Family Office Investment Options

In my daily interactions with family offices, I've been observing a significant shift in their approach to venture capital investments. Increasingly, they are leaning towards direct investments rather than traditional fund investments. This shift is not just about diversifying assets; it's about aligning their investments with their values, creating a lasting impact and believing that they can outperform VC. A lot of the family offices I'm talking to are increasingly drawn to investments that offer both financial returns and alignment with their core values, particularly in areas like sustainable technology and healthcare. They're seeking a deeper connection with their investments, which goes beyond mere financial transactions. They're not just passive investors; they want to be part of the story of the companies they invest in, influencing and nurturing them towards success. Often they see their investments as extensions of their legacy. Navigating direct investments, however, requires a specific skill set and resources. The successful family offices I see in this arena often have robust in-house teams and collaborate with other entities (other families, other funds, independent sponsors). I see a lot of family offices who invest with us so that they can mentor entrepreneurs directly and gain exposure to a curated deal flow they might not typically access. This kind of engagement is invaluable for everyone involved, particularly for entrepreneurs. Many of these families are seasoned entrepreneurs themselves, bringing a wealth of practical knowledge and industry connections that can be pivotal for the growth and success of startups. Risk management is a critical aspect of direct investing. While there is potential for higher returns, the risks are also greater. Balancing direct investments with more traditional fund commitments is a strategy I've seen many successful family offices adopt. This approach allows them to maintain a diversified portfolio while indulging in the more hands-on aspect of direct investing. In my opinion, family offices are setting new benchmarks in venture capital investing through their direct involvement and strategic insights. And yes, some family offices are positioned to potentially outperform traditional venture capital funds. Their unique insights, long-term investment horizon, and close involvement with their investments provide a competitive edge that traditional funds may not match. Source: Dentons (note: the graph below is for all asset classes; not just venture capital)

Really enjoyed my fireside talk with Paul Carbone, President of Pritzker Private Capital about the changing landscape, competitive advantages, and future trends of Family Offices. Our talk began by focusing on the competitive advantages that Family Office have over traditional private equity. The biggest advantage that Family Offices have over private equity is that Family Offices have both strategic and flexible capital. Family Offices, in general, are operators. They made their fortune in a specific industry by operating a company to profitability. This is in contrast to the private equity industry where there is more of a focus on financial engineering than operating a company to profitability. If you look at the private equity firms, most of them have more finance people than operators. In order to create true alpha, in my opinion, you need to operate a company to profitability, not financially engineer a company for a sale in a predetermined time frame. The other advantage Family Offices have over private equity is that Family Offices have patient capital. The private equity model, which has been extremely successful for the past few decades, focuses on buying and selling a company in a predetermined time period -- typically 3-5 years. And it makes perfect sense, based on how the partners at the private equity firms are compensated. Their compensation is structured so that they make more money by flipping a company in a short time period. Family Offices, in contrast, have patient capital. They are not incented to buy and sell companies in a predetermined time period. They have the luxury of having flexible capital, where they can buy and hold companies without the pressure of being forced to sell in 3-5 years. This gives the Family Offices the ability to compound their money over longer periods of time. Why does this matter? If you look at how companies are bought and sold in today's market, in many instances you will have a private equity firm buy a company from a family business. They will do their best to make the company more profitable and try to sell it in a 3-5 year time frame. In many instances, private equity firm 1 will sell the company to private equity firm 2, who also wants to extract profits and exit in a 3-5 year time period. There are thousands of instances where companies have changed hands three, four, or five times from one private equity firm to another. Now if you look at the taxes involved in each sale, along with the transaction costs involved plus the disruption in management and compare that to a Family Office who may hold the company for 20 years and let their profits compound, avoid the taxes and transaction costs, the end results are enormous. I truly believe that the Family Office model is a better model than the private equity model. The problem is that most Family Offices do not have the infrastructure in place yet. But that is starting to change. Thoughts? #familyoffice #tiger21 #privateequity

