At the Ivy Family Office Network (IVYFON) Family Office and Institutional Investor forum held on February 16, investors from across the country revealed experiences and insights that can guide family offices in their investment approach for 2021 and beyond.
During the Family Office/Private Equity Deal Making 2021 panel, which focused on how family offices can successfully invest in private equity deals without getting burned, there were three top insights that stood out:
1. What is the most important first hire for a family office performing direct private deals?
Family offices are generally too understaffed to take on all the aspects of direct investing at once. So, who do you hire first? Chief Financial Officer (CFO)? Analyst? Banker? All of the above?
The Chief Investment Officer (CIO) is at the top of the list. You need an investment strategy, thesis, and deals. Without those, the rest is unlikely. For the time being, co-investing, analysis, and back-office functions can be outsourced. Once deal flow begins, the specific type of personnel required for success will become clearer. Yes, there is lag time between the identification and hiring of talent, but there is also lag time between the identification of deals and closing. Try to make these steps match.2. What is the number one key skill of private equity to incorporate in family office investing?
Private equity has been direct investing for over 50 years. Of course, strategies are evolving, but there are historical takeaways for family offices to follow in any environment.
The top skill to incorporate would be the ability to coach management. Private equity is mastering the art of value creation by working shoulder-to-shoulder with founders, entrepreneurs and their key lieutenants. It has the resources, experience, training and tools to increase the “institutional sophistication” of their investees, and the playbooks are being created for family offices to draw from.3. What resources should family offices bring in house versus outsource?
Every investor weighs how much they can do themselves versus leveraging outside skills. Are there rules of thumb for family offices?
Fortunately, there are a number of free resources available for family offices to use to increase their direct investing capabilities. Even deal flow can be outsourced to a certain degree. However, that usually means more competition and higher pricing. Better to perform pre-Letter of Intent (LOI) functions in house, which includes functions related to the Office of the CIO (i.e., find opportunities, assessing management, arranging financing), and outsource post-close functions, which includes functions related to the Office of the CFO (i.e., obtaining the data, reporting, close process, financial planning & analysis) if the choice must be made.