Investment in Employer Projects - How Much is Too Much?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Investment in Employer Projects - How Much is Too Much?

Post by Scorpion »

My employer allows me to invest in our apartment projects on the same terms as our outside investors. Without getting into too much detail, they provide a 10% preferred return on capital before my capital is returned and project out an IRR of at least 12% per year to investors under conservative assumptions (all recent deals have beaten that materially). The projects are all in different states, but a massive apartment market crash nationwide would hurt them. The projects pay out cash flow to the investors over the life of the projects. I historically have had a 100% equity (or at least 0% bonds) investment portfolio, so I have been using these real estate projects as "pseudo-bonds." I think they are good investments, and I like the idea that they can throw off quarterly cash. As of today, I have 19.6% of my savings in the projects. I have had a thumbnail target for these investments of not exceeding 20% of my total portfolio. I have no real reason behind that. My wife and I are in late 30s, both work. I have the higher paying job by far, but she loves her job. I want to reserve the option to retire early, maybe in the next few years. We have >$1M in investments.

My employer also grants employees interests in projects as compensation, but they must vest over time. My employer might fully vest me even if I retire early, but they might not. When I take into account both pending sales of projects (which returns money to me and thus reduces my percentage of portfolio in these projects) and my total employer grants of interest, both vested and unvested, I am at about 21.5% apartment projects. If I give effect to the pending sales but look only at my vested portion of the projects, I am at about 17.25%. My inclination is to focus on both vested and unvested, as I think it reasonably likely my employer will vest me if I retire, or I may choose not to retire early at all.

So... what do you think the upper bound should be for my holdings here? (I am thinking about an additional investment at this time which could raise my allocation up to as much as 25% if I went all in.) This is not like Enron stock. Each investment has separate investors and is its own unique animal in a different market. I think the exposure to the asset type is a bigger deal than the fact that they are related to my employer. I much prefer these investments to bonds, but I certainly understand they aren't the same and are riskier. I do like the fact that these diversify me out of the stock market, since I am still ~80% equities. I welcome any thoughts you can provide.
ralph124cf
Posts: 2985
Joined: Tue Apr 01, 2014 11:41 am

Re: Investment in Employer Projects - How Much is Too Much?

Post by ralph124cf »

These are close to being pseudo-REITs, and not close to bonds. REITs are basically high dividend stocks, with potential for capital appreciation.

You mention that the projects pay out cash flow to the investors over the life of the projects. What is the exit strategy? I assume that these buildings will eventually be sold. How will the (hopefully) profit be distributed?

Is this investment liquid? Can you sell? At what price?

Ralph
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Re: Investment in Employer Projects - How Much is Too Much?

Post by Scorpion »

Good questions. They are not publicly traded, so their values do not fluctuate like REITs. They are illiquid. The projects get refinanced after the first 2-3 years such that investors get most or all capital back but still own their interest in the project. Sale could be in first 2-3 years or conceivably after 10 years or more. There is a waterfall structure sharing out money to both investors and my company on a sale. Every recent one that has sold, including two I am in, have had > 20% IRRs.
User avatar
Zabar
Posts: 635
Joined: Thu Feb 27, 2014 8:05 pm
Location: San Francisco Bay Area

Re: Investment in Employer Projects - How Much is Too Much?

Post by Zabar »

Scorpion wrote:So... what do you think the upper bound should be for my holdings here? (I am thinking about an additional investment at this time which could raise my allocation up to as much as 25% if I went all in.) This is not like Enron stock. Each investment has separate investors and is its own unique animal in a different market. I think the exposure to the asset type is a bigger deal than the fact that they are related to my employer. I much prefer these investments to bonds, but I certainly understand they aren't the same and are riskier. I do like the fact that these diversify me out of the stock market, since I am still ~80% equities. I welcome any thoughts you can provide.
Remember that the fundamental problem with Enron (and others) wasn't the stock per se, but the actions of senior management that were eventually reflected in the nosedive that those stocks took. I don't want to imply that there's anything shady going on with the senior management of your company, but that's always a risk that should be considered when you're doubling down by investing in the future of the organization that also writes your paycheck.

Having said that, my upper bound for these investments would be 5% of my net worth (not my total assets), especially since they're illiquid. More that that would simply be too risky for my blood.
123
Posts: 10387
Joined: Fri Oct 12, 2012 3:55 pm

Re: Investment in Employer Projects - How Much is Too Much?

Post by 123 »

If you're investing on the same terms as outside investors perhaps you should diversify with projects run by other operators. That could give you a broader perspective.

I wouldn't be happy unless my allocation in this case was 10% or less since your employment in tied to the success of the same organization.
The closest helping hand is at the end of your own arm.
Topic Author
Scorpion
Posts: 388
Joined: Mon Sep 14, 2009 6:56 am

Re: Investment in Employer Projects - How Much is Too Much?

Post by Scorpion »

To some of the concerns and how I have rationalized them: I have significant other assets such that I have not viewed the lack of liquidity as an issue. I think I have marketable skills such that I could get a new job if my company went under, and I think I could retire if needed. I am part of senior management, so that presumably is somewhat helpful as to the Enron risk, but it also means I could drink the Kool-Aid and not think objectively. I would never invest in an alternative investment option like this as a general matter; I do so here only because I have inside knowledge of the investments.
Post Reply