What’s driving family offices to embrace direct investment strategies and what changes are you seeing in the market?
A growing number of family offices that once invested as limited partners now are pursuing direct investment strategies to increase returns.
Reduced fees and expenses are a primary driver. Increased transparency, greater decision-making authority and control over the underlying investments are other drivers.
We have seen several family offices implement successful direct investing strategies and more are following suit. Some operate their offices using a traditional private equity model, while others are far less sophisticated.
We have also started to see greater collaboration between family offices and independent sponsors. Additionally, family offices are increasingly working on “club deals” with other family offices. Unless a family office is prepared to build out a team and infrastructure, developing relationships with seasoned independent sponsors and other family offices is a good way to transition from limited partner to direct investor.
What are the challenges associated with direct investing?
Many family offices are conservative and risk-averse, especially when investing in industries they are not comfortable with. Understanding a target’s business model and putting the right team in place to complete a comprehensive due diligence process will help.
Another challenge is the time it takes to close a deal, in part because of families’ cautious nature. In a competitive market, this can be problematic.
The biggest question for families to ask is, “Are we prepared?” The prudent thing to do is invest in resources and infrastructure needed to go direct. The need for a business development person, investment professionals and operational resources is often overlooked and families are unable to complete a transaction.
Title: Principal, Transactional Advisory Services Practice
Location: New York
Expertise: Drawing on over 20 years of business experience, Cohen advises public and private companies both domestically and internationally. Her clients include private equity investors, alternative investment funds, lenders and strategic investors.
What insight would you offer a family office considering this strategy?
Families shouldn’t underestimate the resources required. They should have their eyes wide open and recognize that getting deals done takes significant time and effort. Ongoing monitoring of each investment is essential, and managing the portfolio also takes a lot of work. Embrace the due diligence process and don’t be scared to utilize outside consultants to navigate this process.
If a formal direct investing strategy is adopted, consider recruiting someone from private equity to help, as opposed to going it alone. If your family office has certain industry expertise, speak with representatives from that industry. Remember above all else: The direct investment on-ramp is a bit more involved than you may think.
This article originally appeared in the November/December 2018 issue of Middle Market Growth. Find it in the MMG archive.