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| Risk & Reward: Strategy |
Seeds of Opportunity
Eileen P. Gunn
05/02/2005
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According to Jeff
Tarrant, the president and chief investment officer at Protégé Partners, another
New York firm that seeds new funds, it is essential that family office investors
plan for those possible failures or success in the contract. For a hedge fund,
investors should lay out how long both they and the manager are obligated to
stick around, and specific reasons why each might be released early. These could
include performance targets for the manager. If the fund really takes off (along
with the manager’s ego), “you might want to give him the option of buying you
out and determine the terms ahead of time,” Tarrant advises.With LBO and
venture funds, family office investors should agree at the outset whether
coinvesting rights or a share of the profits apply to subsequent funds or just
the first one. They should also clearly establish with all parties that being a
seed investor in the first fund will assure them a place in future funds. Elkus
notes that he has seen family offices do both well and poorly at seed investing.
The factors that determine success include the family’s background and risk
tolerance as well as the financial knowledge and connections that they and their
office staff bring to the table. “It’s more hands-on and intense than just being
another investor in a fund, so you have to be interested in that experience,”
Elkus says.
Eileen P. Gunn writes about personal finance, executive careers and real estate. epgunn@hotmail.com
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