The Complete Guide to

Family Office Trends

The Complete Guide to Family Office Trends

Table of Contents

I. Asset Class Diversification:

A Family Office Perspective on Direct Investing 4

II. Family Office Trends to Keep an Eye On 7

III. How to Raise Capital from Family Offices 9

IV. Growth of the Family Offices Industry 11

V. Investment Preferences of Family Offices 12

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The Complete Guide to Family Office Trends

I. Asset Class Diversification: A Family

Office Perspective on Direct Investing
There is a growing trend in which family offices are directly buying or investing in
private companies, as opposed to allocating capital at arms length to managers of
private equity funds. The trend is nascent but could become more widespread in the
coming years, says Gene Lee, Managing Director of Cove Point Holdings, a family
office.

In the below Q&A, Lee explains how many family offices stand out from private
equity firms, source viable investment deals, close transactions quickly with no
leverage, value a company for the long run, and work with existing management.

Q: How prevalent is direct investment buying companies by

family offices as opposed to 3rd party asset allocation?
A: We (Cove Point Holdings) are looking to acquire businesses directly and own
them outright. On the family investment side, more and more people seem to be
going the route of acquiring businesses directly or investing in a minority stake of a
company and having the infrastructure to do so.

Historically, most family offices have operated more like traditional asset
management businesses that hire investment advisors or officers to construct a
portfolio of public securities and private investments for example, placement in
private equity and hedge funds. This is probably what the lions share of family
offices do, but more are starting to take a more active approach of looking for
companies to buy directly and own outright in their portfolios. Theres now small
penetration, but its [a trend] that will probably continue to emerge over the next few
years.

Q: Do you use leverage to complete transactions?

A: No, we dont use any debt to finance the acquisition of a company. We are
an all cash buyer that uses 100% equity capital that is available for immediate
investment. While we have a solid understanding of debt financing alternatives in
a leveraged buyout, we dont believe that its prudent to acquire smaller middle-
market businesses with significant debt as part of the capital structure. Financial
debt in a smaller middle market business can be very risky and limit the operating
flexibility and growth prospects of a business. We dont believe that it makes sense

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The Complete Guide to Family Office Trends

to compound the operating risk of growing a smaller company and the risk from an
ownership transition with the risk of a leveraged capital structure that could have bad
consequences for a company if it misses a beat. Leveraging up a company too much
puts owners, management and employees at risk. Also, on the one hand [not using
leverage] creates an advantage over traditional private equity buyers who might not
be able to get financing, plus we can also move much more quickly in executing a
transaction without debt financing contingencies or risks. But that also means we
arent pricing our offers around leveraged returns, so we may not be able to pay as
much.

Q: How is direct investing as a family office different than traditional

private equity transactions?
A: A family office generally has the flexibility to change its investment criteria and
approach as it sees fit whereas private equity institutions are more limited by their
investment mandates. Family offices generally dont have limitations with respect to
the types of securities we can invest in, transaction structures, industries, startup vs
established businesses, etc.

A primary difference and benefit

associated with private family
ownership is that we generally have a A primary difference
longer and more flexible investment and benefit associated
horizon. Unlike a private equity fund
that might have a five-year investment with private family
horizon and a ten-year fund life and
who needs to exit investments regularly ownership is that
and return cash to their investors in a we generally have
relatively short period of time, we have
the ability and desire to hold and grow a longer and more
companies for the long term. We look
for good businesses that generate flexible investment
attractive cash-on-cash returns, horizon.
and were looking to partner with
management teams for the long-run.
We have owned businesses for more - Gene Lee,
than twenty years, and we take that Cove Point Holdings
same long-term approach to investing
when we evaluate opportunities
currently.

I believe that this ability to have a long-term investment approach has a meaningful
and beneficial impact on the development and growth of a company. The strategic

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The Complete Guide to Family Office Trends

decisions that we make with our management teams for our companies are primarily
based on determining whats best for the business in the medium and long term. We
have no incentive to make decisions that might provide a short-term pop but creates
longer-term losses or risks for the business. For private equity funds that need to
exit their investments and are highly motivated to maximize their own financial gain,
their approach and financial incentives arent always the same. Sometimes the
financial incentives of a private equity fund manager are at odds with the longer-term
objectives of a company. And, exiting an investment at the wrong time through a sale
of the company or a public offering can be pretty disruptive events.

Q: How do you find viable investment candidates?

A: It takes a significant amount of time and resources for a family office to build and
sustain a strong network from the ground up. Its all about building and leveraging
relationships productively. We look at hundreds of opportunities per year, sign
confidentiality agreements on approximately ten percent of them, meet with close to
twenty percent of that group, then bid on a handful of them. If everything goes right,
well acquire one business a year.

