Interest among growth businesses in patient private capital has never been higher, yet for many finding their ideal investor, particularly a family office has never been a more complex and a tortuous journey.
Conversely, if the objective for family offices is to increase the number of superior direct investments, then shouldn’t they first increase their own probabilities of identifying and welcoming high potential prospects? That’s not usually done through gatekeepers and hiding in the shadows.
Family offices, active in direct and co-investing today, need to carve their own future rather than compete head-on with other professional investors. They need to do this in three ways: maintain an abundant mindset; to be seen as a committed investor with a strong brand to growth businesses; and, be highly conscious of their own behaviour and language.
Let’s address the mindset issue. The biggest killer of growth businesses is not capital, it is management, who cling onto a scarcity mentality. What do I mean? They have made it but they don’t live like it. And typically this manifests itself as a lack of trust or belief in their own success and their ability to perpetuate it to the next level of growth.
But family offices, particularly those where the family’s wealth has passed through multiple generations are ideally placed to help and share their successful practices. They have learned to live with ambiguity and trust their investment acumen. Many have also acquired resilience learned the hard way from past failures.
Today’s battleground for much sought after direct and co-investment opportunities is about skills, good judgement, and brand power. The brand part should be well understood. Whether you choose to accept this premise or not, entrepreneurs, executives and their advisers will make a judgement about your family office and its direct investment brand. You can create, build and exploit it or you can leave others to do the work for you.
There is a reason that Blackstone, Accel Partners, and MSD Capital are often the first port of call for ambitious entrepreneurs. There is a carefully crafted perception that their brand brings superior value to the businesses and their limited partners. Why should your family office be any different?
There are three elements in the process of creating and nurturing the family office’s direct investor brand:
- Market need: Realise the market needs for family office investment in vibrant geographies, sectors, stages of growth etc. or ones that can be quickly developed;
- Capability: Nurture visible competencies like intellectual firepower, and show your ability to stand apart from most direct investors;
- Passion: Demonstrate passion for helping management address complex and ambiguous growth objectives.
So, family offices should build their direct investor brand, disseminate it in every way within the family office’s comfort zone such as peer referrals, networking, speaking, publishing, philanthropy and so on. Leverage the brand to attract other families, co-investors and people of interest while increasing the quality and quantity of the introductions.
The greatest risk for the perpetuation of a family’s wealth is never taking any risk. The same dynamic applies in growth businesses. Of course, what is needed is prudent risk taking. What might be obvious to the family office in terms of its financial strength, intellectual firepower, and cultural and social expectations, is rarely explicit to the outsider when it comes to the family office’s direct investment strategy. Equally, what is explicit, like their preferred approach to value creation, is rarely implicit in the family office’s past investment behaviour and actions.
Here is the rub for a great many family offices, which can lead to businesses asking: “so I accept your capital and learn to live with your irrational and opaque decision-making that has led to past mixed results with direct investments? I don’t think so”. This will often be the reaction from businesses that can afford to be choosy about the sources of capital they work with.
What potential investee businesses see a family office do, is more important than what they hear or read. Behaviours matter - and the use of powerful language to build trusting relationships with prospective management teams is critical.
So, the next time the family office direct investment team meets with the family principal to assess their performance, invite the principal to question where you are today, where you ideally want to be in future, and the changes required to excel in the above three areas.
Ask yourselves how outsiders might speak positively about co- and direct investing with you, no matter what your ultimate results. Follow these steps and it might just dramatically increase the return on your time invested in sourcing superior growth investments, more than you ever imagined.
James Berkeley owns and runs Ellice Consulting, a London-based consultancy that works with family offices