How Family Offices Win Direct Private Equity Deals


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Nicholas Donato: Hi folks, welcome to today’s webinar where we’ll be talking about how family offices are now competing with private equity firms to source and win deals, which has just become this huge trend in the past few years. In fact, the numbers on this are pretty astonishing. According to I-Capital Network which recently polled over 160 family offices, we are now at a point where 40 percent of family offices with exposure to private equity do so, at least in part, through direct deals.

And need I remind you, the percentage of family offices who are interest in private equity, is this growing parallel trend. Because what seems to be happening for a lot of family offices, is that they’re going through this evolution of first just entering the private markets through co-mingled funds, your standard traditional fund, and then maybe getting their toes wet with co-investments, where they team up with the GP on a deal before eventually deciding to develop their own in-house direct investment capabilities as a way to take greater control over their portfolio. It’s a path more and more family offices are walking or may soon walk in the time ahead. We’re going to touch on these macro trends, but what we also want to do is give you a sense for how these trends are playing out within the halls of a single family office.

So I want to give you the micro level as well. So I have with me today two speakers who can help us hit both of those angles. David Bain is a journalist covering the family office beat and is the founder of Family Capital, a publication that is dedicated to the global family business sector. He’s going to provide us a birds-eye view of what’s happening in the market. And then we have with us Tyler Swoyer who is a deal sourcing professional at Consolidated Investment Group which is a family office. And so Tyler can provide us the insider’s perspective on the trends in invest practices we think that you need to know about to win the deal. But first, some quick housekeeping. First and foremost, if you have any questions at any time during the presentation, by all means send them our way. You can use the go-to webinar tool on your screen to submit them. And what I’ve done is reserved some time at the end of the webinar for our speakers who’ll introduce themselves shortly to field them. Secondly, because this comes up, a recording of today’s presentation, including the slides, will be emailed out in the coming days, so you’ll find that in your inbox in the short-term.

Also, I want to explain to you how Navatar fits into this picture. Basically, we are a cloud provider for financial services firms. What we’ve done is created the industry’s first connected growth platform for family offices and other types of LPs. And what that platform does is it allows you to conduct due diligence and manage your portfolio, including investments across asset classes from one simple to use system. And if you’re an LP who wants to also explore direct investments, and there’s more of you out there, the system has features that help you do that too. Because look, up until now LPs had to rely on disparate systems like Excel and Outlook to track hundreds, if not thousands of fund opportunities, and to generate reports. It’s a clunky exercise. And then when they’re trying to solve that problem, when they go out to market, what they often find is that a lot of the products out there, have been built with a different consumer in mind. They may have been built for a bank or an insurance firm. What we’ve done is we built a platform specifically for LPs needs, including of course direct investment capabilities should they pursue that route. Near the end of the webinar, what I want to do is we’ll quickly show you a few of the workflows and procedures that we think that you should be mindful of when it comes to managing many of the points that you’ll hear today.

So that being said, I’d like for two speakers to introduce themselves. David, I’d like to start with you if you could provide us the richer background on you and your publication.

David Bain: Thanks very much, Nick. I started Family Capital about two and a half years ago, and it pretty much says what it does on the tin. It covers the whole world of family businesses and family offices. If you like, this is sort of a growing, triangular relationship between family businesses, family offices and private equity. My background is really as a financial journalist and also as an entrepreneur, actually. I setup another website some years ago called Wealth Bulletin which I ended up selling to Dow Jones, that was just before the financial crisis hit. And I’m a trained economist, I went to London School of Economics many, many years ago. So that’s really my background.

Nicholas Donato: And Tyler?

Tyler Swoyer: Sure, this is Tyler Swoyer with Consolidated Investment Group. We’re based out of Denver. It’s early morning here, so I’m trying to get myself nice and caffeinated. My backgrounds in Corporate Development, Investment Banking, M&A. I joined Consolidated about two years ago. We’re a pretty robust family office with around 90 people, not including our portfolio companies. We were created back in 2003 after the family sold their company Chef America to Nestle for $2.6 billion. Chef America is known mainly for their brand Hot Pockets, so that’s how I really pushed how we’re known and what we’ve done in the past. Currently we invest in real estate. We have an internal hedge fund. We do a lot of philanthropy and about three to four years ago, decided to get into the direct, private equity investing game. So creating a portfolio of food and beverage companies to go along with the family’s prior experience and expertise is what my main job is, main duty here at Consolidated.

