20 Aug 2021
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Prior to the COVID-19 pandemic, due to successful economic investments in gaming, hospitality and other industries, Native American tribes had seen their incomes increase dramatically in recent years. Unfortunately, in addition to the significant social and cultural burdens borne by tribes as a result of the COVID-19 pandemic, this has caused significant negative financial impacts in the hospitality sector, lowering the very incomes that fund services. to tribal members.
While this is certainly an unfortunate turn of events in the short term, it has given many tribes the opportunity to reassess their investment strategies to ensure that economic development does not depend on the health of a single sector. . Many tribes are weighing the benefit of diversifying and expanding (or, in some cases, starting) holding alternative investments, including private equity funds, venture capital funds, and other opportunities. direct investment. This article discusses three key investment approaches for tribes.
1. Indirect investments
An alternative investment option for tribes is to make indirect investments in buyout, venture capital, real estate, and other investment funds. This passive style of investing can offer the tribe a chance to diversify their investment portfolio (and, ultimately, their sources of income) while drawing on the industry-specific investment knowledge of the managers. of funds. An example of indirect investment is the Native American Venture Fund, which invests capital from tribes and other investors in areas such as free zones, opportunity zones, logistics, pharmaceuticals, cannabis and carbon credits. From the tribe’s perspective, the threshold for making these investments is relatively low – the tribe simply needs to have sufficient assets to qualify to make the investment and they must be able to feel comfortable valuing. the underlying economics of the investment (which, in addition to an independent appraisal, in many cases, can be determined by examining the track record of the fund with which the tribe invests). The downside is that the tribe will be a passive investor and therefore will have limited control (if any) over specific investments made by the fund outside of the protections in the fund’s operating documents limiting the scope of investments. potentials. When evaluating this type of alternative investment, it is helpful to engage knowledgeable advisers to help the tribe write investment guidelines and ensure that the investment documents provided comply with the terms of the contract. Marlet.
A second alternative for the tribes is to act as co-investors alongside a traditional investment firm in a specific operation or transaction. To do this, a tribe must first identify the types of deals they want to participate in – whether it’s commercial real estate, hospitality, clean energy, or some other type of investment. Once done, the tribe should be able to identify specific investment firms willing to co-invest in one-off deals alongside the tribe. The advantage for the tribe in this type of transaction is that they can get a direct share of the stock (and possibly an increased slice of the upside) by bringing in a large chunk of capital, while also partnering with a business. with industry specific skills. awareness. One option in this vein may be to partner with an independent sponsor-style private equity firm to purchase a controlling stake in a running business, with a plan to grow and sell the business within a three-hour window. at five years. Independent sponsors are often excellent partners with access to transactions or agreements in areas in which they have extensive experience and operational capacity, but which need a financial partner to close the deal.
In evaluating this style of investing, and in addition to considering the fundamental economics underlying any particular transaction, it is crucial that the tribe, as a co-investor, pay close attention to documenting its partnership with its co-investor, as well as any investment or purchase and sale document related to the underlying investment. These documents will not only determine how the economics of the deal will be divided, but will also address crucial operational issues such as how decisions will be made in the issuing companies and how the tribe’s interest in the investment. can be transferred or liquidated.
3. Direct investments
Finally, tribes can choose to make direct investments by purchasing commercial real estate, starting a business, or buying an existing business on their own. Many tribes are already experienced in this type of investment through the formation of their own Section 17 companies or wholly owned tribal business entities (e.g. gas stations, convenience stores or casinos) . This form of investment may require significant infrastructure and initial investments of time and money on the part of the tribe, including the commitment of resources to manage transaction research, valuation models, constitution building. operational teams and the development of sector expertise. But this type of investment can also offer the highest potential, as the tribe will own and control the entirety of the business in which it invests. When considering this style of investing, a tribe is completely in the driver’s seat and may wish to partner with knowledgeable advisors to help them conduct due diligence on any target investment to identify legal and other material issues with the target. , structuring the initial acquisition (including evaluating the forms of consideration or the purchase price) and negotiating the main legal terms of the transaction (such as indemnification, representations and warranties, and closing conditions).
In evaluating the above investment options, it is important to note that each option has the benefit of increasing the diversity of the investor tribe’s portfolio – ideally creating a well-balanced and healthy financial picture. The ultimate question for tribal leaders is “what is right for our tribe?”
Investments can also provide important non-monetary benefits to tribal governments. Tribes can use the income from their investments to consolidate off-reserve land holdings, strengthen culture and tradition, and protect tribal intellectual property through use. Investment income, or the investment itself, can also be used to protect and / or preserve a tribe’s natural resources. In short, tribal investments can offer a range of benefits that go beyond simple income generation.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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