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The Complete Guide to

Family Ofce Trends


The Complete Guide to Family Ofce Trends
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Table of Contents
I. Asset Class Diversifcation:
A Family Offce Perspective on Direct Investing 4

II. Family Offce Trends to Keep an Eye On 7

III. How to Raise Capital from Family Offces 9

IV. Growth of the Family Offces Industry 11

V. Investment Preferences of Family Offces 12
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The Complete Guide to Family Ofce Trends
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There is a growing trend in which family offces are directly buying or investing in
private companies, as opposed to allocating capital at arms length to managers of
private equity funds. The trend is nascent but could become more widespread in the
coming years, says Gene Lee, Managing Director of Cove Point Holdings, a family
offce.
In the below Q&A, Lee explains how many family offces stand out from private
equity frms, source viable investment deals, close transactions quickly with no
leverage, value a company for the long run, and work with existing management.
Q: How prevalent is direct investment buying companies by
family offces as opposed to 3rd party asset allocation?
A: We (Cove Point Holdings) are looking to acquire businesses directly and own
them outright. On the family investment side, more and more people seem to be
going the route of acquiring businesses directly or investing in a minority stake of a
company and having the infrastructure to do so.
Historically, most family offces have operated more like traditional asset
management businesses that hire investment advisors or offcers to construct a
portfolio of public securities and private investments for example, placement in
private equity and hedge funds. This is probably what the lions share of family
offces do, but more are starting to take a more active approach of looking for
companies to buy directly and own outright in their portfolios. Theres now small
penetration, but its [a trend] that will probably continue to emerge over the next few
years.
Q: Do you use leverage to complete transactions?
A: No, we dont use any debt to fnance the acquisition of a company. We are
an all cash buyer that uses 100% equity capital that is available for immediate
investment. While we have a solid understanding of debt fnancing alternatives in
a leveraged buyout, we dont believe that its prudent to acquire smaller middle-
market businesses with signifcant debt as part of the capital structure. Financial
debt in a smaller middle market business can be very risky and limit the operating
fexibility and growth prospects of a business. We dont believe that it makes sense
I. Asset Class Diversification: A Family
Office Perspective on Direct Investing
The Complete Guide to Family Ofce Trends
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to compound the operating risk of growing a smaller company and the risk from an
ownership transition with the risk of a leveraged capital structure that could have bad
consequences for a company if it misses a beat. Leveraging up a company too much
puts owners, management and employees at risk. Also, on the one hand [not using
leverage] creates an advantage over traditional private equity buyers who might not
be able to get fnancing, plus we can also move much more quickly in executing a
transaction without debt fnancing contingencies or risks. But that also means we
arent pricing our offers around leveraged returns, so we may not be able to pay as
much.
Q: How is direct investing as a family offce different than traditional
private equity transactions?
A: A family offce generally has the fexibility to change its investment criteria and
approach as it sees ft whereas private equity institutions are more limited by their
investment mandates. Family offces generally dont have limitations with respect to
the types of securities we can invest in, transaction structures, industries, startup vs
established businesses, etc.
A primary difference and beneft
associated with private family
ownership is that we generally have a
longer and more fexible investment
horizon. Unlike a private equity fund
that might have a fve-year investment
horizon and a ten-year fund life and
who needs to exit investments regularly
and return cash to their investors in a
relatively short period of time, we have
the ability and desire to hold and grow
companies for the long term. We look
for good businesses that generate
attractive cash-on-cash returns,
and were looking to partner with
management teams for the long-run.
We have owned businesses for more
than twenty years, and we take that
same long-term approach to investing
when we evaluate opportunities
currently.
A primary diference
and beneft associated
with private family
ownership is that
we generally have
a longer and more
fexible investment
horizon.
- Gene Lee,
Cove Point Holdings
I believe that this ability to have a long-term investment approach has a meaningful
and benefcial impact on the development and growth of a company. The strategic
The Complete Guide to Family Ofce Trends
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decisions that we make with our management teams for our companies are primarily
based on determining whats best for the business in the medium and long term. We
have no incentive to make decisions that might provide a short-term pop but creates
longer-term losses or risks for the business. For private equity funds that need to
exit their investments and are highly motivated to maximize their own fnancial gain,
their approach and fnancial incentives arent always the same. Sometimes the
fnancial incentives of a private equity fund manager are at odds with the longer-term