Nicholas Donato: Yeah, and that sector of expertise is something that I know we’re going to touch on throughout the presentation, it’s an important point to remember. But to set the stage, I’d like for both of you to share your thoughts on why is it that more family offices are even looking to go direct, why not rely on the professional expertise of a PE Manager, right? And by going direct, if you could both touch on the challenges that a family office faces by doing so. As I mentioned, David, if you could provide us the bird’s-eye view from your perspective as a journalist and then Tyler, you could give us that insider’s perspective as a professional in this.

David Bain: I’ll give you sort of the macro view here. I’m sure as you know, the big factor in all this is really the financial crisis of 2008-2009. Certainly you know, family offices before then were doing direct deals but maybe that just focused the mind a lot more. It was, I suppose a lot of them just became a little bit concerned about the lack of alignment between many of their providers. If they were LPs, they probably some of them became a little bit annoyed at the relationship they were having with GPs. Through that they’ve moved to more of a direct approach. I suppose the other thing is particularly in the last, since maybe in the last 10 years, is that there’s a lot more single family offices out there.

So those are a couple of factors. I think there’s also I suppose there’s sort of a buffet effect, if you like. Everyone becoming more interested in the Berkshire Hathaway model that’s the direct approach, which is been so successful for Warren Buffet and his investors. They like to see themselves as little mini Berkshire Hathaways, a lot of these single family offices. I suppose another big reason being that until quite recently, you know pretty low yield environment. So many have looked at doing direct deals because of that, direct deals with private companies, which they can feel that they could get better yield with over time. There’s also, I suppose another factor which I’ll probably touch on further down the list is just a lot of them, they made, a lot of these people made their money through setting up companies. So, they understand the company concept and that’s what they like to invest in. That’s sort of a background from a, if you like, a very sort of macro view of maybe some of the trends happening here in the family office direct private investment space.

Nicholas Donato: Yeah, if I were to build off that point, there’s really been three things that I’ve identified when talking to family offices. It’s of course fees, they want to bypass the two and 20. It’s been transparency. You have greater control over their portfolio. And a third factor that I’ve seen less people write about in the media has been that there’s a lot of family offices that want to expose their families to entrepreneurship. They want them to have direct stakes in these portfolio companies and learn what it means to really undertake this level of risk-taking. So that’s been a third force that has fueled it even further. Then Tyler, can you give us the insider’s view about how these forces are playing out?

Tyler Swoyer: Yeah, I mean that’s exactly right. The industry and institutional knowledge is really probably the catalyst from our side. Just for instance, they were the founders of Chef America that created Hot Pockets, they grew that from scratch to, I think when it was sold, it was doing $750 million a year. It was just a juggernaut. You never lose that entrepreneurial spirit, first of all. It’s what you know and with all that knowledge in food, for instance. Right down the middle, I didn’t really get into it but I mentioned food and beverage, but right down the middle of what we invest in is food and beverage companies that manufacture their own branded products with $20 million to $100 million in revenues in North America. We’re not straying too far on direct private equity from what we know institutionally. We also do invest in other, as LPs in other funds but we feel with the knowledge in entrepreneurship that we have here going right down the middle for us, it just makes sense.

Nicholas Donato: We’ve identified what forces are leading to this trend. David, can you speak to the challenges that these family offices are facing? They may want to avoid fees. They may want more transparency and control, but they don’t have the same level of resources or they may not have the same level of experience.

David Bain: It’s a very valid point, Nick is that a lot of family offices want to do direct, private deals. There’s no doubt about it, but the cost of doing some of those deals can become relatively expensive. I mean I think that, I’ve talked to both advisers and family offices about this and I suppose that most of them feel that you need to be looking at about a $25 million deal, where it becomes viable if you’re doing it as a direct private investment deal yourself without co-investing or doing it as sort of a limited partnership type situation, so you need to be a sizeable single-family office to be doing those sort of deals. And I suppose that there’s all those other options, co-investment is there and a lot of them are working with other single-family offices, they’re working with Corporate Financiers and also PE houses, and doing co-investment deals where they take on more of a sort of GP role there, so that’s a factor.

So they’re looking at co-investing as a way of maybe touching base in this area and going from there, and if that works maybe they’ll go further down the direct investment role by actually doing one themselves. Should I talk a little bit about the staff costs? That’s another issue if you’re going to bring in PE specialists, that’s going to be expensive, very expensive and that adds more costs so that’s why you need these sort of $25 million plus type deals to make it viable. I think those are sort of some of the issues from a sort of broader perspective they’re facing in terms of doing these direct private investment deals. Maybe Tyler can add something more from his view?

