TOP VIEW
By providing seed money for start-up funds run by up-and-coming managers, family offices can get in on the ground floor. This strategy may require more hands-on involvement in the management of the fund, but under the right circumstances, the rewards can be sizeable. However, experts caution that the ultimate success from the family office’s point of view hinges on how well it negotiates the terms of its commitment to the fund, and to the manager in charge.
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Often, the families that start a new fund know the aspiring manager involved. Kristen Powers, senior relationship manager for the Threshold Group in Portland, Ore., a family firm for the Frank Russell family and four others, notes, “I would say 90 percent of our relationships [with new funds] are with people who have been associated with the Frank Russell Co. Our [founding client] has worked with the person, knows what that person’s skill set is and believes in the strategy.”
Additionally, many affluent investors like the opportunity to get into a promising fund as early as possible, believing that the first few years, when the fund is still small and nimble, are often its best. “Smaller funds can build a position quicker and get out of something quicker than a big fund. Sometimes a good opportunity won’t make a significant difference in the returns of a big fund the way it will in a smaller fund,” says Laurence Cheng, CEO of Capital Z Investment Partners, a fund in New York that specializes in seeding new investment funds.
Priming the Pump
Managers often want the family firm that seeds their fund to commit 10 to 15 percent of the minimum amount they need to launch the fund. For private equity, that could be less than $10 million, but for a hedge fund it might be $25 million or more. A hedge fund manager might also ask for money to finance his operations for a year or so.
In addition, unlike private equity investments, in which all the investors pay their committed money and take their rewards together, hedge funds are ongoing, with investors coming in and out as often as monthly. The manager of a new hedge fund needs time to invest money and build positions. During this early growth phase, he does not want investors getting cold feet and pulling out before he has built momentum.
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