Q: What do you do with existing management of a company you

buy?
A: Management is absolutely key. Our strong preference is to partner with the
existing management team or key executives who want to stay on to run the
business. If we need to bring in an outside manager, we can do so. But, our bias is
definitely to work with an existing team. There are times and situations when you
have to replace a management team, but this can very disruptive and set a business
back quite a few years.

Oftentimes most private equity firms and family offices alike are very management
friendly; they give management significant options or equity stakes to align economic
interests and to provide attractive financial incentives. We give management a
significant amount of operating flexibility while providing appropriate controls to
ensure that were aware of how the business is performing and that were involved
with important strategic decisions. We speak to our management teams regularly,
and we have very open dialogue around operating and strategic initiatives.

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The Complete Guide to Family Office Trends

II. Family Office Trends to Watch

The direct investment strategy of family offices, introduced above, has also become
apparent to Howard Romanow, COO and CFO of Island Management, a family office
for a fourth generation family with more than 100 years of ownership experience. He
continues the discussion on how many family offices are bypassing PE firms, instead
opting to hire ex-PE professional inhouse.

Although many more family offices are looking for private investments, many are
hesitant to invest in PE firms because they do not see the benefit of the structure,
Romanow explained. If you are capable of directly investing, the idea of fees, the
illiquidity of the fund, the lack of control, and the desire to quickly sell the winners
and hold the losers is not appealing.

Limited Direct Competition

If family offices begin direct investing en masse, should private equity firms be
worried about rising competition? Romanow does not believe so. He explained,
When it comes to the types of businesses we are acquiring, there is less
competition the companies that are interested in the value-add of a family office
are less interested in a private equity firm, and vice versa.

The reality is that we typically do not participate in auctions, said Romanow.

Overall, we are focused on fewer, more hands-on investments that we will hold for
far longer than a typical PE firm. We are not confined by any holding period limitation
or structural limitation, so we can be as creative with an investment as we want. This
allows us to review each opportunity as a unique investments and not have to be
confined to a specific industry or investment type. He added, We tend to look at
ownership in terms of generations rather than five-year investment periods.

Romanow was certain to add that family office investment strategies run the gamut.
While Island Management may be interested in long-term investments, there are
many other family offices that are keen on pursuing more traditional private equity-
style models. He explained, Because of the timeline and strategy of most private
equity firms, we would be much more likely to partner with another family office than
a private equity firm. But, much of it depends on the family. If a familys investment
objectives are like a PE firm, a partnership with a PE firm might make more sense.

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The Complete Guide to Family Office Trends

Private Equity Professionals Moving to Family Offices

Rather than competing around investments, family offices and private equity firms may
soon be competing for investment managers. Romanow explained, Although it is still
a relatively young trend, you are more frequently hearing of private equity professionals
leaving firms to move to family offices.

Although it is still a relatively young

trend, you are more frequently hearing of
private equity professionals leaving firms
to move to family offices.

- Howard Romanow,
Island Management

The alignment of supply and demand is near perfect. On the demand side, family offices
have begun to tap existing private equity professionals to source opportunities, conduct
thorough due diligence, negotiate transactions, and work with the acquired companies.

On the supply side, many private equity professionals are finding it an offer they cant
refuse. As the PE industry has evolved and changed especially in response to tax
questions and realization of carry the idea of working for an office under a more
flexible policy is significantly more appealing to many PE folks.

Romanow explained, I spent 15 years in private equity before joining Island

Management. When I decided to move to a family office most of my reasons were
centered on the issues I saw with institutional private equity funds decreasing fund
returns, ability to generate carry, limited holding periods, the difficulty of raising new
funds, registration requirements, the conflict of LPs-GPs, and the fact that we were
regularly selling the best companies for a quick return.

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The Complete Guide to Family Office Trends

II. How to Raise Capital from Family

Offices
The family offices that do pair with private equity firms are notoriously discrete.
So much so that one of the most common adages to describe the industry is a
submerged whale does not get harpooned.

But someone must be Ishmael. With a tremendous amount of investable capital,

these offices are often looking for ways to diversify their investments. According
to Richard C. Wilson the founder of the Family Offices Group just because
the offices are hidden does not mean they are unreachable. He explained that
relationships with single and multi family offices can be cultivated through diligent,
persistent, and intelligent outreach.

Have a Proactive and Diversified Outreach

According to Wilson, the most effective outreach strategy requires both persistent
and proactive outreach. Even for the specialized Family Offices Group, building
relationships still requires a variety of different channels and techniques. Wilson
explained, We use a variety of tactics probably around 30 different strategies
to attract family offices. We speak
at conferences, write books, publish
newsletters, maintain a website, We talk with family
run an association, offer a training
platform and that is just the tip of offices every day and
the iceberg.
meet with them face-
Moreover, diverse outreach also to-face every week,
entails tailoring your conversations
to the specifics of different family and it still takes a
offices. Although there are general
categories of offices small single
long time to generate
family offices, large single family solid relationships.
offices, small multi family offices,
and large multi family offices
Wilson emphasized that each firm
is unique. There is no singular - Richard Wilson,
template. Each family office has Family Offices Group
its own system different sized
teams, different missions, and

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The Complete Guide to Family Office Trends

different values.