Tyler Swoyer: Yeah. No, you’re exactly right. And I wasn’t around when we were just starting up the private equity vehicle, but it’s kind of a chicken or an egg situation; do you build the team and then go after deals or do you start going after deals and scramble to get a team together? We’ve kind of done a mish-mash of both, so I’m kind of I guess, the deal guy, the M&A background guy on the team, but something that we’ve done that may be a little bit different, but maybe other groups are starting to do as well, is we’ve created an operating team of food industry experts that are on staff, not waiting to get a deal, they’re already here working with our portfolio companies and helping look at new opportunities. And on that team we have a food manufacturing expert, we have a food R&D expert, we have a sales and marketing food expert, we have a food marketing expert, so we have all of those people on our operating team to help the portfolio companies and look at different opportunities going forward. And the other part of that is for the most part they’re all people that have worked with the family in the past, so they know and trust them, they’ve worked at large companies like Chef America, like Nestle, so they can bring a lot of knowledge to someone like me that’s more of a food neophyte but knows deals, and we can bring that expertise to bring us credibility.

Nicholas Donato: And then David, can I have you touch on this last point about one of the challenges with family offices going direct, and that’s the agent-principal conflict.

David Bain: Yeah, this is an issue which is… And I think this a problem with an investment in general, it’s not just in a direct investment, it’s the issue of what are the objectives are of the principal and the principal’s family as opposed to what are the objectives of the family office senior staff, and there can also be issues there with that they’re unaligned in terms of their objectives. One, the family, certainly if they’ve made their money from a family business-type situation, they tend to be much more long-term in their outlook, whereas maybe the staff they’re bringing onboard tend to be much more short-term if they’ve worked in Wall Street for instance. And this can create a cost to the family office which is… It can be considerable and then it can lead to problems with staff. And it’s quite interesting, you do see quite a few people who come in from some very good jobs from Wall Street to work for single-family offices and they end up staying a year. And you can sort of see that this is an issue, that there was obviously not a meeting of minds and there was this non-alignment between their objectives.

So yeah, that’s an issue. You also get what terms those family blockholders, which if you get a very large family office then, and I remember talking to Waycrosse, which is the, I was talking to the CIO there at Waycrosse, which is the family office for the Cargill family, which is a massive single-family office, but a lot of family members. And you get different family members wanting different things and that creates tension. And often they work outside of the… They talk to providers without telling the CIO about who they’re talking to, and then they come back with ideas and it creates conflict. So those are sort of the issues, the agency principle. And then you get the double-agency principle problem too which is the family office guys staff working with outside providers and how is that aligned as well. And the other thing is the family blockholder type of situations as well. So those are some of the issues; I don’t know if Tyler can add anything from what he’s seen on that front. I mean you’re obviously a family office staff, and you’re part of a family office staff, and how do you align your… How does the family align their interest with your interest?

Tyler Swoyer: Absolutely, yeah, I mean that’s a tough one and sometimes it is trial and error getting the right people. I did mention our operating team, a lot of them have worked with the family in the past, so there’s kind of a trust factor already established there, that they’re going to do the right thing and continue to move things forward in the family’s best interest when we’re looking at potential acquisitions. Again, this can never be completely eliminated, but we do our best to do due diligence on management teams of potential portfolio companies and sometimes it’s a gut feeling, “Are they going to do the right thing?” And then also aligning financial incentives is also a big help too, whether it needs to be earn-outs or potential bonuses or making sure you set targets and hurdles to make sure interests are as aligned as well as possible.

Nicholas Donato: So I like to take this to the exact advantages that the family office investment model provides family offices, because as I mentioned at the start of the webinar, there seems to be almost a pretty even split between family offices that do direct deals and those that do not, at least if they have exposure of private equity and we discussed some of the competing forces that explains that. But for those who do go direct, it seems that they’re leveraging a few inherent invested model advantages. David, can you walk us through what some of those investment advantages are?

David Bain: Yeah, I mean their investment advantages are, they’ve made their money elsewhere and they will look at, it’s what Tyler was talking about, how the food side of what their family office is doing is a big determining factor in what they invest in directly. So they stick to their niching, they tend to like areas they know about, I mean that’s always the case and obviously some will go outside of their expertise. I mean I think that’s one of the most valid points about single-family offices is that they are a true reflection of the family, and they’re very different, they come in all size and shapes and they have different mentalities depending how they made their money initially.

