In pursuit of more control, discretion and lower fees, family offices are migrating away from traditional private equity funds toward direct investing. What is driving the trend? And with multiple ways to access direct investments, how do you select the right approach for your family office?
3 Direct Investing Options for Family Offices.
As a family office investor, you have three alternatives for direct investing, each requiring distinct resources and skills:
- Build an In-house Team
- Generate Deal Flow on a One-Off Basis
- Partner with Independent Sponsors
1. Build an In-house Team. Not surprisingly, the cost of building a robust internal private equity team is substantial. That’s because successful private equity investing is about more than the capital allocation. It’s about sourcing and vetting hundreds of companies before finding the pearl. It’s about creating value through financial, operational and human capital strategies. It’s about knowing the right time to pursue add-ons and liquidity events. And it’s about managing multiple direct investments—in disparate stages of the lifecycle—simultaneously.
You will need a team, not a singular resource, to provide the necessary skills and domain expertise. While the largest family offices can afford to hire and maintain an experienced team, the cost is prohibitive for small-to-mid-sized family offices.
2. Generate Deal Flow on a One-Off Basis. If your family office generates deal flow independently or through its limited network, you’d likely acknowledge that you see only a small number of opportunities. To generate more deal flow, some family offices partner with a cohort of like-minded family offices, while others pay for deal flow through third-party relationships.
These approaches may be fitting, based on the size of your family office. But regardless of how your in-house deal flow is generated, you’ll still need resources and expertise to assess, manage and govern investments in your portfolio.
3. Partner with Independent Sponsors. As a family office, you are accustomed to outsourcing functions that necessitate specialized acumen. You may already be outsourcing your private equity investing. But family offices that turned for many years to private equity fund managers are now pivoting to independent sponsors.
“Independent sponsors raise capital on a deal-by-deal basis, allowing the family office to opt in to (or out of) known investments; there is no blind pool of committed capital up front.”
If utilizing an independent sponsor is an option for your family office, read on to learn more.
Like Family Offices, Not All Independent Sponsors are Created Equal.
You will find vast differences in the skill set and investment approach of organizations that go by the name “independent sponsor.”
Skill Set. Ideally, the independent sponsor has expertise at the intersection of investing, operational and domain know-how in a Venn diagram. But in practice, most sponsors have knowledge within only one or two buckets. For example, many independent sponsors are one-man bands with roots in the investment banking or private equity world and a focus on financial engineering, M&A and structuring. They’ll tap into their network to bring outsourced sector expertise. Only a small number of independent sponsors feature robust staffs replete with financial specialists and dedicated industry luminaries that blend investment experience with deeply relevant operating and domain experience.
Independent Sponsor Venn Diagram
The “Ideal” Independent Sponsor Skill Set
- Source deals
- Diligence companies
- Structure investments
- Create and implement value creation strategies
- Identify and procure add-on investments
- Execute liquidity events
- Manage a portfolio of investments
Track record is one measure of the efficacy of the sponsor’s abilities. Has the sponsor demonstrated the talent to generate sufficient deal flow with access to high quality off-market investments? Does the sponsor have a proven track record with realized IRR and MOIC?
Investment Approach. Predictably, the sponsor’s skill set influences its investment style and approach to value creation. Sponsors with robust expertise in investing, operations and their chosen sectors are likely to take a more holistic approach to creating value, including: providing operational guidance; instilling governance and nurturing human capital; using domain expertise to earn the trust and respect of company management; and so on. Nonetheless, sponsors with more narrow competencies can still be successful.
Because each sponsor has a distinct investment style, the important factor is whether the family office understands and aligns with the sponsor’s approach. Questions to consider include:
- Is the independent sponsor a strategic buyer or financial buyer?
- Does the sponsor build value through addition or subtraction?
- Does the sponsor play an active role in company management?
- Is the sponsor hands-on or hands-off with its strategic advice and guidance?
- Does the sponsor partner with company management?
- Is the sponsor interested in preserving the owner’s legacy?
What’s behind the Recent Growth in the Number of Independent Sponsors?
The growth in independent sponsors has gone hand-in-hand with the growth of private equity investing. We found that shifting dynamics prompted this growth:
- Select investors grew disillusioned with blind pools and substantial fund fees.
- Select investors sought out skilled, experienced teams for their direct investments.
- Private equity investment managers faced increased competition for capital with the ballooning number of pooled vehicles.
Over the past five years, independent sponsors have gained a strong toehold in private equity, particularly in the low-to-middle market, where investments are often less competitive.
To learn how family offices can access direct investing through independent sponsors, visit Akoya Capital’s website.
Akoya Capital, LLC is a Chicago-based, sector-focused independent sponsor founded in 2005. With investments led by sector-defining executives, the firm strategically blends financial acumen and operational expertise with deep domain knowledge. Akoya Capital partners with company founders to develop and execute powerful value creation strategies. The firm champions growth through strong leadership, governance and operational guidance. Akoya Capital offers direct investment opportunities to family offices.