Family offices target management teams to deliver superior returns

Savvy family offices are increasingly looking to find and back strong management teams in their quest to achieve superior returns, particularly when it comes to private equity-type investments.

A senior family office investment officer told Family Capital that the fierce competition to source direct deals is leading family offices to increasingly look for management teams that are close to an asset and can deliver superior returns. “We like to find really successful private equity teams that have come to the end of their fund and sold their assets, but are thinking about their next move,” he says. “We tell them don’t do it again with a load of investors just do it with our money. Let’s make our own fund of one.”

Management teams are more likely to make money from these assets because of their expertise and proximity to an asset opportunity, he adds. Typically, a mid-sized family office might have around 10 individuals in the front office and 10 in the back office. A lot of time is going into origination by the front office. And it is sometimes difficult to find time to do much else.

“A good management team will really earn their money, particularly when it comes to a complicated transaction, where there isn’t going to be many ways to maximize value,” says the investment officer. “It’s a full-time job extracting the value from that company, or asset. This is when you need a good management team.”

The popularity of direct deals has increased markedly in recent years as family offices seek to achieve higher returns than they can achieve in most public markets. Nevertheless, some advisors have suggested that family offices often aren’t doing enough due diligence on these deals, which could lead to problems further down the investment cycle. But by backing management teams, family offices can avoid, or at least, mitigate these problems – and at the same time achieve high returns.