Especially over the past three years, family offices have been increasingly active in direct private company invests. What is new is that some family offices are investing in “search funds” that basically back an entrepreneur to seek and buy an existing business to take it to the next level.
The participation in Search Funds is an ongoing trend amongst family offices to take a more active role in private equity (PE) investments, beyond investing in general partnerships or funds. Doing direct investments and co-investments has been on and off an activity for family offices that are already active in PE. We’ve published several articles on the topic lately and there has been quite a bit of coverage of the trend PE industry media. The trend is gaining moment and this month unquote’ ran a two part feature on how family offices are turning away from traditional PE towards more innovative vehicles or models. (subscription required).
Search Funds Bring Together Investors and Wannabe Entrepreneurs
The Search Fund model is a “unique bridge between investing in a traditional private equity fund and a direct investing strategy”, says legal advisory McDermott Will & Emery LLP. How such funds work, along with an entrepreneur’s experience, is described in Slate’s I didn’t want to build the next Twitter for cats. It is an objective source for background on this new twist on PE.
Having the right resources available to support direct investing and search fund stakes is important. The sourcing, background checks on sellers, screening, monitoring and exiting of direct investments requires manpower, according to Kate Kalvoda, CIO of Newport Wealth Management in Newport Beach, California, in a Bloomberg report.
It also requires legal advice. The law firm, McDermott Will & Emery’s latest newsletter has two articles about family offices and direct investing. Search funds are discussed in Just What You Are Looking For? — Family Office Direct Investing in Search Funds, describing exactly what a search fund is, along with the pros and cons of the model as a vehicle for a family office.
The same newsletter, Cross-Border Direct Investing, deliberates on the legal and competitive aspects of investing in foreign mid-sized companies with a focus on family office constraints and goals.
Part of an Overall Shift for Family Offices
Family offices, especially those managing the wealth of individuals who made their fortunes in business or commerce, have an affinity to private equity and private company investing. It looks like there will be much more innovation in strategies to come as they increase exposure to privately-owned companies.