RECAP: 2018 FOX Autumn Global Investment Forum
| Presenter: Session Description: As interest in direct investing among ultra-wealthy families continues to grow, so do the challenges. How do investors maintain the discipline and risk controls of their overall investment program while allowing for the greater flexibility needed to take advantage of the opportunities in this space - while managing the many risks specific to direct investments. In this session, we explored different structures and approaches used by families to meet these challenges. |
Almost three-fourths (71%) of family offices invest in real estate properties, with almost half (47%) investing directly in operating businesses, according to the 2018 FOX Global Investment Survey. Nearly half (45%) are actively looking at direct deals, and deal networks dominated (41%) the source of deals entered in 2017.
A key component of a successful private investment portfolio is the development of a plan that provides a framework for deploying capital at risk and that provides flexibility to allow for inevitable changes to the plan. Having a plan reduces the chance of an over-allocation mistake and provides a framework for determining the appropriate number and size of investments.
As families consider a direct investing program they should consider whether to develop an in-house program or find an experienced partner. They should understand what models are available and which ones actually work. A successful direct investing program will include: sourcing, diligence, selection, execution, monitoring, and realization.
Families engaging in direct investing should engage in active risk assessment to measure the risk/return for direct investments in their portfolio. Dynamic financial analysis was recommended as a comprehensive approach to measuring risk.
Best practices for adding direct investment: 1) Deal Flow: investors must see enough deal flow to be discerning and selective; 2) Exposure Management: develop guidelines and stick to them and budget for follow-ons and the unexpected; 3) Be Flexible: sometimes opportunities are not neatly wrapped; 4) Process: put a diligence and approval process in place before considering direct investment opportunities; 5) Alignment: make sure it is there between management, deal lead and other investors.
Important considerations and watch-outs: don’t forget the basics (private, illiquid investments are private and illiquid), don’t start investing without a plan, don’t pick a bad partner (only invest with the highest quality, most trustworthy, and capable partners), don’t forget that structure matters, and don’t drag your feet (say “no” quickly and let partners know where you stand).
The speakers presented two case studies to show how a direct program can be integrated into an overall portfolio allocation. In one instance, the family brought legacy direct investments and the advisor worked to “reconcile” the direct investments within the overall portfolio, from the perspective of risk allocation, benchmarking, return expectation, and valuations. In the second instance, the family requested an allocation to direct investments, and the advisor helped size and source the direct deals.
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