THE POWER OF LEVERAGE

I’m always thinking about how to increase profits and returns for Alliance’s investors. How can we get more output from the same inputs? It’s a question that interests all CEOs.

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Recently, I found a new framework that addresses this question. A Silicon Valley venture capitalist named Naval Ravikant describes three different kinds of leverage.

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I appreciate the clarity of Ravikant’s thinking, and I am also pleased that Alliance is already using all three types of leverage.

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The first type of leverage is people. Of course, a bigger team can do more, and Alliance has grown our team in recent years. We have also put a lot of work into building out a network of partners that multiplies the productivity of our own team. This network of agents, brokers, bankers, attorneys, and other professionals helps us source and close great deals.

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Also, the size of our deal pipeline isn’t everything. We put a huge value on expertise. The specialized expertise and experience of our team gives us a big advantage in the marketplace, so we find the right deals to maximize returns.

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The second type of leverage is financial. The smart use of money can really multiply a company’s output and returns. This, again, is Alliance’s bread and butter.

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Alliance uses a healthy amount of debt financing for our deals. Our excellent track record and banking relationships ensure that we have great access to debt on excellent terms. Even now, with higher interest rates, debt enables Alliance to deliver higher returns for our equity investors.

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Our recent shift to a fund-based financing model, rather than deal-by-deal, is another type of “financial leverage” that multiplies our output. The fund model means that Alliance can raise more equity, faster. It enables us to pursue a wider variety of deal types more easily. And, it simplifies our ability to provide extremely safe and consistent preferred returns to our investors.

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Ravikant’s third type of leverage is digital. This type of leverage reflects the reality that digital products such as media and software have basically zero marginal cost, which means a lot more output for the same input.

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While digital products aren’t really Alliance’s business, we are taking advantage of this powerful type of leverage. This newsletter, along with our investor webinars, and the I Own It! podcast enable Alliance to communicate more quickly and effectively with our growing audience.

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More directly on the business side, Alliance has already found many ways to use digital tools to enhance our productivity. Satellite imagery, online demographic data, and online tax and permitting records are a few examples of digital tools that make our targeting and diligence work far more productive than before.

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In the end, more output for the same (or less) input is how we generate value and returns for our investors. We never lose sight of that bottom line, and I’ll continue looking for more ways to improve returns using different kinds of leverage.

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