And I suppose what are the other issues they have in terms of some of their advantages. It’s interesting, I think that one of the things which we haven’t really talked about is, if they’re working with PE funds, they tend to be a lot more mid-tier PE funds rather than the big guys, because that’s where they can get some action on the fees, pushing down the fees, whereas the big guys like KKRs and the Bain Capitals and the Blackstones of the world. Again, it just gets so much institutional money that they’re not really going to be looking too much for family office money although they certainly are. But the family offices don’t feel that they can really get a good action on the fees if they work with those bigger guys.

Nicholas Donato: Yeah, sure, there’s one thing that I’ve read about in your own publication and that’s this concept of adventurous investing, that family offices because they can take these longer-term plays, it opens up a new world of possibility in where they may be pursuing assets.

David Bain: That’s a very good point, I think you can get carried away with this concept of adventurous investing, but I think we touched on that area, this idea of mentoring the next gen. And if you look at maybe rather than a five-year cycle in terms of looking at investment returns, then maybe some of them will become a little bit more adventurous, going, pushing that out. And particularly, I think in the States you get it a lot more than in Europe, you get a lot of the single family offices are much more likely to do VC investing, they will do start-ups, probably not seed but second, third round.

So that’s I think a more adventurous investing concept, but even… I suppose if you could look at it even more adventurous and you’re looking at property aren’t you, where you’re taking a big punch on lacking values of property in another 10, 20, if not 30 years. I mean if you invested 30, 40 years ago and saying in the East End of London everyone would’ve thought you an absolute fool, but now you’re sitting on incredible returns, you would’ve seen incredible returns. And that’s the way at the same time as well, as sort of inspiring the next gen to bring them into the family office thinking. And I think that is an issue for a lot of single-family offices, is how they bring in the next gen, because they tend to be pretty driven by the principal in terms of the mentality that most of them, if you like family businesses. So that’s yeah, that’s another thing we could talk about if you like further down the road.

Nicholas Donato: I’d be interested in getting Tyler’s thoughts, so Tyler we heard David make the point that family offices have this embedded advantage that they’re not looking for quick returns, that they can be more adventurous in their investing. Does that play out within your halls?

Tyler Swoyer: Yeah, absolutely. I’d say that some of the things that really set us apart is that long-term investment horizon. So we can look at things differently than a typical private equity fund that has a seven-year hold at max. We can look at it, and I’d call this adventurous, we can look at under-performing companies, and we’re not necessarily turn around people, but let’s say we’re looking at a company and it’s a manufacturing company, the gross margins just are not industry standard and really what it’s going to take is millions of dollars in capital expenditures for equipment or whatever… A building build-out, different things to get that gross margin up to par with what it should be doing. We can be “somewhat adventurous” to… We’re not afraid to put in the capital expenditures post-transaction, because we have that longer-term investment horizon.

Some other things that we can do as well that make us different is we don’t need to use debt on transactions necessarily. We keep it pretty minimal, because we don’t have to get those inflated returns. That can resonate with the entrepreneur knowing sometimes that we’re not going to ladder up his baby that he grew, and potentially put it at a risk down the road because it’s over levered. We can also be flexible in some other things like not every entrepreneur wants to do the 80/20 buy out model, we can be flexible and do 100 percent buy out if the owner wants to ride off into the sunset. We can bring in people from our operating team to run the company into the interim until we bring in a new CEO, for instance. We can buy, because we have a big real estate group, if the owner wants to sell his manufacturing facility or associated real estate, we can buy that as part of the same transaction, whereas maybe in other cases he wouldn’t be able to sell the real estate or he’d be beholden in some sort of a lease agreement with the new owners, or it would just be multiple parties to that transaction. The less complication is the better sometimes, and that also resonates with the owners.

Nicholas Donato: And then, David, one thing I’m curious about, you had mentioned that the family offices, when they are doing co-investments, they are usually in the mid-market level. I wonder if that relates to our third point here that that allows them to be more nimble. They’re not working with this large, dare I say, more bureaucratic private equity firm, they can act quicker. Is this something that you’ve seen out in the field?

