More family offices nowadays are seeking to co-invest with other families due to a multitude of reasons. For many this could be where there is a greater alignment of interests or greater control of investments, while others look to target more flexible terms than investing in external funds or vehicles.
Greater collaboration
A report by UBS last year stated the prominence of co-investing among family offices globally. Overall, four-fifths of family offices reported participating in office-to-office or investment bank-syndicated private equity deals in 2013. Average deal size for family office syndicated transactions was $76 million and $119 million for those collaborating on private equity deals.
According to the report, on a regional level, 61% of family offices in North America co-invested together in 2013, while for European offices this figure rocketed to 86%. Interestingly, the research stated that almost half of North American family offices said they had never taken part in syndicated deals facilitated by banks.
Family office practitioners acknowledge that family office activity in direct or co-investments is growing. “More family offices seem to be venturing down this route as co-investment can benefit those who wish to take a longer-term view in the deployment of family capital,” says one specialist. “It is becoming more evident that family offices are taking this strategy as part of a broader trend of taking more responsibility and reducing cost.”
Cost issues
The appetite for co-investments is being driven partly by a cheaper way of investing and the quest for reduced fees and higher returns. Co-investments often avoid annual management fees and capture the full upside by not paying carry and include benefits over a fund such as being able to chose where capital is invested.
Venture capital (VC) and private equity (PE) managers are commonly used by family offices but more investors are looking to cut out middleman costs and undertake investments themselves in partnership with others.
Many family offices have also invested through hedge funds and funds of funds and it is natural that many want to cut out fees given the relative poor performance of the sector in 2014 with the hedge fund sector posting an average of 3.78% returns, according to alternative asset intelligence company Preqin.
Professional help
Using managers does have advantages. For instance, targeting strategies in new sectors or regions would be difficult for a family office that has no prior experience. Therefore, many are prepared to use a manager to undertake the due diligence and analyse opportunities, for example, in frontier markets or alterative assets.
Utilising the services of an experienced PE or VC firm with a hundred deals under its belt could negate risk. A study by advisory firm Altius Associates released in March last year noted that while co-investments do avoid the conventional ‘2 and 20’ fee structures of private equity funds, investors may face “adverse selection” because they do not necessarily get access to the best deals and investment portfolios could become concentrated in too few investments.
Anecdotal evidence, suggests that family offices are taking a pragmatic approach and using managers to access sectors and markets they are not familiar with and undertaking transactions themselves when they do know the markets.
Working with peers
Trust is a very big issue for very wealthy families as unsurprisingly, some families feel more comfortable discussing investment opportunities with their peers. The appeal of investing together or forming a partnership to take a stake in companies is that families can better understand the business they invest in.
Also, this cooperation enables family offices to divide the due diligence by interest and expertise in order to increase efficiency and maximise their resources. Given there will be no professional manager involvement, some families do not feel comfortable taking on the responsibility for the due diligence process and investing unless they have in-depth knowledge about the areas which they are targeting.
Nonetheless, one attraction for other families is that club deals can also result in families gaining expertise in fields they may not be familiar with and thus diversifying their assets. This could be in sectors that they may not be involved in from a business perspective but may have some association from a personal level. For instance, families are big consumers of luxury products, and so naturally this and the lifestyle sectors are a common theme, in addition to well-understood tangible assets, such as real estate.
Strategies
Those family offices that are not risk averse target very early-stage, speculative investments included as part of a portfolio comprising a range of other assets of different risk tolerances. Some of these investments may become worthless, but, by having a range of options, it could be assumed that some could eventually generate multiples in returns.
Those less risk averse naturally favour more stable and more mature companies to own and control. Funds would be used as growth capital to allow the company to expand and become a vehicle to generate stable alternative income for families.
One common theme is that investment horizons are generally long term, given liquidity is very limited or non-existent in the short term.
Deal flow
Many family offices suffer from deal fatigue and the discouraging prospect of seeing another shopped deal that has too many layers of fees or no momentum in the market.
Also, it is commonplace that family offices do not see co-investment opportunities until they have already been reviewed by other institutional investors and prominent private equity funds. This often means that the best deals have already been snapped up and so many families find it increasingly difficult to gain access to quality opportunities.
Deal flow and trying to find a solid company or property is a challenge for family offices. Many families find it difficult to source relevant partners or even know who to trust, as they may not have the right, or any, connections in new markets. Equally, intermediaries and business owners find it difficult to contact family offices since many traditionally maintain a discreet profile.
Joining forces
This is leading to a varying trend in how like-minded families join up together to invest. For instance, the Private Investment Club (PIC) run by Global Partnership Family Offices provides family offices with access to deal flow.
PIC does not consider brokered deals from banks or brokers, which provide no real added value, and has a preference for deals that are sourced internally from within the PIC and GPFO network (see p18, and p7 Winter 2015 FOG). PIC acts like a broad funnel to filter deals through the Investment Review Board and introduce new opportunities to families that they would otherwise not do themselves directly.
Some organisations like multi-family offices (MFO) may have a head start on the networking front by being able to connect interested parties from within. It is understood that many MFOs are looking into formulating their in-house set-ups for enabling co-investment.
Some MFOs undertake full due diligence, research and also anchor deals themselves. These entities then invite clients to participate in transactions and charge family offices a fee. Family offices may not be paying a PE or VC manager but do nonetheless have to pay the cost for piggy backing another family office’s due diligence and experience.
Whatever strategy that family offices take, it seems that networking pays dividends. Finding the best investment could become easier if the right infrastructure is in place to originate investment opportunities.
