A family office approached Quist Valuation for assistance in managing the reporting that is necessary for their direct investing compliance. This office wanted to capture a higher return on their investment dollars through direct investmentsin private equity.
Should your family office move to a direct investing model?
Moving to a direct investing model has upsides. According to Barrons, “Direct investments returned 8% on average in 2016 compared to the private-equity industry’s 6% return for the same period.” If a family office is willing to manage direct investing, it becomes an option with superior returns.”
What strategies are there for going direct?
Be part of a network
Networks can be a formal club of investors with well-defined plans or a more loosely structured and informal group. Independent sponsors approach these networks when raising capital for a deal. This is a low-commitment model for a family office and may be a good start if your family office is looking into this strategy.
Work with an Independent Sponsor
There are independent sponsors that are reliant on a specific family office as their equity partner. This way, family offices have someone handling their direct investing but without the overhead of hiring an internal staff. With a dedicated sponsor, there is the option of more reliable funding sources and less difficulty in closing transactions.
Hire Private Equity Professional Staff
A family office could expand the family office infrastructure to include in-house PE professionals. Becoming a professional operator is necessary to conducting proper due diligence and managing ongoing portfolio risk. According to Nextvest, the breakeven point of hiring a team of professionals is $100M in investment capital. “Among family offices leading direct investments, we see the high fixed costs of in-house expertise become cost-efficient when allocations grow north of $100M…”. Families want an advantage over market-rate investment management fees, and to capture that spread, scaleis required.”
If your family office is doing deals at this level, it could be a viable option.
Family offices that are willing to do the work of direct investing in private equity could see reduced management fees and above market returns. It’s also important to talk with your financial professionals about whether this strategy is a good one for your family office.
As for the family office investing directly in private equity but needing a bit of help with reporting, with the help of Quist’s expert staff a process was put in place to ease the challenge of tracking investments on an on-going basis and meeting the requirements of periodic compliance reports. Quist has the experience to help family offices understand and implement best practices in valuing private equity investments. In addition, Quist commonly acts as an extension of your back office to help interact with auditors. This family office is now well prepared to handle the reporting for their investments, providing peace of mind for stakeholders and investors.
If you need help understanding the private equity investing by your family office, Quist Valuation can help. Let’s set a time for a free 30-minute consultation. We can discuss the specifics of your business and identify the next steps needed to create a plan.
Schedule your free 30-minute consultation here.