Katie Kalvoda, who manages money for a small group of ultrawealthy families, was thinking about investing in an urban farm that grows produce vertically in greenhouses. Knowing that early-stage investments in startups can be dicey, Kalvoda found a way to reduce the risk: She joined a group of other money managers in the offices of wealthy families to do the deal. Combining forces gave these family offices the muscle to get a better price, expanded access to research, and provided them with broader expertise to track the investment.
Family offices are trading in some of their traditional secrecy and pooling assets and intel to make venture capital and private equity investments, much as buyout firms do in so-called club deals. “We’re a block of investors working together with more scale,” says Kalvoda, who is chief investment officer at family office Newport Wealth Management. “We don’t have this wall of secrecy that we had at one time.”
Family offices that want to invest in nonpublic companies typically do so through intermediary fund managers that pick the companies, set the terms of a purchase or sale, and keep tabs on the investment. The third-party firms usually charge management fees of 1.5 percent to 2 percent. They also keep 20 percent of profits and require investors to commit money for as long as 10 years. “Since the financial crisis there’s been a question about whether the value-add from an intermediary fund is worth the cost,” says Ashby Monk, executive director of the Global Projects Center at Stanford University, which studies the movement of financial assets. “For these big families there was this perception that they were often getting screwed by Wall Street.”
Family offices cooperating on deals “is a relatively new phenomenon,” says Raffi Amit, a professor of entrepreneurship at the University of Pennsylvania who is chairman of the university’s Wharton Global Family Alliance, which researches family-wealth management. Families usually don’t publicize their stakes or performance, he says. “The jury is still out on whether this will lead to higher returns on investment capital.”
Ward McNally, whose family co-founded mapmaker Rand McNally, has been advising family offices on joint investments as managing partner of McNally Capital, which serves as a merchant bank to family offices. One of the biggest challenges is reviewing enough deals to find an attractive one, says McNally, whose firm in 2010 helped 12 family offices create an alliance called the Cleantech Syndicate with $1.2 billion to invest in clean-energy companies.
Wealthy families such as the Rockefellers have long had offices that oversee their investments, as well as provide accounting, estate planning, and other services. Relative newcomers such as Bill Gates and Michael Dell have them, too. Single-family offices hold about $1.2 trillion in assets, and ones that serve a group of families manage about $500 billion, according to Bob Casey, senior managing director for research at consulting firm Family Wealth Alliance. Many are big enough to operate like a pension fund or endowment, with a staff to choose investments. About 22 percent had three or more people devoted to finding and managing investments in nonpublic companies in 2010, according to a survey by McNally’s firm. That percentage has almost doubled to 37 percent as of this year, says McNally.
Even with added staff dedicated to direct deals, families are finding alliances valuable—especially to locate investments globally. SandAire, a multifamily office based in London that manages about £1.9 billion ($3.2 billion), formed the Wigmore Association with other family offices in 2011 to share research. The seven members are based in the U.S., Brazil, Germany, Canada, Australia, and the U.K. Some Wigmore members collaborated last year on two investments in private companies in the U.S. and the U.K., putting in a combined $20 million. Due diligence was first done by the family based in the region of the investment opportunity, and then interested members did follow-up research, says Marc Hendriks, chief investment officer at SandAire. The deals they are cooperating on are early-stage technology businesses or startups based on new patents, says Hendriks, who declined to give the companies’ names.
Newport Wealth’s Kalvoda says families should consider setting up a separate entity for group investments to make sure the offices aren’t forced to register as investment advisers and therefore reveal financial details. The registration requirement stems from the Dodd-Frank Act of 2010, which exempts family offices that are owned and controlled by family members and don’t advertise or provide investment advice to nonfamily investors. The added effort to join forces on direct investments is worthwhile because of the ability to create scale and tap into each other’s expertise, Kalvoda says. “With like-minded and friendly investors along for the ride, you can leverage each other’s strengths,” she says. “When it comes to negotiating, you ultimately carry a bigger stick.”