What do investors want, and how can you satisfy them?

In this context, by “investors” I mean professional managers of (mostly) other people’s money, that move millions at a time — not retail savers like most of us with thousands in a retirement account.

Investors want predictable returns that match the risk-weighted expectations for the portfolios they manage.

Every type of investor has a certain risk profile and horizon over which want to achieve returns. And that rate of return will always be compared against some benchmark, hurdle rate, or previous high water mark.

Risk-weighted expected returns are negative here.

Here are some investor type examples, listed in order of decreasing tolerance for volatility:

  • Angel investors want to “give back” to early entrepreneurs by providing their money, advice, and time with minimal expectations of financial return
  • Venture Capitalists will tolerate writing off 9 investments to get one with a 10x exit
  • Private equity partners want 8% IRR in a 6 year horizon
  • Retirement plan administrators want “5 real:” that is, 5% annualized growth after adjusting for inflation and foreign currency exchange

In equity investments, return on capital comes from share price appreciation and dividends. Recently share buybacks have become a hot topic, as an alternative means of returning excess earnings to investors (instead of dividends), but let’s leave that aside for now (instead, read what Matt Levine has written about it). The new theory views public markets as a way to return capital to early stage private investors — again, out of scope for this post.

From this point, let’s narrow the scenario: you are a leader at a publicly traded company. With stock that trades on the public markets, you need to know what kind of returns your investors want. Index funds, representing a large share but not the  majority of equity investors, want the index, which is an aggregate of the prices of the individual stocks in the index, to rise at some multiple of inflation. Some investors speculate on companies being acquired at a premium. Any “long” investor wants prices to grow over time. For a given P/E ratio, earnings growth gets you price growth. Higher earnings growth, sustained over enough reporting periods to establish a new expectation, can command a higher P/E ratio and therefore a greater rate of return on the same annual earnings growth rate.

Drilling down another level, the best way to achieve earnings growth is through revenue growth at constant margins. I say “the best” because revenue has no practical upper limit for a single company, while cutting costs to grow earnings will eventually run out of costs to cut. Revenue growth at constant margins isn’t easy — it’s the stuff careers are made of, or broken by.

I’m fortunate that my entire career has been devoted helping companies achieve more profitable growth, either as a consultant or manager, in both “old tech” and “new tech” industries. I am constantly learning from my direct experiences and case studies of other businesses. Some industries, like energy, healthcare, and FMCG, require significant capital investment across complex global supply chains. Timing these investments within business cycles, maximizing returns of a capital projects portfolio, and pursuing operational excellence are essential in saturated markets with low levels of consumer loyalty and commoditized offerings.

The tech industry contains a different set of growth challenges with different economics: achieving product/market fit then scaling up investment in sales, marketing, support, and infrastructure. Growing markets, loyal (or fickle) consumers, fierce competition for talent and regulatory uncertainty provide endless alternative scenarios for management teams to evaluate when making decisions.

So, when determining what strategy to execute, what projects and initiatives to fund, and generally where to focus your scarce leadership attention, first understand what your investors want based on their expectations for risk-adjusted returns.

Here are some additional resources that you might find useful:

Image credit: Tristan Surtel [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)%5D, from Wikimedia Commons


Two Essential Charts for Portfolio Project Management

Whether your organization is an oil & gas major or an elementary school, making smart investment decisions and managing the performance of a portfolio of projects is essential to maximize returns on limited resources.

Hopefully you have better investment screening rigor than Kramer. But how clearly can you articulate the relative performance of your investment options? Should you cancel an in-flight project that is underperforming, and redirect the resources? The two essential charts below should be included in any executive dashboard for portfolio project management in any organization, regardless of mission or industry.

  1. Portfolio Analysis Bubble ChartPortfolio Analysis Bubble Chart: The two axes on this chart are NPV (Net Present Value, which is the expected future returns minus investments, discounted to today’s value) and IRR (Internal Rate of Return, which is the rate by which you’d have to discount the future returns to equal zero today). Accounting jargon aside, the chart compares the magnitude and efficiency of investments. The third component, bubble size, could be anything that is appropriate for the organization (in this example, something really specific like “impact to stakeholders”). You want to select the big bubbles in the top right corner that have large, efficient returns. pre- and post-money options on the same chart (in different colors), and you can inform a decision to sell or wind down a current project in favor of a more favorable option.
  2. Project Health Trend ChartProject Health Trend Chart: A snapshot of any portfolio of projects could be misleading if your projects tend to have large up-front costs and generate returns towards the end of their life. This chart measures the performance of projects on an arbitrary 12 point scale: 4 points each for 3 factors (in this example, financial health, impact, and innovation). By plotting this score for each project on intervals from their start dates, a leadership team can make both absolute and relative comparisons.

What other charts would you include in your “desert island” project portfolio management package? Have you used either of these? Leave a comment with your questions and feedback.