How do I make my family office a more sophisticated player in direct investing?
“A family office is less intrusive and more hands-off than private equity firms, while it’s also highly effective.”
Private equity firms have traditionally run the show in the high-stakes world of strategic direct investments and buyouts. But, in recent years, a growing number of family offices have emerged as major players with unique advantages.
Here are five tips for family offices looking to establish a strong and meaningful investment:
Understand the risk, and understand the space.
The higher returns family offices see from directly buying or investing in a company are significantly more appealing than having to pay fees to buyout firms. Another advantage is that as the head of a family office, you can—more swiftly work through the due diligence tasks necessary to counteract possible product liability issues, insurance complications and outstanding litigation.
This faster speed can positively affect shareholder value in the long term. At a faster speed, you have an advantage over competing private equity firms. Still, these investment decisions shouldn’t be taken lightly. In order to produce sound, profitable investments, you need to conduct a thorough investigation of the risks and exposures associated with an investment, to make an informed decision.
It’s to your advantage to have a specialist insurance and benefits brokerage and consulting firm in your corner to help with due diligence on a target company and help you better understand the investment landscape. A quality firm can customize an approach to address any issues that might come up, including tax issues and outstanding litigation.
Communication is important to keeping the family’s wealth intact. Be transparent about your interests in the investment and who’s leading the process among family members and with the seller. Guidance from a consulting firm specializing in family offices can help you find the best way to structure communications to drive long-term success.
Find your competitive advantage.
Family offices do not have an investment horizon. Unlike a short-term investment outlook that focuses on the next three to five years, family offices visualize commitment in terms of decades or even longer. The tactic of buying and holding versus buying, building and then selling indicates to potential partners that you’re in it for the long haul, making you a more enticing investor to sellers.
Additionally, putting value on discretion and a collaborative approach works well for family offices. You’re less intrusive and more hands-off than private equity firms and also highly effective. Also, the idea of several partners coming together to leverage one another’s in-house skill sets and Rolodexes highlights the very best of what family offices represent. Sellers may decide to trade cash in favor of strong relationships and industry expertise, especially if those advantages can lead to valuable partnerships down the line.
Narrow your focus.
Target a specific business or industry and become specialized in that area. This approach will help you focus on a specific goal, resulting in better deal flow while differentiating your family office on the front end.
Equally compelling is a family office’s ability to pitch its flexibility in terms of its investment mandate. You could, for example, pivot mid–investment cycle if you chose to pursue other opportunities. This can give you the competitive advantage to ensure that investments flow in a desired direction, while allowing you to expand and deepen your expertise in other areas of interest.
Interested in a complex industry?
Consider teaming up with another family office that shares similar investment interests and/or knowledge in that area. Also, there are CEOs out there who represent a diverse range of industries; these people are looking for the next investment opportunity and blue-chip private equity firms—stable and profitable—that might be interested in co-investing.
Risk management may not be the forte of a family office, so you should seek a consulting firm to provide the support needed so that your investments have an opportunity to thrive. These advisors, who may include insurance specialists and professional counsel, can help especially in the early innings of a family office’s consideration of an investment platform amid a hyper-competitive environment.
Over time, a methodical approach, together with sufficient due diligence, could result in a substantial proliferation of your family office’s fortune.