What seems most important to many CIOs today – and this came through ‘Loud and Clear’ in our survey work and travels in 2023 – is their desire to leverage their longer-term focus as well as their owner/operator mentality to create a sustainable competitive advantage in investing. This is different than the more traditional passive investors, many of which are hampered by the need to offer higher near-term payout ratios and/or are more constrained in their ability to lean into dislocation. Importantly, family offices are looking for partnerships across regions, asset classes and sectors, especially when in house knowledge or resources hinders the ability to scale rapidly. As one seasoned CIO said, “Now is an interesting time to play offense, given that many others need liquidity, and we don’t. We are particularly keen on going direct, for example, in sectors where we have owned businesses in the past. At the same time, we increasingly want to partner with GPs in areas where we may not have regional expertise or industry expertise to further build out our portfolio.” https://go.kkr.com/3SASVGn

Where is the UHNW and HNW investor interest in Q2 2024? My high-net-worth investors are strategically increasing their allocations in multi-family (residential apartments for my international HNW audience) real estate, and here’s why: The current climate, marked by reduced competition due to tightening credit, presents a unique opportunity. This tightening has led to a decreased pool of active buyers, making it an opportune moment for astute investors to acquire institutional-grade properties on favorable terms. Moreover, with interest rates at a 22-year peak, asset owners face high debt expenses and looming mortgage maturities, allowing firms like BAM to secure prime institutional quality real estate that was previously difficult to access under normal market conditions. The challenging market is also throttling further investments in this space, creating a short to mid-term favorable landscape for those who choose to stay in this market as buyers/investors. Interest rates will go down; it's just a matter of time. When they do, investors will benefit from the readjusted supply, better financing, and institutional investors' returns. #familyoffice #investing #markets #future #banking #multifamily #cre

One potential change to your investment strategy could be looking to earn royalties on investments as a minority investor rather than being paid a percentage of profits based on equity. For example, consider owning a 33% equity stake in a growing organic skincare company. You may agree on a gross revenue royalty, providing you with a share of revenue, which can be a better option than profit-based payouts. This approach encourages alignment, transparency, and accountability in your investment strategy. It also helps prevent you from being illiquid in a deal for a decade while you cross your fingers for an exit. If you can get at least your initial investment back as a royalty, you can recycle that cash into another deal and pick up another equity stake or upside - and it de-risks your transaction every month/quarter as you get capital back vs. waiting until profits are available or an exit happens. #investing #investments #capital #investorclub #familyoffice #privateinvestors #business #CFO #privateequity #CEO

In 2023 I spoke to 344 family offices and institutional investors about direct deal capital raising. Here are the takeaways from the data. If you’re an independent sponsor or emerging manager, take note: 👉 Around half of those groups were family offices 👉 Many family offices now have dedicated teams staffed for direct deals and many will ONLY invest directly 👉 Few family offices complete more than 2 transactions a year 👉 Most family offices will work with independent sponsors (a few focus on sponsorless or co-invests only) 👉 The deal size sweet spot for most investors generally remains $10-50M 👉 B2B businesses are still the most highly sought after 👉 Revenue multiple (or even just high) valuations struggle on a single deal basis 👉 Most investors prefer EBITDA at 5M+ 👉 Most investors prefer majority buyouts 👉 GPs need deals in exclusivity – time is at too much of a premium to burn on broader auctions 👉 Economics are stable at 1 / 10% (2023 vs. 2022), though tiered structures are gaining traction 👉 Expenses are often shared 👉 The majority of processes take 3-4 months GPs stand out by their ability to run tight, professional processes and act with integrity. Lax timelines and late re-trades are sure ways of burning goodwill with investors. #directdeals #emergingmanagers #fundraising #familyoffice #familyoffices #uhnw #privateequity #fundlesssponsor #independentsponsor

