Editor's Note: A Reason for Optimism

Donald Trump notwithstanding, 2017 in Seattle may be brighter than anticipated.
| FROM THE PRINT EDITION |
 
 
 
It’s easy to be pessimistic about the outlook for 2017. After 90 months of growth, the economic expansion is aging and may not have much life left. Interest rates, which have fallen pretty steadily over the past 35 years, seem headed up again. If they reach anywhere near their 100-year average of 5 percent, that could choke off growth. And global trade, which has been on a growth path for 70 years, benefiting our technology, manufacturing and agriculture exports, could hit a wall if President-elect Donald Trump follows through on threats to slap tariffs on partners, triggering a trade war. 
 
But 2017 could well be far more prosperous than we have any right to expect. While Trump may be bad news on issues of immigration and inequality, it’s hard to argue that his plans to slash taxes on business, encourage local manufacturing and raise infrastructure spending won’t be good for business in this region. Michael Butler, CEO of Cascadia Capital, who has done a booming business representing entrepreneurs who want to sell their companies, says some clients are now putting off plans to sell their firms, believing the economic outlook is now much brighter.
 
Even if Trump’s pro-business policies don’t come to pass, there is a strong argument to be made that the Seattle region will continue to prosper. When it comes to new infrastructure spending, for example, our region has enough projects in the pipeline to keep workers busy for years, including tens of billions of dollars in new Sound Transit spending, the remodeling of Sea-Tac Airport, the convention center addition and the Manhattanization of downtown Seattle.
 
And the number of new jobs posted continues to rise, driven by strong growth among the region’s ever-expanding tech sector. “We don’t fully appreciate the number of jobs, people and households that will be added over this next cycle,” says Peter Orser, director of the UW’s Runstad Center for Real Estate Studies. Despite an unprecedented building boom during the past five years, Orser says the region has failed to keep up with housing demand, adding just a fourth the number of residential units needed to house the new residents moving into the area.
 
Just five years ago, few institutional and international investors paid much attention to Seattle. “Today, we are their darling,” says Orser. The inflow of new money and young talent is “fueling investment in development, the UW, buildings and new ideas at a scale that is exponentially greater than five years ago.”
 
While there will be cyclical corrections as we overbuild, Orser says it would take “a major event” to knock the regional economy off its trajectory of rapid growth. “I don’t see job creation slowing,” he says. “I see a shortage of labor, land, investment dollars and housing. The breadth and depth of the economy is radically different [from five years ago].” 
 
Matt McIlwain, managing director at Madrona Venture Group, agrees, pointing to Seattle’s strength in rapidly growing technology sectors like cloud computing, virtual reality and “intelligent applications” that incorporate the power of big data, the cloud and artificial intelligence.  
 
More needs to be done to retrain local residents for the jobs being created, build affordable housing and improve transportation infrastructure. But if Orser and McIlwain are right, our economy will continue to be strong enough to expand financing for such activities. 
 
LESLIE HELM is executive editor of Seattle Business magazine. Reach him at leslie.helm@tigeroak.com
 

Looking for high investment returns? Consider investing in a family business.

Looking for high investment returns? Consider investing in a family business.

 
 

Investors do not lack opportunities to deploy their capital, but being able to generate respectable returns is much more difficult. Part of the problem is finding unique investment opportunities with significant upside in a crowded market. The best option may be to put money to work in a privately-held company.

But private companies pose challenges when it comes to understanding their business, and analysis of the company may be fraught with pitfalls. Or it may be that investors are simply not aware of the opportunity in the first place.

There is, however, an important trend that is clearly discernable in relation to family-held businesses. Wealthy families and individuals are increasingly attracted to the idea of providing capital directly to family businesses as part of their overall investing strategy. And the attraction is reciprocated – family-owned businesses are increasingly open to the idea of wealthy families and individuals providing capital.

At Cascadia Capital, we are seeing a rapid increase in the practice of families investing in families, which can be a highly effective solution for both businesses and investors. Family businesses can be attractive investments, particularly for other family businesses, private companies, individuals, or family offices, which are wealth management companies investing on behalf of a single family or individual. Family run businesses often employ management styles that these investors understand well and can offer portfolio diversification without the hefty fees charged by private equity funds and investment firms; fees that, over time, can add up to millions of dollars.

According to a recent survey by the Family Office Exchange, about 70 percent of family offices now pursue this strategy of direct investing. This may be, in part, due to a shift by family offices seeking to bypass layers of fees and a lack of transparency and control that are inherent to the private equity fund model. Instead, many family offices now prefer to invest directly on a deal-by-deal basis offering more direct control, additional flexibility for longer-term holds, and lower fees. 

From the perspective of family businesses, a significant number are considering alternative solutions to meet their strategic objectives. In the event of a sale, an acquisition by another family can be a compelling solution compared to a private equity or strategic buyer transaction. And when seeking financing for business activities, direct investments from family offices can offer significantly more flexibility than funding from private equity firms that are beholden to rigid criteria and fixed investment periods.

 

The benefits for family businesses of having a direct relationship with their investors or buyers can be numerous. For example, if a family is looking to sell its business, family office buyers can provide liquidity and the opportunity for owners to exit without having to sell to a competitor. If a family is looking for additional financing to fund growth, direct family office investments can offer more favorable terms than other traditional sources of financing.

 Importantly, wealthy families and individuals are more likely to take a long-term view of their investment and are not constrained by exit strategies devised to maximize value within a given time period. Further, these investors often made their money owning and operating successful companies and, as a result, are more likely to understand the nuances and unique challenges of family run businesses. 

This investment trend, while also being experienced in other parts of the country, is gaining momentum in the Pacific Northwest. We are increasingly finding private direct investments to be an effective solution for our family-owned business clients and our family office clients.

Choosing the right investment partner is one of the most challenging decisions a family business can make. We have worked with many private, family run businesses to design long-term, flexible capital solutions and introduce our clients to suitable family office and private investors with common objectives.

 For family offices, like any investment opportunity, buying into family businesses can be very attractive, but it is not without risk. Prior to investing, proper analysis calls for extensive financial due diligence to ensure interests and incentives are well aligned in the transaction. Success depends on ensuring both a structural and cultural fit. We actively encourage family business owners and family investors to work with experienced advisors to carefully explore every available option before determining the best course of action.

Christian Schiller is a managing director at Cascadia Capital, specializing in advising family businesses. Cascadia Capital is a Seattle-based investment bank serving middle market clients, globally.