All in the Family – How to Diversify Your Family Office Database

Private Equity firms, long-term oriented by nature and design, seek a level of consistency and professionalism in their investor base. Many perceive family offices as inconsistent with these goals due to their size, staffing and decision-making process. While there are certainly family offices that continue to rely on the more fickle nature of the family patriarch, there has been a quiet revolution within this investor class that has gone, if not unnoticed, unsung. A large number of well-endowed family offices have graduated from their (private) schools, gotten a Masters in PE and are now building out sophisticated and noteworthy investment programs. Not only do their processes resemble many of the best practices implemented by the broader market, but the Family Office community is more regularly represented on the Advisory Boards and at the annual meetings of their portfolio GPs.

It is important to identify these family office investors and absorb the halo they imbue as well as the reference and referrals they can provide. These traits are in addition to the strategic value family office LPs may provide in the sourcing, diligence and operational growth of your portfolio companies. The irony of this complicated relationship between family offices and PE funds is that the marriage between these two parties is such a natural one. Many of the families represented by family offices amassed their wealth through entrepreneurial efforts and therefore have a keen understanding and affinity for private equity, especially for firms that operate in the middle market where they are frequently looking to partner with family-owned companies.

The increased sophistication that these family offices have recently shown is partially the result of time/experience and increased assets. GPs often think of family offices as $10-$20 million investors, but in recent years we’ve seen a dramatic increase in the number of family offices that can make commitments of between $25-$50 million for first-time commitments (and even greater amounts for re-ups). Given the rising amount of capital being directed toward PE, families have dedicated far more time and effort into hiring the best investment professionals and furnishing them with the type of resources more typically seen at larger institutions. In other words, the gap between family offices and other PE-focused institutions has closed significantly and the market is responding.

So, how should you go about identifying and engaging with family offices? Identifying the right family office to partner with is one of the greatest challenges (frustrations) that you will face in developing meaningful relationships with these groups, and one of the key reasons that many PE firms have decided to spend less time focused on this institution type. There are myriad ways to access these family offices, but that doesn’t mean they are easy. Too many sponsors have fallen into the trap of buying databases for the purposes of cold calling these groups or paying expensive attendance fees for conferences in exclusive moneyed enclaves. While there have been significant changes in how family offices comport themselves, one thing hasn’t changed– their focus on relationships. Groups that have taken the time to learn the particular interests of the family’s investment program and shown them quality investment opportunities earn the trust and ear of the key decision-makers. Family offices often have nuances regarding their investment goals and it can reflect the source of the family’s wealth, the amount of investable capital that they have available, the size of the family and of course their appetite for risk. Frequently, there are tax sensitivities that also require navigation.

We have emphasized and re-emphasized the merits of a high-touch IR effort between funds and developing family office relationships is an important piece of that.

While their ticket sizes have increased and their approach has become more institutional, there still exists a distinctly personal (and loyal) aspect to family office style investing that should not be overlooked. Those sponsors that view these relationships as value-added and don’t treat these investments like a commodity will reap the benefits of a true partnership.

Next on 60 Seconds with Sixpoint: A Discussion with Senior Investment Officer Ryan Bailey, of Dallas Children’s Hospital Foundation: How to grow and communicate with your LPs

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