Venture firms, by contrast, have resisted giving a share of their profits or fees to the first family firm to commit money. Instead, they offer the family the opportunity to invest additional money directly into some of the fund’s portfolio companies. The idea is that the venture fund managers see dozens of companies every day and pick the best ones for their fund. They then cherry pick the most promising and let the family office invest alongside them.
“We know families who will put $3 million to $5 million each in a dozen venture firms,” explains Alan Houghton, chief investment officer for Shelterwood, a family office in New York. “Then they will earmark several million more to invest in the 10 best companies the funds invest in.”
Inside Information
Family offices also provide other intangible support in exchange for those nonfinancial perks that allow them access to the fund’s inner workings. For example, some funds allow an individual from a family office to sit on their advisory board if they think that person has useful expertise or contacts. “We wanted [seed] investors who could provide things like access to potential deal opportunities,” says Michael Cochran, an attorney in Atlanta who spent six years running a leveraged buyout fund there. “Investors can also bring investment judgment [in specific areas].”
In exchange, the advisory board members get to see the firm’s day-to-day workings—the daily trades, strategies and information most investors do not have.
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