Ah, the family office LP. They’re often small, secretive, uninterested in risk, and difficult to penetrate. They’re also the lifeblood of many private equity shops. In a recent survey of 34 family offices, data service Preqin found that family offices are actually not as hostile to private equity as they’re perceived to be. In fact, 64% of those said they will establish some new relationships with private equity firms in 2010.
So keep that in mind, placement agents. Also keep in mind that Preqin chose its survey subjects from its own database, and I assume a family office would only be included there if there was already some connection to the private equity industry.
But it’s actually their attitudes that matter here.
Apparently family offices counter-intuitively feel that the big bad buyout barons really do care about their needs. Just over half of those surveyed, or 52%, said they agree GP and LP interests are aligned and only 44% disagreed. That’s a shocker because in a December survey of all types of investors in private equity, a whopping 57% said interests weren’t aligned. So out of all your LPs, the family offices are less likely to be disgruntled.
But that may be because the family offices believe the big pension funds and endowments will do their dirty work of pushing back on terms for them. One investor credited any improvements in terms to the efforts of large pension funds, saying simply, “Family offices aren’t big enough and don’t have the capacity to push for these changes.”
So say you’re courting family offices for an investment. Which qualities do they admire best, besides, perhaps a “family man”? Unsurprisingly, they care about track record and experience. Other random requests include fewer professionals in the key man clause, GPs using non-recourse loans from banks for their commitment, and greater transparency of fees.
Their wish list also included stability of teams, quality deal flow, and a unique investment strategy. Just as important is an understanding of the needs of a family office. They require lots of TLC in the form of a close relationship and good communication. I believe the word used was “hand-holding.”
On the plus side, family offices are more flexible with investment strategies. They’re not constrained by regulators and able to move very quickly on commitments. Lastly, family offices take a longer-term perspective on investments, all of which aligns itself quite nicely with private equity.
Download report from Preqin, a useful data service which infuriatingly uses a “q” with no “u” in its name.