Native American Tribes – Trends In Alternative Investments – Corporate/Commercial Law

To print this article, all you need to do is register or log in to Mondaq.com.

Prior to the COVID-19 pandemic, Indian tribes had seen significant sales increases in recent years due to success in economic investments in gaming, hospitality and other industries. Unfortunately, on top of the significant social and cultural burdens borne by the tribes as a result of the COVID-19 pandemic, this has had a significant negative financial impact across the hospitality industry and has lowered the revenues that fund services for tribal members.

While this is certainly an unfortunate turn of events in the short term, it has given many tribes a chance to rethink their investment strategies to ensure that economic development does not depend on the health of any single sector. Many tribes evaluate the utility of diversifying and expanding (or in certain cases beginning) holding alternative investments, including private equity funds, venture capital funds, and other direct investment opportunities. This article discusses three key investing 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 mutual funds. This passive investment style can allow the tribe to diversify their investment portfolio (and ultimately sources of income) while relying on the fund managers’ industry-specific investment knowledge. An example of an indirect investment is the Native American Venture Fund, which invests capital from tribes and other investors in areas such as free trade zones, opportunity zones, logistics, pharmaceuticals, cannabis, and carbon credits. From the tribe’s perspective, the threshold required to make these investments is relatively low – the tribe just needs to have sufficient assets to qualify for the investment and be able to understand the underlying economic aspects of the investment (which, in addition to an independent valuation, can in many cases be determined from the track record of the fund in which the tribe invests). The downside is that the Tribe is a passive investor and, as a result, has limited (if any) control over the specific investments the Fund makes outside of the protections in the Fund’s operating documents, which limits the scope of potential investments. When evaluating this type of alternative investment, it is helpful to employ experienced advisors to assist the tribe in creating investment guidelines and ensuring that the investment documents provided are in line with market conditions.

2. Co-investments

A second alternative for Tribes is to co-invest alongside a traditional investment firm on a specific deal or transaction. To do this, a tribe should 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 that is done, the tribe should be able to identify specific investment firms that are willing to invest in one-off deals with the tribe. The benefit to the tribe in this type of transaction is that they can get a direct share of the action (and likely a higher share of the profits) by bringing in a large chunk of the capital while at the same time doing business with a company specific to the industry knowledge can work together. One way to do this could be to partner with an independent, sponsorship-style boutique private equity firm to acquire a controlling stake in an operating business with a plan to grow the business over a three to five year window of opportunity for sale. Independent sponsors are often excellent partners with access to transactions or deals in industries where they have extensive experience and operational skills, but which require a capital partner to close the deal.

In evaluating this investment style and in addition to considering the underlying fundamental economics of a particular deal, it is critical that the tribe, as a co-investor, have the documentation related to both their partnership with their co-investor and any investment or purchase and sale documents with the underlying system. These documents will determine not only how the economic aspects of the deal will be broken down, but will also determine critical operational issues such as how decisions are made at investee companies and how the tribe’s stake in the investment can be transferred or liquidated.

3. Direct investment

Finally, tribes can also make direct investments by buying commercial property, starting a business, or buying an existing business themselves. Many tribes already have experience with this type of investment by starting their own Section 17 companies or wholly owned tribal businesses (e.g. gas stations, convenience stores, or casinos). This form of investment may require sensible infrastructure and up-front investments in time and money from the tribe, including providing resources to handle deal sourcing, valuation models, building operations teams, and developing industry knowledge. But this type of investment can also offer the greatest potential, as the tribe owns and controls the entire business in which it invests. In considering this investment style, a tribe is in full control and may wish to work with seasoned advisors to help conduct due diligence on each target investment to identify material legal and other issues with the target and structure the initial acquisition ( including assessment of the consideration or the purchase price) and negotiation of the most important legal conditions of the transaction (such as indemnification, representations and warranties as well as closing conditions).

When evaluating the investment options above, it is important to note that each option has the benefit of adding diversity to the investing tribe’s portfolio – ideally, it creates a balanced and healthy financial picture. The ultimate question for tribal leaders is “what is right for our tribe” and that includes the need to balance the upside potential against the tribe’s involvement in the cradle to grave investment process.

Investing can also provide important non-monetary benefits to tribal governments. Tribes can use the proceeds from their investments to consolidate land holdings outside of reserves, strengthen culture and tradition, and protect tribal intellectual property through exploitation. Investment income or the investment itself can also be used to protect and / or preserve a tribe’s natural resources. In short, tribal investing can offer a number of benefits beyond just generating income.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

POPULAR ARTICLES ON: United States Corporate / Commercial Law

Inside Scoop: D&O Insurance – Tips and Trends

Cozen O’Connor

In this segment of Inside Scoop, Kathy Jaffari will be joined by Sarah Downey, Managing Director, Financial Services Claims Leader and Blockchain Advisory Leader at Lockton Companies …

SPACs & litigation risks

Herrick, Feinstein LLP

Herrick Partner Shivani Poddar and Associate Heather Zimmer wrote an article for Bloomberg Law on Special Purpose Acquisition Companies (SPACs) and strategies for minimizing the risk of potential litigation.

ESG legislation aims to disclose climate risks

Kelley Drye & Warren LLP

The urge for public companies to disclose information about climate risks has found its way into a number of legislative proposals, including a major bill recently passed by the US House of Representatives.