Katie Kalvoda’s interest was piqued when the 40-year-old money manager for a group of ultra-wealthy families heard about a startup urban farm that grows produce in vertical greenhouses.
Kalvoda knew early-stage investments in private companies can be risky. She eventually took a stake in the venture this year with some reassurance. The chief investment officer at Newport Wealth Management in Newport Beach, California, joined a handful of fellow family offices in an alliance that gave them more muscle to get a better price, expanded access to research and broader expertise to track the investment.
“We don’t have this wall of secrecy that we had at one time,” said Kalvoda, who previously worked at fund-of-hedge- funds Collins Associates Inc. and Citigroup Inc. “We’re a block of investors working together with more scale.”
The deal illustrates a recent trend among family offices, the little-known money managers that run the fortunes of the world’s richest individuals including computer maker Michael Dell and Microsoft Corp. co-founder Bill Gates, to team up with likeminded peers for direct investments in companies. They’re trading in some of their traditional secrecy, pooling assets and knowledge to make venture capital and private-equity deals much like buyout firms do in so-called club deals, while circumventing the fees charged by those firms.
Sometimes, the companies they back are local business seeking to make a difference in the community, other times they’re purely financial investments.
It’s a departure from how family offices traditionally invested outside the public markets, which was by committing capital to intermediary fund managers who picked the opportunities, set the terms of a purchase or sale and oversaw the progress. Such third-party firms usually charge management fees of 1.5 percent to 2 percent, keep 20 percent of profits and require lockups of committed money for as long as 10 years.
“This is a relatively new phenomenon,” Raffi Amit, a professor of entrepreneurship at the University of Pennsylvania, said of families that collaborate in direct deals. “The jury is still out on whether this will lead to higher returns on investment capital.”
Single-family offices hold about $1.2 trillion in assets and multi-family ones manage about $500 billion, according to Bob Casey, senior managing director for research at consulting firm Family Wealth Alliance.