GPs must be prepared to listen when pitching family offices - AVCJ Forum

"If you can spend the majority of the introduction listening and understanding who is sitting across the room from you, when it comes to introducing your fund you can do it in their terms," said Christopher Thorne, chairman of Broadline Capital, which focuses on growth capital and impact investments in Asia and North America.

Dan Farrell, chairman and CEO of Privos Capital, a global family office advisory firm, recalled attending a pitch meeting with a Middle East family office client during which the GP made no attempt to ask the family about its knowledge and preferences in terms of private equity. Following the pitch, the executives from the GP left the room, the family head turned to Farrell and asked, "What is IRR?"

Family offices are also quick to pick up on inconsistencies in fund structures and terms as well as within the GP team itself. Farrell noted there is sometimes palpable tension between the investor relations and investment executives sitting across the table during pitch meetings, and it makes prospective LPs uncomfortable. "You are going to be in bed with these guys for a 12-year period," he said.

The common complaint on fund terms is the amount of capital GPs commit to the fund, thereby ensuring an alignment of interest with the LP, and how this contribution is sourced. Asked for an example of a bad pitch, Rosemary Sagar, CIO of the Kingdon Foundation, cited an occasion in which the GP said it would put in 20% of its own capital, "but it turned out that future [management] fees over and above a certain hurdle would be their skin in the game in the fund."

In addition, when dealing with third-party advisors, family offices tend to prefer groups that have an economic interest in what they are selling; it generally means they are pickier about the firms they work with, essentially serving as an extra layer of quality approval. There is general appreciation of the role third parties such as placement agents can play - they likely already know the LP so can tailor the pitch accordingly - but also a residual wariness.

"I look at investments in the opposite way to consultants," said Sagar, in reference to groups such as Wilshire, Mercer and Cambridge Associates. "Consultants like to put everything into buckets; I like to invest with people who have flexibility and have the ability to change their strategy as they go along because the world changes. Consultants have a role to play with large institutional investors that have a top-down approach."

Kingdon's preference for flexibility is born of experience. Sagar recalled backing an Indian group that concentrated on real estate. There appeared to be a huge opportunity and the fund was deployed within a year, but then the industry saw a sharp downturn and exits became a problem. The fund is structured as eight years plus two one-year extensions, "and it's year 11 and we are still waiting," Sagar said.

Jerry Ellis, a real estate expert and the former CIO of a US single family office, added that analysis of exit options should be part of the due diligence process. He identified three key questions LPs should ask: What does the first year of operations look like? What will the exit look like? What are the exit trends in this sector historically?

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