Family offices are moving more into direct investing and away from committing to private equity funds as they look for ways to avoid paying high fees, according to John Rompon, managing partner with McNally Capital.
“There is a strong trend among them toward making direct investments in private companies,” Rompon told PEO during a recent interview. “When they invest directly, they don’t pay any management fee and they don’t share profits. And there are many tax and estate planning advantages associated with making direct investments.”
McNally Capital advises more than 300 family offices with investable assets between $250 million to more than $1 billion. About 80 percent of McNally's family office clients are located in the US, with the remaining 20 percent split between India and the United Arab Emirates. The firm also advises endowments and foundations.
Despite growing appetite, the families McNally works with are not satisfied with the fee structure of their private equity relationships, Rompon said. In response, they are doing two things: they are making a smaller number of larger investments, in part to raise their commitment level so they can negotiate better terms, and they are “aggressively” pursuing direct investments.
Still, family offices will never fully back away from committing capital to private equity funds, Rompon said.
“Most families have a reach that exceeds their grasp when it comes to making a lot of direct deals. [Most] families will maintain direct investments as satellites to core fund investments,” he said.
When it comes to committing to funds, family offices are targeting funds with a “specific strategy” as to geography or sector, Rompon said.
They “favour these funds in part because families value targeted manager expertise and because strategy-specific funds generally maintain a certain risk profile throughout the life of the fund,” Rompon said. “Families can better understand the risk when they take it and while the fund invests, in contrast to a more generalised fund that has a broad mandate and might engage in some strategy-creep with little or no notice to investors.”
The funds that have given the family offices he works with the most “difficulties” are those that have a very
Most families have a reach that exceeds their grasp when it comes to making a lot of direct deals. [Most] families will maintain direct investments as satellites to core fund investments.
Family offices are particularly interested in specific sectors, including water, infrastructure, food and clean technologies, Rompon said. “What all these have in common is their character as fundamental human needs. These are things that the families can get their heads around in terms of understanding the need and risk that they represent.”.
In infrastructure, family offices are more interested in the service or products that support infrastructure projects, rather than the projects themselves, he said, noting as an example they would not want to back “the road builder, but the company that makes a specific axle that the primary construction vehicles use” to build the road.