Investment Holdings, in the traditional sense, refer to companies that make financial investments in one or more businesses and hold a financial stake in those businesses. An investment holding company usually does not engage in the active day to day running of the business. It is not involved in the production, marketing or other management decisions of the business. It holds a financial share in the profits or losses of the business to the extent of the value of its holding. Investment holdings sustain themselves by way of earning dividends on the number of shares held in various companies, or rental income from its holding of commercial or residential real estate, or by way of interest income on any loans extended to its partner businesses. A Real Estate Investment Trust (REIT) is a good example of an Investment Holding company.
Investment Holdings of a Single Business Group
Sometimes large business groups have diversified interests in various businesses. So even if the ownership or the top management remains the same, they have several subsidiary companies that operate independently within the group. Such large groups of companies usually form an Investment Holding company that holds a financial stake in the group’s various businesses. The role of this holding company is to serve as a key finance and investment supporter of the group companies. Wherever there is a need for financial investment in a group company, the holding company can use its internal accruals for the benefit of the group company. The holding company is generally owned and controlled by the owners and the top management of the business group.
Investment Holdings as an Angel Investor
In many cases, the investment holdings have a large amount of surplus funds that they invest in a variety of investment options to optimize the financial growth. Towards this end, in recent years many investment holding companies have begun to play the role of venture capitalists or angel investors because of the potential of attractive returns in such investments. After the information technology and Internet boom, many such angel investors have been able to multiply their investments in a big way and with a short horizon.
Involvement of Investment Holdings in the Business
Some investment holding companies follow a philosophy of non-interference in the management of the business, and act as passive investors. Whereas, certain angel investors like to bring in their own expertise and experience to the business in order to add more value to it. Both approaches have their own advantages, and it depends upon the basic philosophy of the angel investor and the kind of synergy that it perceives between itself and the business that it invests in.
Typical Profile of the Preferred Candidates
Investment holdings and angel investors typically look for candidates that display a superior level of business acumen and focus. Mostly, the clinching factor is a compelling business idea or a new technology that the candidate has developed. Investors are keen on sunrise technologies that have a bright future ahead of them. They like to choose business models that are unique, specialized and offer a clear differentiation from other competitors in the market.
Many of the candidates are young and usually they come from humble origins which is a plus point because they tend to display a high respect for financial resources. The commitment and integrity of the candidate has to be completely above board. Creativity quotient of the candidates is generally very high, and it reflects in their business project and plans as well. The market potential of the business ideas or the project is carefully assessed by the investment holding company before a decision on investment in the project is finalized.
Approach of the Investment Holdings
The usual business approach of the investment holdings is to diversify their investments in different industries in order to spread their risk. Especially the technology related businesses are fraught with risk because the arrival of superior technologies can quickly turn the business outdated and redundant. Therefore, the investment holding company maintains a cautious approach towards its holding businesses.
The preference of the investors is for businesses that are expected to generate quicker cash flows and high capital appreciation in the long run. Sometimes the talent pool of the holding company is so strong that it seeks to invest in such businesses where it can leverage its own talents and play the role of an active business partner along with the entrepreneur or company in which it invests. The aim of the investors is mostly to choose companies that will eventually become leaders in their own industry.
Some investment holdings prefer to put their money in the infrastructure and fixed assets of the business, rather than direct capital investments in the business. The investors may use various routes for collaboration such as joint ventures, partnerships, licensing and profit sharing arrangements, depending upon the suitability of the situation.