The Expanding Role of Family Offices in the Private Investment Fund Arena

Over the past number of years, the number and level of sophistication of all kinds of family offices has increased exponentially. One of the asset classes in which family offices have become significant players is the private investment funds class. Although family offices have been playing a prominent role across the entire spectrum (both on the sponsor and the investor sides) of this asset class, for purposes of this article, we will address three distinct ways in which family offices invest in private investment funds: (a) as seed/strategic investors; (b) as passive investors (i.e., by purchasing ordinary limited partnership interests); and (c) as investors in co-investment opportunities.

FAMILY OFFICES AS SEED/STRATEGIC INVESTORS

Family offices have recognized an opportunity to partner with emerging managers by taking a stake in their business either by making an investment in the manager entity of start-up capital or by making a significant seed investment in the fund as the initial or early-stage limited partner. Investment managers have welcomed this partnership with family offices for a variety of reasons, namely: (a) family offices have the ability to execute quickly, (b) they engage in less diligence than many institutional type investors so create less administrative and operational drama both at the time of investment, as well as on an ongoing basis and (c) in many instances, they have excellent experience in these kinds of investments and can provide seasoned business and operational advice.

Family offices engaged in making seed investments can be broken into two groups: those that make seed investments in the ordinary course and consider these investments as one of the asset classes in their portfolio and those that will opportunistically consider making such an investment under the appropriate circumstances. The former group tends to negotiate more extensively and with a deeper understanding of the business terms surrounding the relationship; they can pose a challenge at the onset of a relationship but in many instances turn out to be a better long-term partner for a manager because they are more patient in weathering market volatilities. This group also appreciates that many managers desire a hands-off partner allowing managers to unilaterally run the day-to-day operations with minimal interference.

FAMILY OFFICES AS PASSIVE INVESTORS

Many family offices are not interested in making a seed investment in a manager and/or taking a stake in the business. In fact, most family offices investing in private funds prefer to diversify their investments in this asset class among various managers with different strategies and, therefore, tend to make many smaller investments across a wider range of managers. Although managers may not necessarily receive large ticket investments from this group, there are many benefits to landing this group as investors in a fund (e.g., (a) they tend to move quickly on investment decisions, (b) they are more patient with investment results because they don’t have accountability to any underlying investors and (c) they are very strong referral sources to obtain future investments from other family offices and other relationships in their network).

FAMILY OFFICES AS CO-INVESTORS

It has become fairly common for private fund managers, especially those running private equity strategies, to engage in co-investment activity. In a nutshell, managers occasionally find themselves with investment opportunities that are not appropriate for a pooled vehicle because of strategy or size limitations, among other reasons. When faced with these kinds of opportunities, managers will either seek a third party or offer their existing limited partners the opportunity to partner up in these investments. As noted above, many family offices have become more sophisticated and are capable of making investment decisions related to many kinds of co-investment opportunities fairly quickly so when time is of the essence a manager will want a partner that can close on an expedited timeline. In fact, co-investment opportunities have become such a critical part of a family office’s mandate, they may demand access to these kinds of deals as a matter of course when investing as a limited partner in a private fund.

Regardless of how family offices wish to engage in private fund investments and co-investments, managers would be served well to appreciate that family offices have become an integral part of this investment community and developing relationships with this group can open many doorways and help a manager grow its business.