Immediate results are not guaranteed, even with quality and diversified outreach.
Quality conversations will take time to develop. As Wilson explained, We talk with
family offices every day and meet with them face-to-face every week, and it still
takes a long time to generate solid relationships, raise capital, or organize club
deals.

Start Locally
While Wilson, through his Family Offices Group, is able to dedicate the time and
resources to cultivating a multitude of outreach channels, it can be unrealistic to
assume that any more generalized firm can mimic such effort especially with
capital and time spread among other opportunities.

If you are looking to connect with just a few family offices, the best place to begin
is in your own backyard. According to Wilson, the best method is to begin locally.
These family offices are usually the easiest to initially meet. He explained, You
can focus on getting to know every single family office in your city. With this base
network, you are able to use it as a foundation for further outreach and referrals.

But what happens if you do not know any family offices in your city or region? After
all, they are submerged whales. Wilson suggests Google as one of the best places to

Connect with 200+ family offices on Axial

begin the search. If you dont know any [family offices], start by searching Google.
You will probably discover at least 2 or 3 in your area. Wilson recommended that
your Google search simply include your area (i.e. Denver) and the phrase family
offices. Alternatively, you could search for the ultra-affluent residents of your area,
and search for an associated family office.

Once you have this foundation, continue to foster the relationships by attending
conferences and events. Eventually, through these efforts and through networking,
you will grow your network.

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The Complete Guide to Family Office Trends

Offer a Value Add

According to Wilson, the hardest part of the relationship is maintaining it. After the
relationship is started, the hard work arrives. You must demonstrate that you will
provide clear value to the family office.

Wilsons value add is his specialty and focus on family offices. He explained, When
I recently wrote The Family Office Book: Investing Capital for the Ultra-Affluent, I
spent a great deal of time ensuring that it was very valuable. I knew that if I made it
outstanding, family offices would reach out to me; if it was just mediocre, they would
not.

The same principle must apply to your outreach and relationships. Demonstrate to
the family office why your firm is the right one to be in contact with. What can you
offer that no one else can Is it a strong track record? Exceptional due diligence
skills? Experience and insight within a relevant industry? Whatever the skill,
emphasizing the trait is a critical component of securing the connection.

The Light at the End of the Tunnel

Ultimately, the extra effort required to build relationships with family offices is more
than warranted. Family offices bring much more than investable capital to the table
a stable relationship with one can offer the power of a warm introduction and a
broader network. As Wilson explained, Many of these family offices are connected
with ultra-wealthy family offices and leaders in a variety of businesses.

He continued, One family with which I work a 6th generation family in San Diego
has helped connect me with a variety of Boards of Directors of publicly traded
companies. These relationships can help facilitate corporate acquisitions and other
investments.

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The Complete Guide to Family Office Trends

IV. Growth of the Family Office Industry

Family offices have conventionally operated on the fringes of the deal economy,
acting as traditional wealth management firms for the ultra-wealthy families of the
world. But many family offices are rethinking their investment strategies, bypassing
the constraints of fund structures and participating as direct investors in deals
traditionally funded by private equity firms.

In this webinar, Richard Wilson, Founder and CEO of the Family Offices Group
discuss the future of the single and multi-family office space, how the shift to direct
investments will change their deal appetite, and how they operate in the private
capital deal markets.

View the slides here or watch the entire presentation below:

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The Complete Guide to Family Office Trends

V. Investment Preferences of Family

Offices & Investing with PE
Deterred by the volatility of the public markets and the high-fee, low-transparency
nature of private equity, many family offices have been seeking direct investment
alternatives. There are plenty of examples of family offices taking their own
networks of contacts and industry expertise to the acquisition table, explained a
recent Forbes article.

However, not all family offices are ready to go at it alone. Instead, many family
offices are seeking club deals or co-investment opportunities with their private equity
counterparts. Whether it is an investment for diversification, or they simply need
extra capital, a symbiotic relationship with private equity can be quite valuable to the
right family office.

To establish a successful relationship, firms need to understand the unique

strategies, perspectives, and goals of a family office. In the below presentation,
Richard Wilson Founder of the Family Offices Group discusses the 7
investment priorities of family offices, their 3 types of direct investments, top
mistakes when dealing with family offices, and more.

View the slides here or watch the entire presentation below:

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The Complete Guide to Family Office Trends

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