axial guide family-offfamily office co investing webinar axialices

5/21/2018 Axial Guide Family-OffFamily Office Co Investing Webinar Axialices

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The Complete Guide to

Family Office Trends


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The Complete Guide to Family Ofce Trends

Table of Contents

I. Asset Class Diversication:A Family Ofce Perspective on Direct Investing 4

II. Family Ofce Trends to Keep an Eye On 7

III. How to Raise Capital from Family Ofces 9

IV. Growth of the Family Ofces Industry 11

V. Investment Preferences of Family Ofces 12

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There is a growing trend in which family ofces are directly buying or investing inprivate 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

ofce.

In the below Q&A, Lee explains how many family ofces stand out from private

equity rms, 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 byfamily ofces 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 ofces have operated more like traditional asset

management businesses that hire investment advisors or ofcers 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

ofces 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 nance 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 nancing alternatives ina leveraged buyout, we dont believe that its prudent to acquire smaller middle-

market businesses with signicant debt as part of the capital structure. Financial

debt in a smaller middle market business can be very risky and limit the operating

exibility and growth prospects of a business. We dont believe that it makes sense

I. Asset Class Diversification: A FamilyOffice Perspective on Direct Investing


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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 notbe able to get nancing, plus we can also move much more quickly in executing a

transaction without debt nancing 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 ofce different than traditional

private equity transactions?

A:A family ofce generally has the exibility to change its investment criteria and

approach as it sees t whereas private equity institutions are more limited by theirinvestment mandates. Family ofces generally dont have limitations with respect tothe types of securities we can invest in, transaction structures, industries, startup vsestablished businesses, etc.

A primary difference and benet

associated with private family

ownership is that we generally have a

longer and more exible investment

horizon. Unlike a private equity fund

that might have a ve-year investment

horizon and a ten-year fund life andwho 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 thatsame long-term approach to investing

when we evaluate opportunities

currently.

A primary dierenceand benet associatedwith private family

ownership is thatwe generally havea longer and moreexible investmenthorizon.

- Gene Lee,Cove Point Holdings

I believe that this ability to have a long-term investment approach has a meaningful

and benecial impact on the development and growth of a company. The strategic


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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 nancial gain,their approach and nancial incentives arent always the same. Sometimes the

nancial 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 nd viable investment candidates?

A: It takes a signicant amount of time and resources for a family ofce 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, signcondentiality 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 isdenitely 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 rms and family ofces alike are very management

friendly; they give management signicant options or equity stakes to align economic

interests and to provide attractive nancial incentives. We give management a

signicant amount of operating exibility 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.


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II. Family Office Trends to WatchThe direct investment strategy of family ofces, introduced above, has also become

apparent to Howard Romanow, COO and CFO of Island Management, a family ofce

for a fourth generation family with more than 100 years of ownership experience. He

continues the discussion on how many family ofces are bypassing PE rms, instead

opting to hire ex-PE professional inhouse.

Although many more family ofces are looking for private investments, many are

hesitant to invest in PE rms because they do not see the benet 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 ofces begin direct investing en masse, should private equity rms 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 ofce

are less interested in a private equity rm, 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 rm. We are not conned 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

conned to a specic industry or investment type. He added, We tend to look at

ownership in terms of generations rather than ve-year investment periods.

Romanow was certain to add that family ofce investment strategies run the gamut.

While Island Management may be interested in long-term investments, there are

many other family ofces that are keen on pursuing more traditional private equity-

style models. He explained, Because of the timeline and strategy of most private

equity rms, we would be much more likely to partner with another family ofce than

a private equity rm. But, much of it depends on the family. If a familys investmentobjectives are like a PE rm, a partnership with a PE rm might make more sense.


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Private Equity Professionals Moving to Family Ofces

Rather than competing around investments, family ofces and private equity rms 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 professionalsleaving rms to move to family ofces.

The alignment of supply and demand is near perfect. On the demand side, family ofces

have begun to tap existing private equity professionals to source opportunities, conductthorough due diligence, negotiate transactions, and work with the acquired companies.

On the supply side, many private equity professionals are nding 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 ofce under a more

exible policy is signicantly 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 ofce most of my reasons were

centered on the issues I saw with institutional private equity funds decreasing fundreturns, ability to generate carry, limited holding periods, the difculty of raising new

funds, registration requirements, the conict of LPs-GPs, and the fact that we were

regularly selling the best companies for a quick return.