objectives of a company. And, exiting an investment at the wrong time through a sale
of the company or a public offering can be pretty disruptive events.
Q: How do you fnd viable investment candidates?
A: It takes a signifcant amount of time and resources for a family offce to build and
sustain a strong network from the ground up. Its all about building and leveraging
relationships productively. We look at hundreds of opportunities per year, sign
confdentiality agreements on approximately ten percent of them, meet with close to
twenty percent of that group, then bid on a handful of them. If everything goes right,
well acquire one business a year.
Q: What do you do with existing management of a company you
buy?
A: Management is absolutely key. Our strong preference is to partner with the
existing management team or key executives who want to stay on to run the
business. If we need to bring in an outside manager, we can do so. But, our bias is
defnitely to work with an existing team. There are times and situations when you
have to replace a management team, but this can very disruptive and set a business
back quite a few years.
Oftentimes most private equity frms and family offces alike are very management
friendly; they give management signifcant options or equity stakes to align economic
interests and to provide attractive fnancial incentives. We give management a
signifcant amount of operating fexibility while providing appropriate controls to
ensure that were aware of how the business is performing and that were involved
with important strategic decisions. We speak to our management teams regularly,
and we have very open dialogue around operating and strategic initiatives.
The Complete Guide to Family Ofce Trends
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II. Family Office Trends to Watch
The direct investment strategy of family offces, introduced above, has also become
apparent to Howard Romanow, COO and CFO of Island Management, a family offce
for a fourth generation family with more than 100 years of ownership experience. He
continues the discussion on how many family offces are bypassing PE frms, instead
opting to hire ex-PE professional inhouse.
Although many more family offces are looking for private investments, many are
hesitant to invest in PE frms because they do not see the beneft of the structure,
Romanow explained. If you are capable of directly investing, the idea of fees, the
illiquidity of the fund, the lack of control, and the desire to quickly sell the winners
and hold the losers is not appealing.
Limited Direct Competition
If family offces begin direct investing en masse, should private equity frms be
worried about rising competition? Romanow does not believe so. He explained,
When it comes to the types of businesses we are acquiring, there is less
competition the companies that are interested in the value-add of a family offce
are less interested in a private equity frm, and vice versa.
The reality is that we typically do not participate in auctions, said Romanow.
Overall, we are focused on fewer, more hands-on investments that we will hold for
far longer than a typical PE frm. We are not confned by any holding period limitation
or structural limitation, so we can be as creative with an investment as we want. This
allows us to review each opportunity as a unique investments and not have to be
confned to a specifc industry or investment type. He added, We tend to look at
ownership in terms of generations rather than fve-year investment periods.
Romanow was certain to add that family offce investment strategies run the gamut.
While Island Management may be interested in long-term investments, there are
many other family offces that are keen on pursuing more traditional private equity-
style models. He explained, Because of the timeline and strategy of most private
equity frms, we would be much more likely to partner with another family offce than
a private equity frm. But, much of it depends on the family. If a familys investment
objectives are like a PE frm, a partnership with a PE frm might make more sense.
The Complete Guide to Family Ofce Trends
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Private Equity Professionals Moving to Family Offces
Rather than competing around investments, family offces and private equity frms may
soon be competing for investment managers. Romanow explained, Although it is still
a relatively young trend, you are more frequently hearing of private equity professionals
leaving frms to move to family offces.
The alignment of supply and demand is near perfect. On the demand side, family offces
have begun to tap existing private equity professionals to source opportunities, conduct
thorough due diligence, negotiate transactions, and work with the acquired companies.
On the supply side, many private equity professionals are fnding it an offer they cant
refuse. As the PE industry has evolved and changed especially in response to tax
questions and realization of carry the idea of working for an offce under a more
fexible policy is signifcantly more appealing to many PE folks.
Romanow explained, I spent 15 years in private equity before joining Island
Management. When I decided to move to a family offce most of my reasons were
centered on the issues I saw with institutional private equity funds decreasing fund
returns, ability to generate carry, limited holding periods, the diffculty of raising new
funds, registration requirements, the confict of LPs-GPs, and the fact that we were
regularly selling the best companies for a quick return.
Although it is still a relatively young
trend, you are more frequently hearing of
private equity professionals leaving frms
to move to family ofces.

