GPs should take more care when targeting family offices - AVCJ Forum

“Family offices are looking for world-class partners – there is a saying that everyone bets on the jockey and is agnostic about the horse,” Dan Farrell, chairman and CEO of Privos Capital, a multi-family office, told the AVCJ Forum. “You have to find the family office LP that matches up.”

He recalled participating in a series of meetings with private equity firms with a family office client in the Middle East. The family has 177 trusts and more than 100 different portfolio companies around the world, but not one of the PE managers bothered to ask about these business interests. Putting the right opportunity in front of the right family office can be beneficial to both parties, though.

For example, Hong Kong-based Sun Hung Kai & Co – an investment business controlled by the Kwok family – backs private equity funds but is now primarily a direct investor, often leveraging its financial services expertise. It prefers to work alongside private equity firms and in certain cases identifies investment opportunities that it presents to portfolio GPs with a view to co-investment.

The flexibility that underpins Sun Hung Kai’s approach to investment – it may start looking at a deal as an equity play but ultimately decide that structured credit will deliver a better risk-reward profile – means it might not be the ideal partner for private equity every time. However, this flexibility can be helpful to GPs as well.

“A GP had just finished investing Fund II and was in the process of raising Fund III but they had yet to do a first close,” said Sebastiaan van den Berg, CIO and head of principal investments at Sun Hung Kai. “They found a good deal they wanted to do so we funded them, lending them $100 million. We charged a handsome interest rate, but it was a win-win situation.”

Daina Spedding, an investment manager with Lewis Trust Group, the family-owned group that controls the River Island fashion brand in the UK, added that flexibility allows family offices to be a reliable partner. “We are not forced to deploy a certain amount of capital in a certain timeframe,” she said. “We can be patient and long-term.”

Lewis Trust focuses on e-commerce, fashion, and wider consumer opportunities, leveraging its domain expertise. For example, the family office is an LP in L Catterton’s Asia fund and has invested alongside the private equity firm in a fashion-related business.

Once a GP has identified a family office that is likely to be interested in a certain kind of investment, it must then demonstrate why it should be the partner of preference. Spedding noted that she has turned down private equity firms with strong track records “because the GPs have big egos and I know if I put them in front of the [family] principals, they would just say no way.”

Farrell of Privos added that when PE managers approach family offices purely with the mindset of filling a gap in their funds, there is unlikely to be an alignment of interests. “If you are coming to our office we know why you are there and it’s because you can’t get money from CalPERS and the sovereign wealth funds aren’t talking to you,” he said. “You have to articulate your value-add and what your special sauce is, and how you can generate returns for a multi-family office.”

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