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Many in the energy industry have accumulated wealth through the companies they have worked for, the businesses they founded, and investments in their personal names. This dynamic often creates investment concentrations. A former executive worked with his J.P. Morgan Private Bank advisors to help him identify his risks, determine a diversification strategy, and execute a plan to reduce his concentrated stock position over time. However, the decision-making process about how to reinvest the proceeds created unforeseen difficulties.

First, his advisors worked closely with him to understand his goals and objectives. Deciding to sell a concentrated stock position is an important – and often emotional – process. After careful review and analysis, his advisors crafted a customized strategy to help him methodically reduce his position over a set period of time. This strategy allowed him to set pre-determined prices at which to sell. After sales were executed, his advisors helped him evaluate complementary investment strategies, particularly given his significant remaining energy investments across public and private markets. 

Avoiding hidden concentration risk

Energy industry executives and business owners often “buy what they know” in their investment portfolios, basing their decisions on personal knowledge and familiarity. The executive’s thought process was consistent with this theme. Unfortunately, these choices can often result in new hidden concentrations in the energy sector, risking the ability to grow and preserve wealth over time. His advisors provided guidance on two key areas: investment strategy and prudent liquidity management. They illustrated the volatility he would be exposed to if he followed his desire to reinvest proceeds into other energy-specific investments. After reviewing other investment considerations that would offer lower correlation to the energy markets, he better understood the diversification benefits of this approach. He also acknowledged that over the long term, this would not only reduce the volatility of his portfolio, but also help sustain his wealth.   

As a final step, his advisors discussed putting in place a line of credit now that the executive’s portfolio was more diversified. He found value in the timely service the lending team provided. With concentration risks mitigated, borrowing against the portfolio enabled him to finance several private investment opportunities and meet other spending needs. The executive appreciated his advisors’ insights, and in time, helped reduced his concentrated energy exposure, created a more diversified portfolio, and better optimized his balance sheet.

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For a J.P. Morgan Private Bank energy-focused banker near you, please contact pb.energy@jpmorgan.com.

IMPORTANT INFORMATION

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. Results shown are not meant to be representative of actual investment results. Past performance is not necessarily indicative of the likely future performance of an investment. Diversification does not ensure a profit or protect against loss.

Not all option strategies are suitable for investors; certain strategies may expose investors to significant potential losses. We have summarized the risks of selected derivative strategies. For additional risk information, please call your sales representative for a copy of “Characteristics and Risks of Standardized Options” or visit: http://www.optionsclearing.com/about/publications/character-risks.jsp.

We advise investors to consult their tax advisors and legal counsel about the tax implications of these strategies. Please also refer to option risk disclosure documents.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.  These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.

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Not a commitment to lend.  All extensions of credit are subject to credit approval.

Loans collateralized by securities involve certain risks and may not be suitable for all borrowers and investors.  A decline in the value of securities pledged as collateral may require the borrower to provide additional collateral and/or pay down the loan or line of credit in order to avoid the forced sale of the securities by the lender.  Please read your loan documents carefully so that you understand your obligations.

This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice.

“J.P. Morgan Private Bank” is a marketing name for private banking business conducted by JPMorgan Chase & Co. and its subsidiaries worldwide.  Bank products and services, including certain discretionary investment management products and services, are offered by JPMorgan Chase Bank, N.A. and its affiliates. Securities are offered by J.P. Morgan Securities LLC, member FINRA and SIPC.

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