- Howard Romanow,
Island Management
The Complete Guide to Family Ofce Trends
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II. How to Raise Capital from Family
Offices
The family offces that do pair with private equity frms are notoriously discrete.
So much so that one of the most common adages to describe the industry is a
submerged whale does not get harpooned.
But someone must be Ishmael. With a tremendous amount of investable capital,
these offces are often looking for ways to diversify their investments. According
to Richard C. Wilson the founder of the Family Offces Group just because
the offces are hidden does not mean they are unreachable. He explained that
relationships with single and multi family offces can be cultivated through diligent,
persistent, and intelligent outreach.
Have a Proactive and Diversifed Outreach
According to Wilson, the most effective outreach strategy requires both persistent
and proactive outreach. Even for the specialized Family Offces Group, building
relationships still requires a variety of different channels and techniques. Wilson
explained, We use a variety of tactics probably around 30 different strategies
to attract family offces. We speak
at conferences, write books, publish
newsletters, maintain a website,
run an association, offer a training
platform and that is just the tip of
the iceberg.
Moreover, diverse outreach also
entails tailoring your conversations
to the specifcs of different family
offces. Although there are general
categories of offces small single
family offces, large single family
offces, small multi family offces,
and large multi family offces
Wilson emphasized that each frm
is unique. There is no singular
template. Each family offce has
its own system different sized
teams, different missions, and
We talk with family
ofces every day and
meet with them face-
to-face every week,
and it still takes a
long time to generate
solid relationships.
- Richard Wilson,
Family Ofces Group
The Complete Guide to Family Ofce Trends
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different values.
Immediate results are not guaranteed, even with quality and diversifed outreach.
Quality conversations will take time to develop. As Wilson explained, We talk with
family offces every day and meet with them face-to-face every week, and it still
takes a long time to generate solid relationships, raise capital, or organize club
deals.
Start Locally
While Wilson, through his Family Offces Group, is able to dedicate the time and
resources to cultivating a multitude of outreach channels, it can be unrealistic to
assume that any more generalized frm can mimic such effort especially with
capital and time spread among other opportunities.
If you are looking to connect with just a few family offces, the best place to begin
is in your own backyard. According to Wilson, the best method is to begin locally.
These family offces are usually the easiest to initially meet. He explained, You
can focus on getting to know every single family offce in your city. With this base
network, you are able to use it as a foundation for further outreach and referrals.
But what happens if you do not know any family offces in your city or region? After
all, they are submerged whales. Wilson suggests Google as one of the best places to
begin the search. If you dont know any [family offces], start by searching Google.
You will probably discover at least 2 or 3 in your area. Wilson recommended that
your Google search simply include your area (i.e. Denver) and the phrase family
offces. Alternatively, you could search for the ultra-affuent residents of your area,
and search for an associated family offce.
Once you have this foundation, continue to foster the relationships by attending
conferences and events. Eventually, through these efforts and through networking,
you will grow your network.
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The Complete Guide to Family Ofce Trends
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Offer a Value Add
According to Wilson, the hardest part of the relationship is maintaining it. After the
relationship is started, the hard work arrives. You must demonstrate that you will
provide clear value to the family offce.
Wilsons value add is his specialty and focus on family offces. He explained, When
I recently wrote The Family Offce Book: Investing Capital for the Ultra-Affuent, I
spent a great deal of time ensuring that it was very valuable. I knew that if I made it
outstanding, family offces would reach out to me; if it was just mediocre, they would
not.
The same principle must apply to your outreach and relationships. Demonstrate to
the family offce why your frm is the right one to be in contact with. What can you
offer that no one else can Is it a strong track record? Exceptional due diligence
skills? Experience and insight within a relevant industry? Whatever the skill,
emphasizing the trait is a critical component of securing the connection.
The Light at the End of the Tunnel
Ultimately, the extra effort required to build relationships with family offces is more
than warranted. Family offces bring much more than investable capital to the table
a stable relationship with one can offer the power of a warm introduction and a
broader network. As Wilson explained, Many of these family offces are connected
with ultra-wealthy family offces and leaders in a variety of businesses.
He continued, One family with which I work a 6th generation family in San Diego
has helped connect me with a variety of Boards of Directors of publicly traded
companies. These relationships can help facilitate corporate acquisitions and other
investments.
The Complete Guide to Family Ofce Trends
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Family offces have conventionally operated on the fringes of the deal economy,
acting as traditional wealth management frms for the ultra-wealthy families of the
world. But many family offces are rethinking their investment strategies, bypassing
the constraints of fund structures and participating as direct investors in deals
traditionally funded by private equity frms.
In this webinar, Richard Wilson, Founder and CEO of the Family Offces Group
discuss the future of the single and multi-family offce space, how the shift to direct
investments will change their deal appetite, and how they operate in the private
capital deal markets.
View the slides here or watch the entire presentation below:
IV. Growth of the Family Office Industry
The Complete Guide to Family Ofce Trends
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Deterred by the volatility of the public markets and the high-fee, low-transparency
nature of private equity, many family offces have been seeking direct investment
alternatives. There are plenty of examples of family offces taking their own
networks of contacts and industry expertise to the acquisition table, explained a
recent Forbes article.
However, not all family offces are ready to go at it alone. Instead, many family
offces are seeking club deals or co-investment opportunities with their private equity
counterparts. Whether it is an investment for diversifcation, or they simply need
extra capital, a symbiotic relationship with private equity can be quite valuable to the
right family offce.
To establish a successful relationship, frms need to understand the unique
strategies, perspectives, and goals of a family offce. In the below presentation,
Richard Wilson Founder of the Family Offces Group discusses the 7
investment priorities of family offces, their 3 types of direct investments, top
mistakes when dealing with family offces, and more.
View the slides here or watch the entire presentation below:
V. Investment Preferences of Family
Offices & Investing with PE
The Complete Guide to Family Ofce Trends
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