David Bain: Yeah, yeah, I think so. I suppose a lot of, when it comes to co-investing it sounds like quite a technical concept, but I think that a lot of them do it just meeting their friends down at wherever their club, and they talk to their friends and say, “What about this investment? Do you want to come with me on this investment?” So a lot of these guys obviously got a pretty big network and they work with other family offices. And I think some of the corporate financiers and the other guys who’ve got access to deal flow again are going to be looking at doing co-investments with single family offices. Yeah, if they have… If they’re entrepreneurs that made their money being entrepreneurs, they’re going to be much more entrepreneurial in their single family office structures. They’d be looking to do things, move quickly and that’s why they probably… They don’t want to move so much, work with some of the bigger more, probably if you like, more bureaucratic and high fee structures of some of the bigger private equity groups.

And I think it’s fair to say that the PE firm, and I’m sure there’s a few on the call here, would probably agree with this. This is interesting I think, this is interesting from the point of view of the relationship between if you like PE firms and family businesses. And I think this is a good area because PE and family businesses didn’t mix, most family businesses were… They finance their expansion through their own internal cash flow. But now there’s beginning to be a better relationship between these PE firms and some of these family businesses. And a lot of PE firms are not necessarily looking at flipping a company in three, five years. They’re willing to hold onto these companies they’re buying. Well not a lot, but you’re certainly seeing some PE firms moving more to that structure. If a family office wants to buy into a family business, maybe doesn’t have quite the sort of the money necessary, then maybe work with a PE firm. There’s a couple of good PE firms moving more towards working with family offices on that basis, looking at buying family businesses.

Nicholas Donato: And then, Tyler, what does that looks like from the inside? Do they feel nimble? Do they feel quick?

Tyler Swoyer: Yeah, we’re definitely… Because of our very narrow focus we’re going to be probably more nimble, we don’t have to get up the speed. As far as the co-investing thing, we’re actually probably the opposite of most family offices that are looking for co-investments. Because of our expertise and the way we’re set up, we would welcome people bringing… If they run across an interesting food company, for instance, they would like to invest in it but they don’t have the expertise, I would welcome that conversation, so that they would bring the co-investment to us.

David Bain: Tyler, just from my own perspective, in terms of the fee structure there… If you’re bringing the deal on and you’re looking for another co-investment guy involved, is there any fee structure there or are you just working with them, purely as a co-investor?

Tyler Swoyer: Yeah, I think we would probably work with them just as a pure co-investor. We have no co-investments in our portfolio at this time so I guess it would be a case by case basis. But I can’t give you an exact answer on that.

Nicholas Donato: And then Tyler, just in terms of running a lean operation, and having that entrepreneurial approach, how technology’s able to facilitate that, if so?

Tyler Swoyer: Yeah, on the sourcing side and really moving deals to closing, I do have resources here. But there’s too much for my simple brain to keep track of. Thank you for putting this on and we definitely use Navatar to keep track of the number of deals. I go to a lot of food shows, and talk to food companies, and for instance, maybe they’re not ready to do something at that time, any type of transaction, but they want to talk a year, two years, down the road. That’s something that needs to go into the CRM, I can put a follow-up task in there. I have a dashboard that tells me, kind of a deal pipeline, where every different transaction or potential opportunity is sitting whether it’s… It gives me statistics on why we passed on deals, so I can get some sort of understanding on why things aren’t fitting. It tells me what I need to follow up on; what deals are currently under review; if there’s an IOI date pending, or an LOI date pending, and I can go in there and none of us are around forever, so putting that institutional knowledge in there for my successor some day, is important as well.

Nicholas Donato: I want to take the conversation to what, I would say, is one of the most difficult issues in the family office sector, and that relates to transparency, and how much transparency that they should pursue as they are pursuing these direct deals. Because visibility becomes a concern if private equity firms have a website or a public presence. It’s easier for them to grab potential seller’s attention. David, I know that this is an issue that you track as well. If you could give us the downside of why a family office would want to be more transparent, and if you could explain for us why more family offices then are moving towards transparency given those downsides?

David Bain: Yeah, sure. I think that it’s really the whole issue of wealth, and a great deal of wealth. Maybe it’s probably more of a European context, but you don’t want to shout to the world that you’re incredibly wealthy, so that’s probably one of the big reasons why you’re not maybe be transparent about your single family office. There’s obviously issues over cybersecurity, things around, even kidnapping I suppose. But I don’t know, I think that if you look at something like Cascade Investment, which is the single family office of Bill Gates. It’s probably one of the biggest, if not the biggest, single family offices in the world. One level, I know that Gates said to his staff that they couldn’t have LinkedIn profiles. They didn’t want to tell the world what they were up to but at the same time, if you’re doing direct deals, big direct deals, like Cascade is doing, it’s going to leave a public trail, so that’s ultimately… There is quite a lot. You can type type in Cascade Investments into Wikipedia and there’s quite a big entry about it, despite the fact that Gates has tried to keep it very secretive.

