How Much to Pay Venture Investors in Family Office

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"Family Offices." Along with intermittent fasting, CBD, and Megan Markle, information technology seems that no one tin stop talking about them – at least in the finance world. That existence said, the term Family unit Office implies some level of homogeneity surrounding a group of organizations. In this case, it is a misnomer. Family unit Offices are as broad and varied – in source, size, structure, and strategy – as the individuals whose money is being managed.

In this commodity, ancillary with the surge in popularity of the theme, I volition discuss the reasons for setting upwardly a family office. Through this, I will explicate the variety among the different kinds of entities and the numerous aspects of managing interactions with family offices.

What Is a Family Function?

Firstly, what is a "family office"? Fifty-fifty the nomenclature of a firm as a family office would be different depending on who is asked. That being said, the way I recollect about family offices is: whatever firm that is investing money direct on behalf of the ultimate main. As compared to hedge funds, pension funds, endowments, and other institutions, family offices are not pooling third-party capital and and then investing. They are operating with a single – or multiple – family's avails.

Thus, even defining a family office is somewhat challenging. Co-ordinate to the heretofore mentioned description, a son who manages his mother's $500,000 retirement account by trading equities in an online account would theoretically have a family office. Interestingly, I have come across a family unit office that was zero more than the principal and 1 advisor (although in this example the AUM of over $iv billion was somewhat larger than my instance to a higher place).

Broadly speaking, most practitioners would use the $100 million net worth threshold as the point in which someone could potentially accept a family part. According to a 2018 Credit Suisse report, globally at that place are ~l,230 individuals who have a net worth greater than $100 million. Many of these individuals manage their cyberspace worth within their firms, many pool their assets to create multi-family offices, and many are different branches of the same family unit. Every bit such, Credit Suisse'due south estimates in terms of how many private family unit offices exist range widely from 6,500 to 10,500.

With that every bit a backdrop, at that place is a saying that "when you know one family function, you know i family office." Family offices are varied in terms of their:

1. Source: Family offices may be solely structured around ane principal ("single-family") or multiple ("multi-family").
2. Size: Ranging from a few hundred millions of dollars under management through to multiple billions.
3. Structure: From fully-fledged investment advisors that would rival even the most institutional of firms to simply one cited private advisor.
4. Strategy: While wealth preservation on a real basis is by and large the main goal, capital appreciation or growth tin be simply as important depending on the nature of the principals.

I created this matrix to demonstrate the two paradigms that ascertain the kind of family offices that tend to exist: centered around the history of the family'south capital and the financial sophistication of the principals. Included are some (general) examples of who could exist classed into the respective sections.

What Is Behind the Contempo Rise in Family Offices?

Why have these investment organizations get so prevalent recently? In big part, information technology'south due to the increasing returns to capital as compared to labor, which take created big multi-generational-type fortunes. Across numerous industries, concentrations of returns are generating significant fiscal wealth.

However, the 2d factor is just equally important, if not more than. Wealthy individuals and families have discovered that they can operate at a significantly lower cost than the traditional vehicles accessible to them, while maintaining strong performance. In the recent past, wealthy individuals would be funneled into institutional investment funds which would often charge significant management fees (in some cases the "2 and 20" model). On the other hand, the recently released UBS Global Family Office Report 2019 shows that the 360 family unit offices surveyed paid an average of 117 bps (i.17%) in total costs, including all operational, administrative, and performance-related costs.

Besides, ofttimes times a wealthy private or family generates wealth by having domain expertise in a specific industry. This expertise can extend to operating experience, valuable relationships, or general thought leadership. By specifically maintaining a family part, the principal tin continue to exercise some level of control over their investments and also have a role in helping to create value once investments are made.

Finally, family unit offices are often operating on a much different timeline than traditional institutional funds. Rather than a seven to 10-yr horizon when looking to exit, family offices are looking across generations (many family offices say they are targeting third-generation, or 100-year wealth). Every bit a result, holding periods can be much longer, especially if an asset is generating greenbacks catamenia that is being remitted to the main and their family.

The Process of Interfacing with Family Offices

With that properties, thinking nigh the best way to interface with a family function becomes a bit easier. The first takeaway should exist obvious. Just every bit in that location is no uniformity to family offices, there will exist no uniform way to deal with each family office. Each relationship will exist predicated and influenced by the individual firm. That existence said, there are some general benefits and considerations that should be measured.

