Private market investing is increasingly preoccupying investment professionals of family offices as they attempt to gain greater yield and higher returns from their portfolios. But should those investments go into private equity funds, co-investment deals, or direct deals? Nextvest, a fintech startup, is making a pretty compelling case for the co-investing approach. Here’s why – and it might involve a big reality check for some family offices.
Despite the desire to do direct deals, many family offices are often kidding themselves they can do them successfully, says Nextvest’s CEO, Thomas Krenik. “There’s a high level of delusion around how to do a deal effectively in the family office space.
“We see nearly every day a case where a few people on the staff of a family office want to place their portfolios into high yield/high growth private markets, but these guys have little, or no expertise to invest efficiently. You look at any successful private equity investment house, like Blackstone, KKR, and Bain Capital. It took those guys decades to learn the craft.”
As many family offices are aware, if they want to do direct deals themselves the cost of hiring staff to do so is hugely expensive. As the New York City-based Nextvest recently said in a perspectives piece on its website : “The fixed cost of keeping these pros in your living room starts rolling at a conservative $2.1million per year (an annual salary sum of around $1.4 million, with travel & expenses, benefits, and office space rounding out to about $2.1 million). Shy of paying them in kindness or charging for coffee, the bill can’t be trimmed much tighter than that.”
Nextvest says that sort of commitment only makes sense if a family office is willing to commit $100 million-plus to private equity. “There’s a difference between deciding you want to do deals and going out and finding the deals yourself,” says Krenik. “As well as finding the appropriate level of due diligence yourself and having the internal decision-making capability to pick winners over time. That is where the system breaks down.”
But at the other end of the perspective – private equity funds – Krenik reckons family offices aren’t getting a good deal. “Many family offices don’t want to do private equity funds because they have very long lifetimes and low transparency.” The other thing is that family offices are going to have to pay maximum fees to gain access to many of these funds. “If you look at the limited partner makeup of KKR, Blackstone, etc, they’re all institutions. If you’re let into these funds as a family office you’re at least going to pay maximum fees – and sometimes extra fees just to get into the door.”
Krenik adds the style of these big private equity funds is also something that few family offices are interested in. “Many of these funds have priced themselves out of the style of deals family offices want to do, because they’ve become so big.”
So that leaves co-investing as the best option for many family offices, says Krenik. “The benefits of co-investing for a family office are numerous, not least that they have more portfolio control – they can decide what trends they like and invest in them, and they don’t have the expense of setting up an in-house team, but they still get that individual asset control. They’re also closer to the liquidity of that investment because individual companies are designed to run on say a three to seven-year timeframe, not 12 to 18 years.”
Nextvest set up a platform offering investors co-investment opportunities through a network of fundless sponsors. Sponsors show co-investment opportunities, which are fully vetted by Nextvest, to investors on the fintech group’s platform.
Krenick says the original concept was tested on Wall Street bankers. “These are some of the most sophisticated investors around and they really liked the platform.” Through the success with these investors, Nextvest started to meet family offices and Kenrick says they now comprise most of their clients.
“Historically speaking most family offices have done a pretty bad job in doing deals and the reason for that is most of them are being done on social signals – so many family offices are doing these deals with their family office friends…these social mores around deal-making have led to a set of behaviours that are often inefficient,” he says. “We hope Nextvest can offer something different.”