Direct private equity is an attractive yet challenging investment space which requires a broad skillset and deep resources. Direct opportunities often require investors to move fast conduct due diligence and make final decisions within weeks. This tight turnaround makes it critical for family offices to be proactive to originate high quality deal flow and conduct thorough and consistent due diligence.
The private equity market is a very competitive space and every family office crafts their own strategy. For example, some family offices capitalize on their unique advantages whether it be industry or operational expertise, a strong network in a particular sector, or unique experience in operating a family business. Of course, every family office has their own special needs. However, regardless of the investment strategy your family office deploys, we have outlined the best practices we believe family offices can apply to help enhance their direct investment approach.
Sourcing high quality and consistent deal flow is a prominent challenge facing family offices in the direct investing space. The competition for high-quality investments across the private equity landscape has increased steadily over the years due to firms sitting on large amounts of unfunded capital capitals.
Furthermore, the recent special purpose acquisition company (SPAC) boom has further elevated this competition. With extensive connections, knowledge, and investment capabilities, sophisticated family offices have been very active in this space and these SPACs have generated further competition for deals. In this competitive environment family offices need to be proactive and can benefit from utilizing a specific strategy to improve their origination efforts.
Strategies may include: (1) developing a trusted relationship network, (2) leveraging family-owned business or industry expertise, and (3) partnering with institutional intermediaries or banks. Family offices should also utilize their unique advantages, outsource, or a combination of both to ensure consistent deal flow.
B. Due diligence
Family offices operate like other institutions with processes, procedures, and controls in place to evaluate, approve, and oversee investments. In fact, many family offices can now evaluate potential direct opportunities as they look to hire investment professionals with private equity background and continue to develop in-house investment infrastructure as well as expand operational teams. Successful direct investors conduct thorough and consistent diligence to help mitigate risk.
C. Portfolio management
It is necessary to consider the importance of robust portfolio management. We believe it is the key to achieving long-term returns and objectives, as well as protecting against losses and potential risks. Investment management takes time and sophistication. Many family offices are very small in size with only one or two employees who rely on service providers as much as possible for portfolio advice, investment strategies, and consulting on solving their investment problems.
Other family offices that are more sophisticated may have in-house resources who can help in consolidation, performance monitoring, and risk management. No matter what the approach is, family offices should design a strategic long-term asset allocation plan around their private capital concentration.
When family offices construct a portfolio, they should consider exposure towards their private capital investments and to help mitigate potential risks associated with high exposure towards private equity. The main objective during portfolio construction should be to create a portfolio allocation that helps maximize the portfolio return given specific limited parameters such as volatility and downside risk.
Such practices can help family offices gain the insight necessary to answer many portfolio construction questions around both direct investing approaches and pathways, and how they can align direct investments with their total portfolio.
For more on the subject of direct private investing for family offices, please read our latest whitepaper.