Join the club
Families are often tempted by the idea of teaming up to pool expertise, but the reality can be less enticing than it sounds.
Fed up of paying two and 20? Tired of getting returns near the median? It may be time to strike a deal – and it seems that many family offices are joining forces for the first time.
Club deals, the staple of the private equity sector, are the flavour of the month. On both sides of the Atlantic, the world of family offices is awash with talk of who is striking deals with whom.
On the surface, the benefits are obvious: family offices joining forces – both financially and in terms of expertise – to get the best terms (and, hopefully, returns) for their investors.
One family office might have more expertise in the retail sector – thanks to the family’s underlying business – and might be best placed to advise on potential deals. Another might be better versed in private equity and be able to steer co-investors through the minefield of a new investment area.
Win-win, no? Well, that’s where you’d be wrong. While talk of club deals is everywhere – one family expert told me that at a recent conference, that “90% of the people there were looking for families to co-invest with them on a deal” – the actual number going through remains low. “In the hundreds,” several people close to the deals said.
But while the numbers of deals may be low, the amounts involved are high. Charlie Hoffman, managing director of HSBC Private Bank, talks of six or seven deals done in the past three years “in the $200 to $250 million (€153 to €191 million) ticket range”.
In 2010 the bank negotiated the $209 million purchase of 1625 I Street in Washington DC. “It was two times oversubscribed,” adds Hoffman.
Indeed, demand remains strong, particularly in terms of real estate and private equity deals. Joining forces with another family – or with a bank – immediately brings the benefits of economies of scale.
Pooling your resources will help boost your purchasing power. And, says Hoffman, what you are ultimately accessing is your business partner’s expertise.
It is not always entirely straightforward, though, warns Charlotte Thorne, partner at Capital Generation Partners, the private advisory firm: “If you are a family with a $100 million investment, then making $12 million in a direct deal will take as much effort and legal time as it would to do a $50 million dollar deal. It could cost you as much time and effort as the mega-deals and the return will be smaller as it’s a smaller deal.”
So what’s the point, to put it bluntly? “If you cannot move the dial on a really large portfolio but it takes up a vast amount of the family office’s time, then there is an opportunity cost in doing this,” she says.
Ceding control is another oft-cited issue. These are the family offices of some very powerful individuals – entrepreneurs or second- and third-generation members of some of the biggest business dynasties. Control can be critical.
These types of deals may also not be for the smaller, perhaps less sophisticated, family offices. While co-investing with another family or bank may open up routes into hedge funds and private equity, usually seen as the preserve of the institutional investor, minimum investment levels usually start at around $5 million.
But, weighing the pros and cons, it would appear that while club deals may have captured the imagination of family offices in both the US and the UK, they have yet to become the norm. Amid the sound and the fury, it remains to be seen if this new form of investing will ultimately signify nothing.
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