Nixon Peabody and FTI Capital hosted a Hot Topics dinner on family offices and the direct investment trends and opportunities and challenges they face on Thursday, April 4 at the rooftop dining room of the NoMad Hotel in Manhattan. The event was attended by a broad range of family offices and other private investment offices, comprising investors based in the United States, Europe, Asia, Latin America and the Middle East. Dick Langan and Greg O’Shaughnessy of Nixon Peabody moderated the discussion together with Glenn Tobias of FTI Consulting.
The private investment office participants kicked off their discussion with a recognition that many families made their money in privately owned businesses and understand:
• what it means to have a long-term investment horizon.
Thus, it’s no surprise that family offices are increasingly characterizing themselves as private investment offices based on their focus on investment decisions for the family. The participants acknowledged that, in this low-interest rate environment, increasing attention is being paid to direct investment. It is well-documented that family offices (private investment offices) have had a major increase in acquisitions. The following statistics should be no surprise:
• Almost 70% of family offices engage in direct investing and in 2015 out performed buy-out firms with average return of 15%
• 80% of family offices are involved in some form of co-investment and more than half of all family offices are looking to increase their allocations to co-investments
• 62% invest in private equity with allocations to private equity over 20% but many family offices are moving to direct investments
• 13% invest 20%–50% of portfolio assets in private equity
• 40% of family offices investing in private equity also invest in direct assets
• 56% plan to increase direct private equity investments in the next two years
The logic is that families that do not have an over-riding need for liquidity can achieve superior long-term performance if they are patient and even absorb unrealized short-term losses as the investment matures. The “buy and hold” approach (or “patient capital”) of family offices is not only attractive for the family office but oftentimes for the companies they’re backing. Family offices take the approach that it’s a “marathon not a sprint.”
The participants emphasized that their private investment offices have a disciplined, long-term investment approach by investing in high quality companies with low turnover, strong management teams and an ability to withstand down markets. High quality companies turn their operational strength into substantial free cash flow to support further growth and distributions to shareholders. Based on low returns today, families are making larger commitments and direct investments.
In addition, the family office representatives exchanged ideas on approaches to deal sourcing and how they are able to demonstrate their commitment to an “invest and hold” strategy in order to present a compelling offer to sellers of businesses. The participants also discussed the due diligence process, including the timing and the depth of the process. Many participants stressed the need to undertake comprehensive due diligence that includes but goes well beyond a financial and quality of earnings review but also includes a review of industry competition and markets as well as management competencies.