One major benefit of working with a family office is the ability for the house to bring more than financial capital letter to an investment. When thinking through investment partners, we often think about the "iii forms of capital": intellectual capital, human relationship capital letter, and financial uppercase. In many cases financial uppercase is the most fungible of all. If the principal of a family part has extensive manufacture experience and relationships that are relevant, that can be a huge positive to a firm seeking investment partners.

Additionally, family offices can often operate with much more speed and flexibility than traditional investment firms. Unlike institutional funds, many family offices do not have a formal mandate or even an investment committee. The full general goals come downward to the determination of the principals, and as such, investments tin can be made much more quickly and unique structures can exist deployed.

Similar to structure on the entry, family unit offices can be very flexible on the exit of their investments. Every bit mentioned above, they are ofttimes longer-term holders, which can be a valuable asset to have in a capital letter structure. Furthermore, family offices are often natural buyers as companies scale and abound, especially to a family office whose principal has deep domain expertise.

Finally, family unit offices frequently brand investments on metrics other than those that are purely financial. Whether it is a pet project in which they want to invest (e.yard., a winery or golf course) or based on a relationship, family offices often make investments looking at overall utility to the principal, rather than pure IRR. This aspect is apparently a double-edged sword and tin can pb family offices to immediately rejecting very bonny opportunities. Yet, when approaching a family unit office it is always best to frame the opportunity in terms of their passions. Endeavour to visualize the investment within the types of upper-case letter buckets that will be in their minds.

The Challenges of Dealing with Family Offices

Working with a family function tin can bring some unique challenges. Firstly, depending on the level of sophistication of the family unit office, there may be a lack of organization. In my experience, family unit offices are generally leaner in terms of staff, and given the potentially changing demands of the main, sometimes information technology seems as though they are running in many different directions at once.

Similarly, family part principals may have a diversity of different interests and may lose involvement in your opportunity, specifically if it is what nosotros refer to as a "cocktail party" investment. A "cocktail political party" investment is the type of investment that a principal makes specifically to discuss with friends at social gatherings. Many direct early-stage venture capital investments made by individuals with niggling knowledge in the relevant industry are made in this nature. While it is not necessarily a bad affair to accept an investment of this sort, it is of import that the master truly understands the opportunity and the business plan. If not, having a tough-to-manage investor may non be worth the amount of investment, especially at early stages. This account from Fabrice Grinda, who founded the European auction site Aucland in the late 1990s, provides a fascinating insight into his experiences of raising coin from a venture fund linked to the big LVMH family unit conglomerate.

Finally, in negotiation theory, there is an acronym that is frequently used, BATNA: Best Alternative To a Negotiated Agreement. BATNA tin be used as a full general metric to make up one's mind the relative leverage of two parties in a negotiation. Most family offices have a very high BATNA, which means that if the bargain does not go through, or the investment is not made, information technology will not impact their lives in any meaningful mode (if at all). As a consequence, family offices are known for dragging out the investment procedure to create as much optionality as possible. Also, given that you are dealing with individuals who are naturally used to getting their way, it can be very difficult to adjust favorable terms.

What Does the Future Agree for Family Offices?

In all, the family office space remains a dynamic and ambiguous corner of the capital markets. The one thing that most agree on is that the corner is growing quickly. As income inequality and the rapid increase in returns to capital – every bit compared to labor – continue to grow, these types of firms should continue to accelerate in number.

Furthermore, service providers are now spending more fourth dimension thinking through the best fashion to service these unique clients. Investment banks are competing to offer the nearly turnkey solutions in hopes of having these families piece of work with them. Historically, family unit office relationships were based on long-continuing familial relationships. However, increasingly beingness able to provide all of the wants and needs of the family part principals and operating staff is essential. These services tin can bundle everything from Chiliad&A advisory, personal or transaction financing to bespoke concierge services – such as art valuation and educational programs for rise generations.

As service providers go more attuned to the needs of these firms, it will increasingly brand more sense for these family office firms to form. Every bit more firms form, more service providers volition offer increasingly efficient services to them. All in all, a virtuous cycle will pb to a drastic rise in family offices.

Equally such, it is incumbent upon anyone who is soliciting capital to recall seriously nigh approaching family unit offices. While this prospect volition have to exist much more nuanced than the "spray-and-pray" mental attitude generally adopted past many seeking funds, it can exist very fruitful in the long run.

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Source: https://www.toptal.com/finance/private-equity-consultants/family-office

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