The family office continues to evolve. As their numbers and assets grow, direct investment models are emerging and traditional portfolio architectures are being vigorously reconsidered in the post-corona environment.
A recent Dentons Family Office Direct Investing Survey reveals a variety of reasons why more family offices are focusing on direct investment. These include increased returns by avoiding management fees and carry interest in fund investments, alignment with family interests to exercise greater influence, and greater control and investment within specific industries and company types. It includes enjoying transparency.
Despite these advantages, direct investment is not without its challenges. These types of investments are often complex, illiquid and risky, and there is no guarantee that they will outperform the fund or the general public. Additionally, you need skilled investment management resources to ensure your success.
Below are the main factors that complicate direct transactions, cited by survey respondents. These factors, along with a lesser-considered factor, trust and credibility, should be carefully considered when developing a direct investment strategy for 2023 and beyond.
According to Denton data, 45% of family offices are concerned about too much operational risk when investing directly. This is a legitimate concern given the nature of operational risk and the fact that even small oversights can have significant consequences. However, there are ways to maximize operational security and mitigate this risk.
Operational risk incorporates many factors and should be carefully considered when evaluating direct investments and continuously monitored and evaluated throughout the investment process. Therefore, it is important to consider and evaluate potential risk factors, no matter how nuanced, rather than focusing solely on a few critical risks in the operating category.
We also recommend that family offices involved in direct investments develop a documented operational due diligence process and set a minimum consistent level of standards for ongoing review. The initial formulation of such a procedure can be time-consuming and present additional challenges initially. However, when identifying objective minimum standards across a range of opportunities, having a structured and well-defined process in place provides a solid foundation for evaluation that can be adjusted to best practices over time. will be
Family offices that do not have the full capacity to implement operational risk assessments and control strategies may consider investing in developing this expertise in-house or retaining it outside the council to ensure long-term can save you a considerable amount of money.
Access to high-quality trade flow
43% of Denton survey respondents cite access to quality deal flow as a direct investment challenge. This is particularly relevant in an increasingly competitive environment where family offices are transacting more value and volume deals than ever before, as evidenced by the findings of the recent PWC Family Office Deals Study. .
Single family offices are reportedly working in partnership with other family offices and groups to secure deals. Extending these partnerships is critical, and families need to look beyond their immediate networks and build relationships beyond them.
Still, building a new trading pipeline is often tricky. Family offices are increasingly seeking new opportunities as they are private by design, but it can be difficult for outside parties to identify which families are actively seeking investment opportunities. This will break the deal flow pipeline. Therefore, it is very important for family offices to establish a presence within the industry they are interested in. This can be achieved by participating in relevant industry associations and associations, attending conferences, attending networking events and education to build relationships and grow the footprint of the Family Office.
Control exit options
Family offices are known for providing flexible and patient capital, but direct investment exit options are still being considered. I am listing.
To minimize complexity, direct investing family offices need to understand total assets, liquidity and strategic objectives across their portfolios. These factors, along with the investment timeline, should be clearly defined and aligned for the family, portfolio companies and stakeholders.
According to FINTRX data, most family office investments are made through early-round funding, with 29.5% of these coming from early seed-stage and venture rounds.
While there is no denying that due diligence is a necessary step in the investment process, 41% of Denton survey respondents cite it as one of the biggest challenges they face with direct investments, especially from a legal perspective. I’m here. When it comes to startups, conducting due diligence the same way family offices do large companies can lead to significant delays and missed opportunities.
New businesses are notoriously difficult to evaluate and, like family offices, each one is different. Seraf said his comprehensive due diligence efforts on start-ups, which require endless hours of research into every aspect of the company and drags on for months, do little to de-risk the deal. There is a possibility.
Similarly, family offices involved in direct investments should consider re-evaluating how they conduct due diligence on startups and avoid applying the same approach as when evaluating more mature companies. I have. Creating a new process that revolves around identifying risks, obtaining enough information to write an investment thesis, and knowing what you need to believe to make an investment viable It helps in performing due diligence in a comprehensive and rapid manner.
trust and trust
Foreign direct investment is essential for the development of the world economy. There has been a marked decline as countries around the world have been hit hard by tax reform, anti-globalist policies and most recently his COVID-19 pandemic.
Investor confidence has plummeted across developed, emerging and frontier economies, with the latter two hardest hit. But a return to fundamentals has been spotlighted, with investors favoring larger, more stable markets with more predictable political and regulatory structures.
It is more important than ever for family offices to utilize strategic forecasting tools to improve planning strategies and anticipate the likelihood of future exogenous shocks. As a result, emergency and scenario planning, simulations, and “war game” exercises are becoming an integral part of foreign direct investment protocols.
The challenges associated with direct investment are undeniable. Still, with aligned values, proactive strategy and process formulation, investment in the resources needed to develop expertise in this area, and a little creativity, the Family Office will reap the benefits of these opportunities for years to come. You can continue to enjoy it for a long time.