18.05.2016

The piece of cake everybody wants

In conversation with a friend, administrator of an important private capital fund, the reflection arose about the nature of his business, in particular the chain of investment that his projects mean and the intention of the actors that participate in them.

In conversation with a friend, administrator of an important private capital fund, the reflection arose about the nature of his business, in particular the chain of investment that his projects mean and the intention of the actors that participate in them.

 

Undoubtedly, the flow of capital for these funds is very generous. Most of the funds come from Afores and institutional groups that seek a higher return on their investments without raising the level of risk. This allows them to optimally balance their portfolios.

 

My friend told me about his commitment to generate value in terms of seven to ten years, investing only in projects that achieve a return higher than the preferred return sought by their partners. Their objective is to win prizes (promotes) or, in other words, to have access to a piece of the cake.

 

And although the internal rate of return on investment (IRR) is the metric most used to calculate the utility of these instruments, it is the return on capital (ROE) that most directly indicates the amount to be collected at the end of an investment. In this sense, it is worth asking what would be the value of an IRR of 30% if only a small part returns in proportion to the total.

 

The adoption of this capitalist thought by the funds leads me to think about the convenience of its application in our companies. Generating results should not only be a short-term idea, but also a medium and long term one. Profits should not be the only drivers of the business pattern; new measures of wealth generation for partners and our employees also deserve their place. For this we will have to be patient.

 

A maxim of real estate is that, even without making all the investments in the planned period, the capital tends to grow over time; there is a value in the assets that increases by inertia.

 

In short, let’s generate more awareness in that sense.

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