Microcap companies have a voracious appetite for capital. It is incumbent upon the management teams to know how to raise capital efficiently. Yet the fastest growing segment of the investment community is frequently overlooked. What’s the fastest growing segment in terms of assets? If you’re thinking ICOs, hedge funds or private equity, you’d be wrong! Over the last 10 years, a relatively new class of investor has emerged with an insatiable thirst for deals. If you guessed family offices, you’re correct! Family offices are indeed the fastest growing segment of the capital markets. They are very private, so accurate data is hard to obtain. But the latest estimates are that family offices controlled between $3 and $4 Trillion in 2017, according to Bloomberg. And that number is growing significantly as UNHWIs or ultra high net worth individuals are minted in fast-growing economies such as China, Vietnam, and Indonesia.
The family office concept dates as far back as the 8th century in Europe, and even further back in China, where dynastic families controlled vast wealth and property, with accounting and reporting procedures that would put many modern-day institutions to shame. The first well-documented example of the family office in Europe was the Medici family, founded in 1169. Known as the Medici Bank, the Medici family were the wealthiest family in Europe, and in addition to financing trade, financed whole governments. 19th century Europe produced the Rothschild Family, and in the U.S., The House of Morgan, followed shortly by the Rockefeller Family and others. Today there are over 2500 family offices worldwide.
Family offices come in all shapes and sizes ranging from $100M on the low end to several billion on the high end. Some follow very disciplined low-risk investment models, such as multi-family residential housing only, but most diversify their risk across strategies ranging from venture capital to public markets. I was talking to a colleague a few months back, who told me I’m wasting my time with family offices because “they only invest in real estate”. Nothing is further from the truth.
Where it is accurate that many Single Family Offices have real estate strategies, their holdings can be quite diverse. Consider TPG Capital founder David Bonderman’s family office, Wildcat Capital Management.
According to Insidermonkey.com, AUA (assets under administration) of Wildcat, are now more than $2.3B. And according to public filings, Wildcat has made a significant number of public company investments. The number of family offices is growing fastest in Asia. This is a result of the tremendous economic success in China, Korea, Vietnam, India and Indonesia.
Streamlined Decision Making
One of the most attractive aspects of the single-family office is SFOs manage their own capital. Decisions are usually fast, and are not laden with the layers of committees which are often typical of major institutional investors. SFOs offer many advantages over other investors such as hedge funds. In most cases when presenting a deal, you’re sitting across from not only the decisionmaker but the owner. Many companies often make the mistake of assuming that when presenting to a manager at a hedge fund or private equity company, they are sitting across from “the money”, while in reality, they are presenting to an analyst designed to evaluate your deal. You are rarely pitching “the money”, so SFOs represent one of the few chances. But be on your game, you’re sitting in front of the intellectual horsepower that created the family office in the first place. They understand a thing or two about business.
In many ways, family offices are nirvana for the microcap CEO looking for an anchor investor. So why aren’t most management teams focusing efforts on family offices? The first reason is the sector is so private that it’s off the capital raising radar. In fact, most SFOs do not have people on staff to market the availability of capital like a hedge fund. So SFOs usually see less than 5% of the activity in a sector.
Secondly, the family office ecosystem has its own protocols and language. Understanding the various terms and protocols is critical to success. For example, there are SFO’s (single family offices) and MFOs (multi-family offices). We’ve explained the clear benefit of the SFO, but it gets more complicated with the multi-family office structure. MFO can mean a lot of things. For example, (a.)are they actually managing the SFO funds with discretion to invest? Or (b.) are they recommending deals to the SFO subject to the SFO approval. You can achieve closure with either structure, but obviously, the discretionary account is best. There’s a “c” scenario in which some MFOs are purely service providers for legal, regulatory and administrative services, and leave investment alone. They may refer your deal to a client as a favor, but it’s unlikely the client is relying on their recommendation. So understanding the type of MFO, a, b or c, can save a lot of time.
Entering the family office universe can be difficult. Where most institutional funds have origination platforms that encourage inbound inquiries and are equipped to manage the process, most SFOs do not have this infrastructure. Deals that come in “unsolicited” go into a pile. And there’s no guarantee anyone will ever review the deal. So the best way to approach an SFO is to approach through a trusted advisor. Usually, that’s an accountant or a lawyer for the family. Accountants, in particular, are always willing to review a deal because they have the skills to understand the fundamentals. If they think its sound, they are happy to refer, because referring a good deal is considered “value add” for them. Purchasing a family office list and cold calling or even worse, mailing unsolicited teasers is a waste of time. The family office ecosystem is one based on multi-year trusted relationships. Do your research and learn who the advisors are for the SFO. Look at deals they worked on in the past and find a common tangent. That’s difficult and time-consuming!
Hack the marketing: Remember that family offices want great deals! They don’t see enough and routinely go to conferences in search of transactions. Last year I ran into several family offices at the Planet Microcap conference. I expect their presence to become more common as they reach out to more venues in search of deals. There are several regional and national family office associations that hold conferences. The Wilson Family Office Club offers services ranging from capital raising boot camps to presentation opportunities. Conferences consolidate buyers and offer the most efficient way to meet family offices. Many of these conferences are full of accountants and lawyers offering their services. Optimize their presence by asking “do you work for any family offices”. If the answer is yes, then you may be able to leverage their relationship. And they’ll be happy to help in the interest of getting your business.