INSIGHTS
                     
How Family Offices Source Private Investment Opportunities

Jun 2018 by Hannah Grove

HOW FAMILY OFFICES SOURCE PRIVATE INVESTMENT OPPORTUNITIES - CoverTwo of the biggest sources of private investment opportunities – private equity fund managers and middle-market investment banks – have had trouble finding, reaching and connecting with single-family offices (SFOs) since the beginning of this decade and the perceived difficulty has modestly increased over the years to almost unanimous levels (Figure 1).

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Two of the biggest sources of private investment opportunities – private equity fund managers and middle-market investment banks – have had trouble finding, reaching and connecting with single-family offices (SFOs) since the beginning of this decade and the perceived difficulty has modestly increased over the years to almost unanimous levels (Figure 1).

FIGURE 1: DIFFICULTLY ACCESSING SINGLE-FAMILY OFFICES FIGURE 2: IMPORTANT TO SOURCING PRIVATE INVESTMENTS

This sentiment is echoed widely throughout the financial services community and well-beyond, as many SFOs choose to operate under the radar. The very structure of a family office is designed to act as a buffer to the outside world, protecting the family members and the family’s assets from unwanted overtures and reinforcing the importance of privacy and confidentiality.

A key tenet of effective marketing is meeting people where they are. In the case of SFOs and private equity, this means understanding how they currently source funds and direct investments and determining where and how to become part of the process. As it turns out, funds and direct investments are likely to be sourced and vetted in two different ways with professional intermediaries and investment teams taking the lead on funds while family members and other family offices can be important sources for direct deals (Figure 2).

How Family Offices Source Private Investment OpportunitiesINTERMEDIARIES

Almost two-thirds of SFOs cite intermediaries as the most frequent and reliable source of private equity investments. Intermediaries is a catch-all group that includes the array of professionals such as attorneys, accountants investment bankers, financial advisors and consultants that provide specialty services to a family office.

These intermediaries fill two important functions:

- they are a type of gatekeeper who can provide access to a family office via an introduction or referral because they have an established and trusting relationship and a working knowledge of the family and its priorities;

- they have the clout to ‘validate’ an investment offering with a professional opinion related to their area of expertise (e.g., cross-border tax implications) or their views of a specific provider.

Despite the influential role played by intermediaries, it is useful to recognize that the investment team within the family office will ultimately evaluate the offerings and determine where to allocate assets.

INVESTMENT TEAMS

Family office CIOs and their colleagues are predominantly industry professionals employed by a wealthy family and not members of the founding family. About four in 10 investment teams are actively sourcing and conducting due diligence on private equity funds. However, at least in the early stages, they tend to operate independently using databases and their personal networks to identify and cull opportunities, rather than meeting with asset managers directly.

Because an investment team’s scope of responsibilities can often extend beyond strict investment functions to things like philanthropy and legacy planning, they are connected to and rely on a carefully vetted network of specialists for critical expertise and deliverables – many of whom are also the sourcing intermediaries described previously.

OTHER SFOS, UHNWS AND FAMILY MEMBERS

When family members bring investment opportunities to their own family office or their counterparts at other SFOs, those opportunities are more likely to be individual companies than funds. This allows for a higher degree of control that can yield an array of other potential benefits that may not be possible when investing via funds, such as:

• Engaging with other families via a co-investment or ‘club deal’ format and sharing best practices

• Focusing narrowly on opportunities where the family’s unique industry expertise and connections can be leveraged to full effect

• Taking an active role in the strategic direction and/or day-to-day operations of a business

• Proactively managing the tax consequences associated with the investment

The most constructive way to reach and engage with family capital investors is to work through the key sources they currently rely on to find and evaluate private equity investments. But simply knowing who those sources are and targeting them with an array of short-term sales tactics (e.g., email campaigns, pitch meetings, conferences) won’t result in their support without the confidence that comes from a relationship built on shared understanding and experiences. Cultivating them like clients and building a consistent connection over time will help construct a foundation that can support a variety of opportunities and scenarios.


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