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Family Offices Know Their Industries Where They Made Their Capital......But....

Working for a Single Family Office, I have the fortunate opportunity to speak with and look at many deals with other Single Family Offices. The issue that many Single Family Offices have is the ability (or inability in many cases) to do the due diligence that is needed. Why? It primarily has to do with the lack of expertise in the area that they are reviewing. Now, this is understandable for several reasons. Maybe they made their money in steel or fashion, or chemicals and sold out after building that business over the last 40 years for a few hundred of millions of dollars. I am pretty sure that if you were to ask the Patriarch about a deal that you were looking at in their area of expertise, he could size up the opportunity in a matter of just 5 minutes. Lets be honest, these Patriarchs /Matriarchs are very very smart intelligent successful people. But to be able to get into the nuts and bolts of investing into a hedge fund, a private equity deal or a real estate transaction and understand the intricacies of the transaction could take them years. Just like it took them time to become successful in their area of expertise where they created their wealth. This is understandable; after all, some people have made it their career by focusing on the hedge fund, private equity, or real estate field.

Another reason for the shift towards direct deals, according to a report by iCapital titled "Family Offices are going Big on Direct Investments," is the desire for the family office to avoid the fees associated with gaining exposure via third-party funds. My question is "will wanting to avoid these "fees" end up costing the family office more money in the long run because they did not understand what they were investing into, or could not do the real due diligence that was needed?" While talking with a family office, I experienced this first hand, or should I say was watching the whole thing unfold before my eyes. An example of this can be explained through a story. On one Friday, I was speaking with a family office CFO, and I said "what are you doing this weekend?" and his response was "I plan on spending my whole weekend trying to understand this oil and gas deal that our Patriarch wants to invest into." The first thing that came to my mind was "uh oh," and secondly I was thinking "people spend their whole life in that space to understand it and your going to understand this is only two days?"

This future trends for Single Family Offices will be them going back to funds or by targeting professionals to work with. This idea started to resonate with me after a dinner I had with Ron Diamond from Diamond Wealth Strategies a few months ago. He commented that he sees family offices moving back to funds in the future and away from direct investing after they start to see the faults they made in their investments and come to realize that perhaps this is a little bit tougher than they imagined. Maybe this is why a recent trend is hiring experts in their respective fields to become part of a family office is happening. In a Jan 2017 Forbes article by Russ Alan Prince titled "Single-Family Offices are hiring Hedge Fund and Private Equity Investment Talent" Russ goes on to say "a driving trend in the world of single-family offices is that they are becoming increasingly professional. Part of this drive is drive-in upgrading single-family offices is hiring experienced, proven investment talent. This is, even more, the case when it comes to investment professionals with hedge fund and private equity backgrounds." The same was noticed by Angelo Robles, founder, and CEO of the Family Office Association who said: "We're seeing family offices raising the bar when it comes to the quality of investment professionals they're hiring." What's even more telling is that some experienced and exceptional hedge funds managers and private equity fund managers are joining family offices." For me, that was one of the main reasons why I made the decision last year to focus strictly on real estate as my area of expertise in the single-family office space. More and more family offices are understanding the importance of hiring experienced, proven investment talent in their respective industries just as Russ Alan Prince noted.

In an industry where 99% of the family office executives "fell" into their role because they were someone the Patriarch trusted. (an old banker, a financial advisor at a wirehouse, or accountant) It seems that this trend of increasingly bringing on experienced professionals in their respective area of know-how will continue to increase.............I believe after many of these family offices see the results of their participation in the direct deals, they were doing in the past few years come to fruition.
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