Added Staff
About 22 percent of family offices had three or more people in their office tasked with the sourcing, screening, monitoring and exiting of direct investments in 2010, according to a survey by McNally’s firm. That percentage has almost doubled as of this year to 37 percent, said McNally.
Even with added staff dedicated to direct deals, families are finding alliances valuable -- especially to locate investments globally. SandAire, a multi-family office that manages about 1.9 billion pounds ($3.2 billion), formed the Wigmore Association with other family offices in 2011 to share research. The seven members are based in the U.S., Brazil, Germany, Canada, Australia and the United Kingdom.
Some Wigmore members joined last year on two deals in private companies in the U.S. and U.K. investing more than $20 million combined. Due diligence was first done by the family based in the region of the investment opportunity and then each member interested does follow-up research themselves, said Marc Hendriks, chief investment officer at London-based SandAire. The investments are in early-stage businesses in the technology industry or startups based on a new patents, said Hendriks, who declined to give the companies’ names.
Leader Appointed
“We are strong believers in investing in pre-IPO companies,” said Hendriks, who was previously chief economist at firms including Societe Generale and Swiss Bank Corp.
The challenges of direct deals don’t end with due diligence, said Stephen McCarthy, who helps manage his family’s investments as senior vice president of New York-based KCG Capital Advisors. Families also must come up with a plan for management post-investing and appoint a leader because many of the investments may not see profits or an initial public offering for years.
Families participating in direct investments generally haven’t abandoned funds altogether. They usually allocate 12 percent to 14 percent of their portfolio to them, according to data compiled by the Family Office Exchange, a network of private families with an average of $450 million in investable assets. They also have 10 percent to 12 percent of their assets in private equity funds and the same proportion in real estate.
Separate Entity
Kalvoda said families should consider setting up a separate entity for these co-investments as she did to make sure their entire family offices aren’t forced to register as investment advisers and therefore reveal financial details. The registration requirement stems from the Dodd-Frank Act of 2010 and exempts family offices that are owned and controlled by family members, don’t advertise or provide investment advice to nonfamily investors.