And there’s others which are much more transparent. A very good one to look at is a European one called Ferd, it’s F-E-R-D. I’m bit of a cheerleader for this single family office. The guy who owns it is a guy called Johan Andresen. He believes very much in the importance of being transparent, and he thinks that a lot of these very big single family offices are competing for the best talent. You need to be transparent because of that, and you want to attract the best talent, you want to attract the best investment deals as well. If you go into family capital and you type in “Ferd” you can get quite a lot of information, and he talks to me specifically about why they want to be transparent. And there’s US ones, MSD Capital, that’s Michael Dell’s family office, is pretty transparent. Vulcan which is Paul Allen’s family office. Much more transparent then his old colleague, Bill Gates’ family office. These are big, substantial, multi billion dollar single family offices. And even some of the smaller ones are more transparent. But I don’t know, it’s really horses for courses isn’t it, it’s up to the family how they feel. But I think on the whole, if you like, over the next maybe five to 10 years, they probably will become a little bit more transparent. As a trend there’s always going to be some which aren’t, but on the whole I think there will be a move towards more transparency, for some of the reasons I’ve said before, earlier.

Nicholas Donato: And then Tyler, how’s CIG see this, I guess, debate?

Tyler Swoyer: Yeah, you’re exactly right. In our specific case, we become a lot more transparent. Take our name, for instance, Consolidated Investment Group, it doesn’t get… That’s about as generic as it gets and it was done that way on purpose when the family office was first established. It wasn’t seen as there wasn’t a need to market who we were, it was to keep some shroud of secrecy and just kind of continue doing what they were doing and investing. But now that a lot of things have changed in the world and in our specific family office here, for instance we just revamped our website to be more specific and what we’re trying to do on private equity and real estate with our different philanthropic efforts. You have to have some transparency to lend yourself credibility. If you were a portfolio company or an entrepreneur and I approached you about buying your company and we had no website and I said, “Just trust me, we have a lot of money behind this, we can do this transaction.” If they can go online, see the story, understand what our investment approach is, why we’re going after food and beverage and what our expertise is, that just lends a lot more credibility to moving forward in a potential transaction.

Nicholas Donato: Right, and we mentioned talents as we’re walking through these points. I’d like to expand on that conversation because I know that talent retention, or scouting for talent, is one of the challenges that we identified during the beginning of the webinar. David, if you could give us the birds eye view on how family offices are attracting and retaining the talent that’s necessary to do direct investments and win these deals.

David Bain: Yeah, it’s a good issue, Nick, I think that it’s a complicated issue. I think that typically maybe a lot of these single family offices used to… Some of them came out of the business, they were embedded within the business, kind of like embedded single family offices which didn’t… They were still part of the, if you like, the family business and it was the CFO or the treasury guys who were managing also the affairs of the family. And so some of them morphed out of that, they became single family offices, bona fide companies in their own right. And often the people who start them were those, and as Tyler’s mentioned, they had the trust of the principal and the principal family because they’d worked in the business beforehand. And there’s still a lot of them who rely on those loyal, who were trusted, and I think trust is a big factor in that.

But increasingly you’re seeing them recruit more from outside, if you like, the guys who are good deal makers, the rainmakers, they’re bringing these guys in, these people in. And I’d touched on some of the issues there about potential… They have to get the alignment right and that’s essential, and sometimes you bring in the hardest Goldman Sachs banker, and they come in and they have a lot of ambition but they just don’t… The alignment isn’t there with the family and that doesn’t work. It’s very important to have that cultural fit, and that’s crucial, which im sure Tyler would feel that that is one of the reasons why he works for the family office he does.

Tyler Swoyer: Yeah absolutely. It’s just a different culture. We are working on private equity deals but you do get a little more well-rounded in working on other things. From time to time you can get pulled in to the capital markets team to discuss an opportunity they’re looking at, or the real estate team on something they’re looking at, and you also get a look at some of the different philanthropic things that are going on. It’s not just deal deal deal, so there’s that going on. There isn’t the pressure to churn a number of deals at the same time. We’re looking to do one to two really good deals per year but not necessarily have five or six LOIs out there at any specific time, so it’s a little bit different mindset on how you’re looking at things. And also, a final thing, when you’re looking at a family office there is no fundraising, I know that’s kind of a… That can be a bane to some people, so that can definitely be an advantage that you have, a set source of funds and there’s no finite time horizon to it.

