Readers of the site who aspire to move to the buy side or raise their own distressed fund someday (who in this business doesn’t want their own fund!) will find the highlights of the Family Office Panel quite beneficial. Family offices have proliferated in both size and sophistication around the globe. Family offices are a sought after destination by PMs and analysts as they have branched out into direct investing hiring their own internal portfolio managers and increasingly making direct investments in a variety of assets classes.
While all the panelists agreed that family office objectives differ significantly from most other investment vehicles, with capital preservation being their first objective, many family offices have multiple roles which include not only managing the family’s money but also foundations and endowments that more and more wealthy families are establishing. Moreover, family offices have evolved from essentially an internal fund-of-funds to direct investment vehicles making investments in venture startups, mezzanine loans, direct private equity investments, real estate in addition to traditional allocations to hedge funds, PE funds and public equities.
The panelists noted several characteristics of family offices that make them attractive to work for as well as in partnership with. Perhaps most important, is their long term time horizon (the topic of an important blog post coming) which spans multiple generations and frees them from being concerned with monthly NAVs and short term liquidity. This makes family offices ideal as LPs as well as co-investors in distressed situations which can exhibit high volatility and long time horizons to effect a turn around and exit the investment. Panelists also noted that they have unique abilities to pursue more creative structures than many institutional investors and in the right situations have the ability to act more quickly. Nevertheless, they agreed that perception in the market is that family offices spend a lot of time looking at deals but rarely come to the table.
All the panelists agreed that co-investing has grown substantially as family offices have become more sophisticated and they see co-investing as a growing opportunity set. It is typical for a family office to co-invest with investors that they already have a track record of investing along side of in the past. Their capital tends to be sticky and the allocations increase to those funds or partners who they have had success with in the past. These characteristics make family offices attractive capital partners, however, getting in the front door and earning their confidence is a high hurdle. Once earned however, the family office can become a reliable and steady partner and provide a symbiotic relationship in sourcing deals as well as investing along side in deals.
In addition, to co-investing along side sponsors in deals, family offices are originating and leading their own direct investments. The large majority of direct investing is in middle market PE deals, mezzanine lending, private placements and individual public securities. Family offices employ an extensive due diligence process and many specialize in certain niches such as clean energy or sectors similar to where the family built its fortune.
Managers at family offices maintain both formal and informal networks for sourcing investment opportunities. Furthermore, if an investor develops a good reputation with one family office, that will carry more credibility with other family office managers. That operating leverage can make it worth the time and effort to cultivate these relationships. Any investor looking to develop these networks though needs to spend the time understanding the family’s unique situation, requirements and interests. This means avoid boiler plate presentations and demonstrate your understanding of the family’s needs.
Most family offices seek to maintain a low profile and want to avoid negative publicity. Managing a family office requires strong diplomacy skills, particularly where there are multiple generations of children and grand children who are heirs. First generation family offices tend to be heavily influenced by the family’s patriarch who looks to maintain final decision making authority. Succeeding generations tend to be more democratic, but that can generate much conflict given conflicting interests, sibling rivalries and other family dynamics that need to be managed. Wealthy families are increasingly looking to provide their members with greater financial training and sophistication so as to be better able to handle the responsibility of great wealth. Managers need to incorporate succession plans, protocols for investment committees and often times may have to play the tie breaker when the family is divided over an issue, which all the panelists agreed was not a pleasant situation since regardless of what you decide there will be a disappointed party.
In conclusion, family offices have grown in size and sophistication and represent a unique opportunity for distressed funds as both LP investors as well as co-investors. However, hedge fund and PE managers looking to develop these relationships have their work cut out for them as these relationships take along time to cultivate and getting in the front door can be difficult. But for those who succeed they will likely be pleased wit the results.
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