From Your Side of the Table Five essential questions to ask about seeding new investment funds: 1. How does this new fund’s strategy fit with my overall investment plan? 2. Do I trust this manager’s ability to execute that strategy successfully? 3. Do I believe this manager can successfully raise money and handle the day-to-day work of running a fund? 4. How will I protect my interest if the manager and I disagree down the line? 5. Are my returns in proportion to the risks of backing an unproven manager?

In exchange, family office investors usually receive a share of the boutique firm’s annual management fee (which is typically 1.5 to 2 percent of the fund’s assets) and incentive fee (generally a 20 percent share in the investment gains). This happens most often with hedge funds, and is becoming more common in private equity. Typically, the family firm’s share of these fees ranges from 10 to 50 percent, depending on how much it is investing and the professional reputation of the new manager.

Family office investors still pay the management fee like everyone else, but ideally the amount they receive back will eclipse what they pay, Elkus explains. Better still, a share of that incentive fee can nicely plump the family’s returns. For example, David St. Pierre recently launched Legacy Capital Partners, a real estate investment fund in Cleveland. An affluent investor who liked the idea of a real estate fund agreed to seed it, St. Pierre recalls. The investor committed a little over 5 percent of the $44 million Legacy raised. However, because he committed money before anyone else and introduced the team to other investors who then committed money quickly, he also received just under 10 percent of the firm’s fees.

If, for example, that fund generates a 15 percent return, or $6.6 million, in a year, Legacy keeps 20 percent, or $1.32 million as its incentive fee. Those who seeded the fund will get 10 percent of that, or $132,000, on top of whatever they have earned as investors in the fund.