Often it seems like there are endless investment routes to go down. Lately, family offices have been … [+]
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Family office investment, from either single or multi-family offices, is often hailed as the holy grail of private equity. The reason? It’s generally regarded as “evergreen” capital, patient with an indefinite fund life, and long term or no investment horizons to speak of.
Venture capital dollars aren’t as readily available as they once were and when they are, the terms associated with them are often hard to swallow. It’s little wonder that family office investments capture the minds of most entrepreneurs at some point in their fundraising journeys.
While family office investment is an attractive captive funding source, is it always the optimal choice? This is something both family offices and those seeking investments need to consider. To answer this question, one needs to evaluate the differences between the investment mandates of affluent families and traditional venture capital, as well as the lesser-known facts about the nature and subtle nuances of family offices that are often overlooked.
Family office investments versus Venture Capital mandates
Family offices are generally far more agile than traditional investment firms, with the ability to make decisions and act with speed and flexibility. Unlike institutional funds, many family offices do not have a formal investment mandate or committee. Instead, investment objectives are generally determined by the family and guided by management.
This can be beneficial as investments can be made rapidly and the necessary resources and structures put in place with relative ease. It does, however, mean that exits can take place when the family’s objectives change or the management guiding these leaves.
Venture capital firms, on the other hand, have structured contractual mandates to deliver returns to their limited partners (LPs), which means that they have to remain committed to seeing investments work and this may also influence decisions to continue into future rounds.
Evaluating the “evergreen” nature of family office capital
Most trends indicate that the family offices tend to engage in long-term investment options as they’re not generally seeking liquidity and are uniquely positioned to absorb short term losses as their investments mature.
While this can certainly be the case, it does rely on the family and management involved being well aligned with the investment. A change in management or a mandate from a next-generation family owner can cause rapid changes that could influence divestment or result in a loss of interest in investing in next-round funding.
Another aspect to consider is that family offices may not be pressured to cash out for the same reasons as other institutions; this doesn’t mean that they aren’t prone to cyclicality of their own. Family office succession, management changes and even fluctuations in capital requirements are just a few issues that can all influence family office investment decisions and prompt changes in previously plotted courses.
Drivers of decision-making
Within single-family offices, internal ambitions often influence investment decisions. With this naturally comes an emotional aspect that is not only difficult to separate from the equation but can also cause unanticipated changes in decisions.
As such, the potential for emotive decision-making is a variable that must be evaluated along with other non-financial factors that may specifically come into play in family office investment decision making processes. These may include things like succession, next-generation engagement and future private equity deal flow, to name a few.
This can make the evaluation process rather complicated and filled with complexities that aren’t encountered when dealing with venture capital firms.
Portfolio strategies are critical
Defining a solid, clear portfolio strategy not only takes time but also requires the input and buy-in of multiple parties to make direct investments work. This definition involves considering aspects like asset classes, return, as a whole while also looking at how the portfolio could potentially support another company at a specific stage or point in time. Simultaneously, investment timelines and exit strategies also need to be taken into account.
In many instances, family offices do not have this type of clarity within their portfolio strategies, or they may lose sight of these as internal changes or opportunistic events arise that shift their focus.
With their primary focus on investing, venture capital funds have clear, well-defined investment strategies and a global view of the greater portfolio that they manage. They know the types of early stages companies they are looking to invest in, the potential returns they’re looking for and a well thought out exit strategy. They also have screening criteria in place that ensure efficiency in the decision-making process.
When it comes to raising capital, family offices may not always be the obvious choice that many have been led to believe they are. Do they offer unique advantages? Certainly. Are they always preferable to venture capital? Certainly not. Instead, the decision comes down to the alignment of the investor and investee’s objectives and strategies.