A quick overview of a couple of reasons why Family Offices should consider writing LP checks into emerging manager funds through their Venture allocation: 1. Emerging Managers show a better risk-return profile than institutional funds. 2. Fund of Fund type vehicles have a great chance of outperforming or performing equally as funds up to the top decile. Your probability as a family office to be a top decile direct investor is low. 3. Better access to top talent. In my deal sourcing efforts for the family office, I learned quickly that it will be extremely difficult for us as a FO to establish strong relationships with the best talent before their next fundraising round. Getting access to the top GPs is not easier, but it's substantially more achievable. 4. More time to build a relationship and trust prior to investment. 5. Learnings. If you want and if you are proximate enough to the GP, you have a fantastic opportunity to learn from their industry insights and apply those learnings to your various other strategies. 6. De-risked direct opportunities. There is a high probability LPs get to pick up the pro-rata of the GPs' in existing portfolio companies. Invest in the winners of GPs you trust. 7. More impact. Emerging Managers invest in startups at the earliest stages, which will significantly impact the future. 8. This is a less sexy factor, but it's simply more time efficient. If you're working with a lean team and running multiple investment strategies, philanthropy, tax strategies, etc. simultaneously, you only have so much time to dedicate towards sourcing and due diligence. I know, if you have met one family office, you've met one family office. So, every family office will have different reasons, and variety of factors which affect wether investing in emerging funds makes sense. This is just an overview of various factors I constantly re-assess and why I would recommend to family offices to consider investing in emerging managers.

I spoke to a family office yesterday that's providing 99-year ground leases as an alternative to preferred equity. A few notes: ‣ Check sizes $10M-$100M ‣ Sizing to 30-35% of the fee simple value ‣ Rate of approximately 6.0% ‣ Ground rent increases ~2% per year, e.g. Year 2 is 6.12% ‣ Offer ability to buyout the ground lease after 30 years ‣ Only considering strong primary and secondary markets ‣ Focused on multifamily deals with a Freddie senior loan, but would consider office and hotels as well at a higher rate. There can be exceptions, but for ground lease deals Freddie typically increases the DSCR from 1.25x to 1.35x and adds 18 basis points to the spread. The simplified example I provided in the table is purely intended to highlight the concept and potential annual cost savings with the ground lease structure vs preferred equity. A more accurate way to show this would be with a 5-10 year cash flow that includes the annual rent increases and potentially a higher exit cap rate. If this information may be helpful for any of your connections, please Like and Repost. Thank you! #cre #multifamily #multifamilyrealestate

Are Family Offices Going to Eat VC's Lunch? HNWI (high net worth individual >$50M) hold $74tn. VC AUM is somewhere around $2.5tn (Preqin). Private markets AUM (assets under management) is estimated at $13tn with ~ $3.7tn dry powder (McKinsey & Company). 𝗦𝗼: 𝗪𝗶𝗹𝗹 𝗙𝗮𝗺𝗶𝗹𝗶𝗲𝘀 𝗿𝗲𝗽𝗹𝗮𝗰𝗲 𝗩𝗖𝘀 𝗶𝗻 𝘀𝘁𝗮𝗿𝘁𝘂𝗽 𝗳𝘂𝗻𝗱𝗶𝗻𝗴? Traditionally, Family Offices deployed into VC funds as part of their portfolio strategy. But a generational shift is underway: 𝟭) 𝗧𝗲𝗰𝗵 𝗕𝗶𝗹𝗹𝗶𝗼𝗻𝗮𝗶𝗿𝗲𝘀 Four out of ten family offices have been created in the past decade and tech billionaires are happy to invest directly in startups. Check Sam Altmans portfolio in case of doubts. 𝟮) 𝗗𝗶𝗿𝗲𝗰𝘁 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗲𝘀 1/3 of allocation goes into private markets and there is a growing trend among self-made billionaires to invest in technology startups (founders like to invest in founders). 𝟯) 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝘆 𝗮𝗻𝗱 𝗖𝘂𝗹𝘁𝘂𝗿𝗲 Family offices might prioritize long-term growth over quick exits, enabling strategic support with sector-specific expertise. Families in the East are more likely to acquire assets in the same or an adjacent industry and region. 𝟰) 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆 No fund structure, personal interests and flexibility in deal structure. As the traditional VC model (5+5) seems increasingly outdated, family offices might fill a gap in special verticals and emerging regions. Kudos to DBS Bank for a great report. Comment/tag me if you need the link. Founders: Are you including Family Offices in your outreach? Investors: What trends are you seeing? #familyoffice #venturecapital #startupfunding #privateequity #founders