Ten months ago, our family office made a decision to become part of the family office community. During that time I have had the chance to attend nine different conferences put on by seven different conference organizers, and I have had the chance to meet close to three hundred families. By going through this process I have learned a number of things. The most important item and one that makes 100 percent sense to me is that there is a major family office investment trend.
Family offices are moving away from funds as a result of fees, transparency issues, nonalignment of interests and the inability to understand all of the investments within the fund. Because of these issues (and a few others), family offices are moving toward direct investments, coinvestments and partnering with other families in the specific area in which each family created its wealth.
A Trend In Direct Investing
In a recent Bloomberg News article by Margaret Collins, Devin Banerjee and Chad Hagan, “Wealthy Families have $4 Trillion Up for Grabs,” it was mentioned that wealthy families are embracing their inner Warren Buffett, albeit on a smaller scale. Where they used to hand most of their assets to managers to invest, now they are following the likes of Warren Buffett, Michael Dell and Bill Gates; many are acting like private equity firms and investing directly into deals. This is becoming more and more evident in that many of the large institutional firms are trying to court wealthy families and allowing them to invest alongside them in deals.
According to a Family Office Exchange survey in April, of 80 offices surveyed, almost 70 percent engaged in direct investing, and they outperformed buyout firms in 2015. The survey showed that direct deals returned an average of 15 percent—more than double private equity results that year.
Direct investment strategies are also being used by some of the major university endowment funds. A good example of this is the direct investing into real estate by one of the largest endowments in the world, Harvard University. For example, the fiscal year 2015 was challenging for many investors as global markets reacted to falling oil prices and concerns about slowing growth in China. However, Harvard’s annual return of 5.8 percent outperformed a number of other benchmark indexes, and real estate played a leading role in boosting the endowment’s overall return for the year. Specifically, Harvard’s direct real estate investments posted the highest annual return of all portfolio asset classes at 19.4 percent, trouncing its second- and third-best-performing asset classes.
According to a letter from HMC President Stephen Blyth in the endowment’s 2015 fiscal report, the real estate return of 19.4 percent was driven primarily by the “exceptional, continued success of a direct investment strategy started in 2010.” Blyth stated, “In fiscal year 2015, the Harvard direct real estate program returned 35.5 percent, as their internal real estate team and their joint venture partners continued to create outstanding value throughout their portfolio.” That performance reinforced the advantages that can be found by devoting a percentage of an investment portfolio to not only direct investments but also, in this case, direct real estate assets.
A Way To Minimize Expenses
Chad Hagan, from the previously mentioned article “Wealthy Families have $4 Trillion Up for Grabs” and whose family built its wealth in private health-care and financial businesses, said, “After a decade of direct investing we found that we actually saved millions, which were reinvested in companies and assets which resulted in huge, huge savings!”
Family offices understand there is a cost to do business and costs associated with the transactions. In fact, they are happy to share in the expenses, a sentiment disclosed in a white paper written by Cohn & Reznick and summed up by Noam Abrams, vice president of private equity at the Vinik Family Office, which is headed by the owner of the Tampa Bay Lightning hockey team, Jeff Vinik. “We like to know where our money is going,” Abrams told RIABiz, a news site for the advisory community. “Why pay a substantial management fee and carry for something that you don’t know? We believe that we can get better alignment doing one-off deals.”