Although it is still a relatively youngtrend, you are more frequently hearing ofprivate equity professionals leaving rms

to move to family oces.

- Howard Romanow,Island Management


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II. How to Raise Capital from Family

Offices

The family ofces that do pair with private equity rms 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 ofces are often looking for ways to diversify their investments. According

to Richard C. Wilson the founder of the Family Ofces Group just because

the ofces are hidden does not mean they are unreachable. He explained that

relationships with single and multi family ofces can be cultivated through diligent,

persistent, and intelligent outreach.

Have a Proactive and Diversied Outreach

According to Wilson, the most effective outreach strategy requires both persistent

and proactive outreach. Even for the specialized Family Ofces 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 ofces. We speak

at conferences, write books, publish

newsletters, maintain a website,

run an association, offer a trainingplatform and that is just the tip of

the iceberg.

Moreover, diverse outreach also

entails tailoring your conversations

to the specics of different family

ofces. Although there are general

categories of ofces small single

family ofces, large single family

ofces, small multi family ofces,

and large multi family ofces

Wilson emphasized that each rm

is unique. There is no singular

template. Each family ofce has

its own system different sized

teams, different missions, and

We talk with familyoces every day andmeet with them face-to-face every week,and it still takes along time to generatesolid relationships.

- Richard Wilson,Family Oces Group


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different values.

Immediate results are not guaranteed, even with quality and diversied outreach.

Quality conversations will take time to develop. As Wilson explained, We talk with

family ofces every day and meet with them face-to-face every week, and it stilltakes a long time to generate solid relationships, raise capital, or organize club

deals.

Start Locally

While Wilson, through his Family Ofces 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 rm can mimic such effort especially with

capital and time spread among other opportunities.

If you are looking to connect with just a few family ofces, the best place to begin

is in your own backyard. According to Wilson, the best method is to begin locally.

These family ofces are usually the easiest to initially meet. He explained, You

can focus on getting to know every single family ofce 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 ofces 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 ofces], 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

ofces. Alternatively, you could search for the ultra-afuent residents of your area,

and search for an associated family ofce.

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.

Connect with 200+ family ofces on Axial
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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 ofce.

Wilsons value add is his specialty and focus on family ofces. He explained, When

I recently wrote The Family Ofce Book: Investing Capital for the Ultra-Afuent, I

spent a great deal of time ensuring that it was very valuable. I knew that if I made it

outstanding, family ofces 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 ofce why your rm 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 ofces is more

than warranted. Family ofces 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 ofces are connected

with ultra-wealthy family ofces 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.


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Family ofces have conventionally operated on the fringes of the deal economy,

acting as traditional wealth management rms for the ultra-wealthy families of theworld. But many family ofces are rethinking their investment strategies, bypassing

the constraints of fund structures and participating as direct investors in deals

traditionally funded by private equity rms.

In this webinar, Richard Wilson, Founder and CEO of the Family Ofces Group

discuss the future of the single and multi-family ofce 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 hereor watch the entire presentation below:

IV. Growth of the Family Office Industry
http://www.axial.net/wp-content/uploads/2013/07/Growth%20of%20the%20Family%20Office%20Investor%20Channel.pdfhttp://www.axial.net/wp-content/uploads/2013/07/Growth%20of%20the%20Family%20Office%20Investor%20Channel.pdfhttp://www.axial.net/wp-content/uploads/2013/07/Growth%20of%20the%20Family%20Office%20Investor%20Channel.pdfhttp://www.axial.net/axial-landing-page/the-future-of-family-offices-five-factors/?packet


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Deterred by the volatility of the public markets and the high-fee, low-transparency

nature of private equity, many family ofces have been seeking direct investment

alternatives. There are plenty of examples of family ofces taking their own

networks of contacts and industry expertise to the acquisition table, explained a

recent Forbes article.

However, not all family ofces are ready to go at it alone. Instead, many family

ofces are seeking club deals or co-investment opportunities with their private equity

counterparts. Whether it is an investment for diversication, or they simply need

extra capital, a symbiotic relationship with private equity can be quite valuable to the

right family ofce.

To establish a successful relationship, rms need to understand the unique

strategies, perspectives, and goals of a family ofce. In the below presentation,

Richard Wilson Founder of the Family Ofces Group discusses the 7

investment priorities of family ofces, their 3 types of direct investments, top

mistakes when dealing with family ofces, and more.

View the slides hereor watch the entire presentation below:

V. Investment Preferences of Family

Offices & Investing with PE
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