of your planning needs. You no doubt have advisors in many areas: tax, investments, legal, trusts and estates, etc. Don’t try to conduct it all. Let yourself be the client and put your trust in a personal CFO or firm that can orchestrate a truly cohesive, comprehensive planning strategy. That’s exactly why we created Cresset, to serve as a shared family office. Surround yourself with a team that is integrated and working from a shared plan so that you can focus on growing your firm.

Next, recognize that now is the time to review your family’s financial plan. The seismic economic shifts that are happening all around us - and that could accelerate going forward - could upend your planning strategy, or better yet potentially offer up new and exciting opportunities to explore.

The following are my recommendations for planning strategies to focus on now, both offensively and defensively, to help ensure your family is both protected and positioned for success. Let’s start with going on defense.

Playing Defense

Review your estate plan.

Now is an opportune time to have your estate plan carefully reviewed. Why? First, there could be tremendous opportunities available to you resulting from changes in the valuations of your assets and funds, as well as the ability to transfer assets at greater discounts. In addition, many people believe that the estate tax exemption amount could drop significantly in the near term, as much as 50 percent, if President-Elect Joe Biden’s proposals become reality.

Enhance your lines of credit.

During times of uncertainty, enhancing lines of credit can be a smart defensive move. Do you have access to credit across your portfolio, whether it be individual accounts or trusts, that allows you access to liquidity for new or existing investments? At Cresset, through working carefully with lenders, we have helped our clients find rates on lines of credit as low as one percent or less.

Incorporate insurance into your planning strategy.

Although not the first thing most people think of when it comes to financial planning, insurance can be a powerful planning tool and tax-mitigation strategy. Think about it, if you were to die unexpectedly, would your estate have the liquidity to meet the capital calls for funds you’ve committed to?

Another type of insurance worth considering is Private Placement Life Insurance (PPLI), which is a type of variable universal life (VUL) insurance that allows investments contained within the policy to grow, all while the income and capital gains taxes are deferred. Ultimately, these gains can be received income tax free at the passing of the insured in the form of a death benefit if the assets are owned by a properly structured insurance trust and all the rules are followed. Given both current tax rates and expectations around a potential increase in future tax rates, this can be a very advantageous strategy to invest in more tax-inefficient investments that are diversified beyond private equity.

Protect your involvement on boards.

Many private equity partners who sit on the boards of directors of portfolio companies don’t understand all of the details of what is needed to be protected in that role. Does the company offer indemnification for directors? Do you have a copy of the directors and officers (D&O) liability insurance, and has it been reviewed by an insurance expert? If your firm has an umbrella policy beyond the portfolio company, has it been reviewed as well? Don’t assume a company has a great D&O policy. I have found that D&O policies need to be reviewed and negotiated carefully.

Playing Offense

Diversify into new asset classes.

To provide for more immediate liquidity and diversification of your assets, develop a portfolio outside of your private equity holdings. A great option can be cash-flowing real estate. The passive income from real estate can be extremely valuable to a private equity partner. Plus, real estate can offer tax benefits that private equity does not. With real estate, the appreciation of an asset helps provide inflation protection, as real estate is not getting cheaper to build. In short, the counterbalance of investing in another asset class like real estate can provide a sense of freedom by creating cash flow for you from outside your firm.

Explore Qualified Opportunity Zone investments.

If you have capital gains from the sale of portfolio companies or other assets, a Qualified Opportunity Zone (QOZ) investment can allow you to redeploy those gains in a tax-advantaged way. The QOZ legislation created sizable tax breaks to incentivize private investors who make long-term investments into QOZ funds that provide for economic development and growth.

Investments in QOZ funds offer diversification, as well as three core tax benefits:

  1. Deferral of capital gains tax through 2026.
  2. 10% reduction in tax if invested into a QOZ fund by the end of 2021.
  3. No tax on the appreciation of the QOZ investment itself if held for at least 10 years.

In pursuit of the highest-quality real estate opportunities, Cresset Partners and Diversified Real Estate Capital have come together to create a leader in the Opportunity Zone market with the Cresset-Diversified QOZ Fund. Cresset-Diversified raised $465 million to close its first QOZ fund, and launched the Cresset-Diversified QOZ Fund II earlier this year. There are opportunities to invest in the fund for diversification, or directly into the underlying properties.

The above recommendations are just some of the strategies that can help you play both offense and defense with your financial planning. The key is to stop trying to play quarterback yourself. Replace yourself as QB and delegate to a team that will have your back, make sure you do not miss important opportunities, and ensure no balls are dropped.

Right now, without you taking the lead, will someone ensure your estate plan is reviewed at least once a year? If you don’t say anything, will someone review your insurance coverage to make sure it aligns with your current risks? Do you have someone leading your overall financial roadmap to make sure it is up to date? That person doesn’t have to be you. Work with a great team and have confidence that you, and your family, are in good hands.

By Eric Becker, Founder & Co-Chairman, Cresset

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Specializing in Intelligent Wealth Management™ for CEO Founders, entrepreneurs, wealth creators, and high-net-worth families. With True Fiduciary® standards of Transparency®, your interests come first with a focus on asset protection, cash flow, and open access. Our Family Office goal is to simplify and elevate your life so you have more time to spend on what matters to you most.

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    Cresset refers to Cresset Capital Management and all of its subsidiaries and affiliates. Cresset Asset Management, LLC, also doing business as PagnatoKarp, provides investment advisory, family office, and other services to individuals, families, and institutional clients. Cresset Partners, LLC provides investment advisory services strictly to investment vehicles investing in private equity, real estate and other investment opportunities. Cresset Asset Management, LLC, and Cresset Partners, LLC are SEC registered investment advisors.