Nicholas Donato: So what I would like to do now, just looking down the horizon, is for each of you to give us two to three predictions on where you see these trends going and what it means for the family office sector, if David, please could we start with you.

David Bain: Yeah, I think I touched on the point earlier, I think that, if you like, the deal flow probably will… I don’t know if it will improve. I think it will improve and I think that’s a lot to do with the whole area of family businesses probably looking at working on bringing in outside investors and I think… So that’s good as far as the deal flow is concerned. You get a lot of the family businesses I talk to, some of them struggle to get and international presence but they’re great in their local markets and I think these typically maybe second, third generation family businesses or even more will be looking at bringing in outside investors more over the next five to 10 years and that’s a great and incredible opportunity for a lot of family offices and a lot of them like to work with family offices because it’s just the family concept. And within that also if you’re looking at co-investing, then maybe PE funds can help there as well, doing a co-investment deal with a PE firm or corporate financial or other family offices, MFOs, multi-family offices as well. So I think that’s going to be a trend, quite good deal flow coming from the family business sector which wasn’t maybe there as much as it was a couple of years ago when they were still probably reluctant to look at outside… Bringing in outside money.

Tyler Swoyer: I think definitely you’re going to see… I think maybe this alignment issue is going to be addressed more, the alignment between the principals, the family and the non-family professionals working within the single family office world with some sort of more… staff they’re bringing in are making a good amount of money, but also be in line with the family’s possibly more long-term approach to investment returns. I think there’s another thing which I didn’t touch on and which is a whole area of impact investing and I think that’s going to grow, there’s a great one for Blue Haven Initiative which was started by a couple of next gens of the Pritzker family which is really looking at entirely investing in impact investment opportunities. And I know I’ve mentioned already actually, just today there was a press release by Ferd about what… They’ve just invested in a sustainable fish company which is listed on the London Stock exchange. So I think the whole area of impact investing is going to grow as a big investment opportunity and a lot of single family offices are going to be there, they’re often… But they’re there at the trends of these where they start off and they were in the 60s with hedge funds and they were there when there were PE funds as well. So they’re kind of ahead of the curve when it comes to what is the next big investment wheeze if you like.

Nicholas Donato: And then Tyler you’re on the front lines of these trends, what does your view look like down the road?

Tyler Swoyer: Yeah. I think family offices are going to continue to do direct investments and more of them are going to look at it so I think it’s going to just be an increasing trend. In response to that, I think that traditional PE funds are going to continue to be dynamic like they always have been. They’re going to change their fee structures, they’re going to become even more focused on whether its industry verticals or other things to increase the returns to make themselves more attractive to these family offices that are looking at direct private equity investing. So it’s a very competitive world out there, multiples across the board in the lower middle market are high. So it’s not the good old days of just finding a company and leveraging it up and watch the returns come in. You’re going have to be more specific and you’re going to have be more focused and I think that’s going to continue.

Nicholas Donato: So what I would like to do now is introduce you to Navatar’s COO Ketan Khandkar because one of the points that we heard made earlier was that family offices, they need to be lean, they need to be nimble in order to have that entrepreneurial approach and act quickly on a deal but one of the problems that I know that family offices have, because they have skeleton crews, is exactly how to manage the portfolio, while at the same time undertaking this entire direct investment capability. It’s a lot to put on someone’s plate. So Ketan if you could show us any processes or ways to manage the additional work load, that would be great?


Nicholas Donato: Yeah, thanks Ketan, because the point that I want to reinforce there is that if you are a family office and you are pursuing a direct investment strategy, managing that through Excel or Outlook will put you at a disadvantage because we’re seeing private equity firms embrace these types of systems and technology and so you want to ensure that you’re on equal footing in terms of your ability to act quickly and organize the information. We are getting some questions coming in so I want to touch on those. The first one, someone is asking, and I’ll keep names anonymous here, “What is your advice for family offices that don’t have enough visibility with investment bankers?” I know that we touched on that a little bit around the transparency slide, but the person saying that, they don’t tend to see us, this being the investment bankers, as active enough players to be on the radar. Does anyone want to jump on that?

