Everyone should have a favourite great uncle. Mine, whom I mainly knew from my late teens until my early thirties, was a celebrated figure in a small town of south west England, where we spent many an evening drinking warm beer beneath a framed portrait of Margaret Thatcher at the Conservative Club.
Not everyone’s idea of fun, granted, but to watch Uncle George work the room was something to behold. Everyone knew him, everyone liked him, and I’m pretty sure everyone owed him something.
The topic of conversation, over numerous pints of Flowers bitter, a barley wine or two and a couple of night-cap whiskeys, was very often investment.
George, a thoroughly working-class man, was part of a first wave of mum-and-dad investors who snapped up utility shares in the public asset sales of the Thatcher government. Once they had a taste for it, they’d buy banks, retailers, airlines – you name it.
The worker in George knew about more industrial processes, patterns of private demand, labour relations and even the basics of financing than many fresh-faced economics or finance graduates ever will, and he parlayed that knowledge into a series of very sound investment decisions.
In the same way that John Howard transformed Australia’s outer-suburban tradies into a Coalition of supporting ‘battlers’, Thatcher had helped George and his friends to see that there was no special breed of Brit who could manage investments. It was their money, so why pay others to manage it?
Years later, it wasn’t George and his friends who nearly crashed the global financial system. It was the army of slick derivatives salesmen who duped institutions into building massive exposure to shadow banking securities.
But why mention all this now?
Because, as outlined in three articles prior to this one, a ‘wall of money’ looks set to be unleashed in the Australian investment community (Unleash the property wealth beast, December 23). And it’s the Uncle Georges of this world who will manage it.
This time, it’s not utilities shares or blue chip ASX-listed shares. Most people already own a slice of those through their super funds.
What’s missing is a genuine, investor-controlled, private equity investment culture that allows small investors to directly engage with start-ups or existing SMEs that they think are the growth stories of tomorrow.
Financial planners often tell clients that 5 per cent of their risk should be in this space, but actually buying the exposure is not easy. That means something like $50 billion of investors’ money in Australia is either too heavily lumped into a few projects, or diverted to other assets.
The exciting development on which this series of articles is based is a new trading platform developed by Melbourne start-up DomaCom that, in its first phase, will allow residential property to be unitised and traded (Bringing homeowners the bacon, December 24). Via the DomaCom platform (or competing platforms, if any emerge) one of our largest asset classes – the family home – will potentially stop being a holy cow and start being a rational investment decision, like everything else.
The logical extension of that platform, according to the company’s chief executive Arthur Naoumidis, is to start funding companies the same way (A new perch for eagle-eyed investors, December 27).
The instant objection is that such a plan is a wonderful way for feckless oldies to gamble away their net worth and end up scraping by on the pension.
However, the DomaCom platform will be available to investors only through accountants and planners who have a duty to warn clients of these risks. Moreover, they should be advising on what kind of risk profile a client should have, and therefore how much of their capital should be allocated to private equity ventures.
What is also widely overlooked is how much retirees know about certain areas of the economy. An engineer who has worked in battery technology, for instance, might be the very best investor in a new kind of lithium battery manufacturing. A retired restaurateur, meanwhile, might see the potential in a small ‘internet of things’ company that can automate part of the kitchen supply chain.
The examples are too numerous to list – but the point is that at present it is difficult for a retiree on a modest income to take a large punt on either of the examples above. What the unitised investment platform developed by DomaCom has the potential to offer is to find, in the second case, 100 restaurateurs who understand what the internet-of-things company is trying to do; each can then choose a small level of exposure and pick other investments elsewhere to diversify their private equity asset allocation.
If only half of that misallocated $50 billion found a home this way, Australia’s start-up and innovation culture would change dramatically.
So again, let’s ask – what’s holding the wall of money back?
It is not only that, previously, this kind of trading platform didn’t exist. The other side of the coin is the skewed nature of Australia’s savings/investment regime. Householders are encouraged, through tax and superannuation law, to lock up large amounts of capital in the family home until they die and leave the lot to their descendants.
By contrast, renting retirees who actively manage their capital – and thus help fund the next generation of jobs and prosperity – are penalised for being ‘too rich’. That’s why the emergence of DomaCom is only part of the story. Politicians have to face up to a huge inefficiency in the economy.
The Australian economy is struggling to adapt to the Asian century. To compete on something other than low, low pay rates, a new era of innovation and investment is required. Without it, Australians will become the disempowered workers of smarter, better-capitalised businesses already growing in Asia.
Australia has always relied on foreign investment for the big businesses that are the cornerstones of the economy – mining, banking, agribusiness, manufacturing and so on – but that is no excuse for not creating a dynamic and innovative start-up culture funded with the idle money currently locked up in housing stock.
My Uncle George (may he rest in peace) would have been all over this kind of opportunity. The conversations at the Conservative Club would have become a lot more interesting, and its patrons – at least the smart ones – wealthier.
The very nature of retirement may be about to change.