Raising finance from family offices

Family offices, the wealth managers of very wealthy families, are often cloaked in mystery. As investors, they are not constrained like venture capital or private equity. George Pennock pulls the curtain back

UK family offices manage the wealth and investment strategy of very wealthy families, typically with funds available to invest of £30m and upwards. Family offices have increasingly become an established alternative to venture and private equity funding over the past 10 years. Despite this, they remain a very discreet, some would say secretive, source of capital and this brings with it challenges and opportunities for entrepreneurs looking to finance their business plans.

Why are family offices of interest, when the UK already has a very well-established market for the funding of private companies?

Family offices have a number of inbuilt advantages over venture and private equity funds. The first thing to consider is that most family offices do not operate under the constraints of the conventional fund structure.

Conventional funds have strict rules about how much (or little) of a fund can be put into a single investment, how early (or late) they can invest in a business and which sectors and geographies they may consider. This is because these funds are managing capital on behalf of third-party investors.

>See also: Why family offices could be a godsend for start-up funding

They have only been able to raise this capital by setting out a very specific investment approach and they have to stick to it. Family offices only have to answer to themselves and this means that they are able to operate with far greater flexibility when it comes to choosing what industries to invest in, what geographies, at what stage and how much money to put to work.

Family offices do not typically have to worry about raising their next fund, being more interested in ensuring that their capital is fully invested in the right opportunities. Traditional funds typically aim to hold their investments for a period of three to five years, so that they can market a track record of successful and rapid exits to help them raise their next (ideally larger) fund.

Family offices don’t have to worry about this fund cycle and so will often take a five to 10-year approach, or perhaps even longer. Not surprisingly, most entrepreneurs find this much more appealing. Given that the average hold period on a private equity investment is now over five years, it could be said that family offices are also taking a more realistic view of the private investment world.

Family office funds can also often stomach lower rates of return for the right risk/reward profile. Unlike conventional funds, they do not have to worry about returning their capital to third-party investors after it has been invested once. This means they can assess every opportunity on its own basis, rather than in the context of the need to maximise the return on the capital they employ.

Investors are also often attracted by family offices’ approach to managing their investments. Family offices have generally grown and survived through building and nurturing long-term business relationships and so many believe in the importance of giving management teams the time and space to flourish.

This means that they tend to be less focused on trying to micromanage entrepreneurs and more interested in building a close and long-lasting working relationship. This does not mean that they may won’t want a place at the board table, or sensible rights and powers of veto when it comes to key business decisions in their investee companies.

However, as one family office investor recently explained to me: “Our investment controls are constructed around three key principles: build a close working relationship with your senior management team so they really want to tell you what’s happening, establish strong reporting processes so you can really analyse what’s happening, and ensure you have the deepest pockets around the board table, so that if necessary, you are the one that can do something about what’s happening!”

So which family office is the right fit for you?

Family offices, like families, come in many shapes and sizes. Some will operate a little like a private bank, investing and managing across all asset classes, from equities to bonds to commodities to property to venture and private equity. With these firms, it is important to establish if they are really serious about regularly investing in your asset class, or if they only make a private company investment once in a blue moon.

  • Have a look at the bios of their team members to see if they have meaningful venture and private equity experience; and if they are familiar with “the ride” in terms of the long-term nature and high volatility of most entrepreneurial investments.
  • Use a data service such as Pomanda to see how many private company boards they have sat on. A family office which only commits a small proportion of their assets, time and management expertise to venture and private equity investing may offer you more attractive terms upfront but may not turn out to be the best partner for the long term.

‘It’s often said that the very best businesses and the very worst businesses are family businesses’

Some family office firms model themselves more closely on conventional venture and private equity firms, focusing on a single asset class and with a full and experienced investment team. They will often require more detailed investment terms and controls, but in return will play a much more hands-on investment role, assisting with strategy, key hires and the ultimate exit process. These firms have become increasingly prized by entrepreneurs since they offer many of the positives of the professional venture and private equity fund managers, while avoiding some of the limitations of the formal fund model.

One trick when trying to get a feel for the different traits of these firms is to have a closer look at their origins and history and the makeup of their investment teams. For example, Smedvig Capital, one of the earlier European family offices to concentrate on the venture space, moved away from its industrial origins to focus on investing but maintained its strong interest in an operationally-led approach, with many of its team drawn from management consulting backgrounds.

Another take on the professional family office model is Perscitus, which was born out of the private equity successes of its founder, Jon Moulton, and has a team with a more traditional PE feel, majoring on accounting and banking experience.

So how should you decide which family office to work with?

Bearing in mind that many family offices remain difficult to identify, research and approach, you may want to work with one of the advisory firms like Chrystal Capital, which specialises in building and maintaining a wide network of active family office investors.

Things to consider when selecting an advisory partner include depth of network, quantum of deals and capital placed and whether they invest alongside the family offices they represent.

There are also several firms in the market which organise investor evenings and the opportunity to pitch your ideas directly to family office team members. However, this remains a highly hit and miss approach to finding the right family office investor.

Assuming you do manage to find a family office that is keen to engage, then there are a few key questions you should ask.

  • Establish how the decision-making process works within the family office (both the formal and informal) and if there is a key member of the family who must sign off on all investments
  • Ask to meet that person and to have the chance to spend time finding out what they like and dislike, and what really makes them tick
  • Ask to speak to CEOs of existing and former private company investments, to understand what it really would be like for you to partner up with them for the long term
  • Establish how much funding will be available for your investment over the next five to 10 years and clarify if there are likely to be any constraints on this beyond your business’s performance
  • Ask if the family office offers any special access to key business networks, be that banking, commercial or recruitment. Many family offices have built such networks up over decades, sometime even longer, and you should expect them to help you to take advantage of your association with their name

Finally, it’s often said that the very best businesses and the very worst businesses are family businesses; it’s worth bearing this in mind before committing to a new relationship with a family office investor.

However, there are some exceptional examples out there of investment partners with the experience, empathy, patience and deep pockets who can help you transform your idea or business into something exceptional. It’s up to you to take the time to search them out and to not necessarily accept the first proposal that comes your way.

George Pennock is chairman of information platform Pomanda.com, which helps SME owners and managers increase the value of their businesses

Further reading

Is your business worth what you think it is? – how to calculate sale price

 

George

George Pennock

George Pennock is chairman of information platform Pomanda.com, which helps SME owners and managers increase the value of their businesses.

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