Tyler Swoyer: Yeah, this is Tyler, I can jump on that. Yeah that’s definitely a problem and we don’t do enough deals, there isn’t a huge amount of deals to keep on their radar, so I would encourage direct outreach via email, send them your one-page investment paper, or reach out to them by phone, go to ACG or MNA events and touch base with them there, just try and stay in front of them and let them know what you’re looking for, as much as possible.

Nicholas Donato: We have a second question coming in. Someone is asking, “How can the same site staff manage both direct investments, and the straightforward asset management functions?” I’ll point you to technology, technology makes life easier and more efficient. But did either of you want to piggyback on that point?

David Bain: Yeah, I suppose that’s where some of the FinTech stuff come in doesn’t it Nick, I suppose. Maybe some of the innovations there, the robo-advisors, and what’s going to happen on that front, the sort of synthetic hedge funds, the artificial intelligence side of things, I think, will probably help with some of those dilemmas in the future.

Nicholas Donato: And then David too…

Tyler Swoyer: I can mention too, there’s definitely firms, whether it’s due diligence, or other things that can be outsourced. So there’s great firms out there that can do things like that.

Nicholas Donato: Yeah, that was a point I wanted to make, too. That we’re seeing more and more family offices, if they are pursuing the direct investment, they’re outsourcing some of the simpler stuff. I see a last final question: “To what extent are you seeing family offices club together on direct investments? Is this a trend to watch?” I guess, David, that might be one for you.

David Bain: Yeah, no absolutely. I mean, there’s actually quite an interesting platform. It’s a FinTech platform, called Nextvest, out of New York, which probably anyone should have a look at, which is trying to facilitate co-investment deals with other single-family offices. And I think this is the issue: If you can’t write a $25 million check to do a direct investment, and private direct investment, you’re going to be looking more at the co-investment road, or the LP route which is still extremely, potentially extremely, worthwhile. Both of those are, so there is much more, I think, there’s attitudes that a lot of people want to do co-investment deals. And if you can find the right people, then it’s a good model.

Nicholas Donato: I may have spoke too soon. We do have one last question that I want to address. Someone’s asking, “Are family offices just another type of fish in the private equity pond? Or is there a greater economic significance to this trend?”

David Bain: I’ll start with the macro view. I think they are greater, they’re not just another PE type of development. They control so much capital. They control massive amounts of capital. And I suspect, actually, I’m not absolutely certain about this, but I suspect that further down the road, you’re going to see even less very wealthy families, but not the sort of $500 million plus sort of areas of… That’s what you need to set up a single-family office. You know, maybe move further down the food chain, and you have families with less money setting these single-family offices up. It’s the concept of control. They want to control their investment more than working with advisers or providers out there, so of course they will. But I think that there will be many more single-family offices set up. And obviously, with advances in technology, that will make it easier, as well.

Nicholas Donato: Yeah, and David, if I could build off that point. This statistic is actually coming from your publication, Family Capital: Single-family offices currently account for more than $2.4 trillion in investable capital. And we saw some figures from Bain & Consultancy, saying that the private equity industry is currently sitting on top of $1.5 trillion, and dry powder. So if we go back to an earlier stat, where I said that 40% of family offices with private equity plays are doing direct investments, the two figures are not wildly far off. So they are a force to be reckoned with.

David Bain: Sure. Sure. And you can look at… I think there’s a bit of a grey area, too. You could look at a lot of these family investment groups which be not so… They’re not sort of qualified as single-family offices as such, you know they’re like a huge investor in Sweden, which is massive, it’s the Wallenberg family. Exor in Italy, which is the Agnelli family. These effectively are… They’re listed as businesses, but they’re operating pretty much as a sort of family investment vehicle. And you get, then you get all the holding companies, too, classically in places like Asia, and the Middle East. And also, still in Italy, which de facto, operating as family investment vehicles, because they’re buying other businesses, so it’s massive and it’s growing. And there’s a lot of money.

Nicholas Donato: Yeah. And you know what, that just about does it for time here. I kept my own promise to keep this under an hour. So a big thanks to our speakers today, David Bain, and Tyler Swoyer. As mentioned at the start of the webinar, a recording of the broadcast we’ll include the slides in that, will be mailed to you in the coming days. And if you’d like to learn more about Navatar Limited Partner, and how it can help simplify for you portfolio management, or help you pursue a direct investment strategy, please do not hesitate to reach out. You can also seek contact details for David and Tyler, if you have any follow-up questions for them. So on behalf of Navatar. I’m Nick Donato, and enjoy the rest of your day.