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The family office real estate co-investment strategy

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Single-family offices in the real estate space often develop deep expertise.  For some families, real estate investing is almost all they do and their sector experience means they morph into what is effectively a privately owned real estate office.

Years of transacting in the sector may mean these families have significant experience in accessing off-market deal flow.  Or they may have specialised in taking planning or development risk. They know the local service providers, including the real estate fund managers, and can provide effective market access to other families unacquainted with a particular city or regional market.

 A family office will not invest with another simply because they are a family office

Because of this, some family offices wish to trade on their expertise by opening up to outside investors on a commercial basis and become multi-family offices.  Others want to open up to co-investors on a ‘family office rates’ basis. In this case, they will charge for service but at a substantial discount, perhaps on a cost-plus basis.  The way this is structured and paid for may seem like a subtle distinction, but it can be decisive in whether another family office wishes to participate. They are, after all, notoriously fee-averse.

Once the decision has been made to open up to outside investors you still need to find them.  This can be complicated or straightforward. The low-hanging fruit is friends and family of the principal, who may be happy to invest on the basis of trust, connections and historic returns.

But once the principal runs through his black book it becomes more complex.  For one thing, unless the family is a long-standing real estate brand like the Duke of Westminster in the UK or Donald Bren in the US, then trading off its name alone to attract investors becomes less relevant.  A family office will not invest with another simply because they are a family office. Now the relationship has changed and the prospective family are providing the money in return for the other office providing the “brains”.  

They will expect to deal with real estate experts who have a deep understanding of the market and can explain why their strategy works.  This may be accompanied by professional decks, a website that is more than a placeholder and a formal public brand. Employees will need to be identified or hired who can access the market and sell the story effectively.  

All this will take time and cost money.  This can be difficult for some principals to swallow.  Their idea of marketing may be hosting a party on their yacht in Monaco and inviting their friends.  They may not appreciate that family office executives do not enjoy such leverage.

Of course, accessing other family offices is notoriously difficult.  Most are private and by defensive. Typically they will only meet new people by an introduction.  Unless there is a compelling reason, such as the ability to access a new market or a trophy asset, those families already heavily involved in real estate are unlikely to partner with another family.  They consider themselves the real estate experts and too many cooks spoil the broth, as the saying goes.

A more promising target is those families who wish to dip their toe into real estate or regularly invest perhaps no more than 10% of their portfolios in the sector.  They are happy to consider themselves “the money” and willing to seek outside expertise.

More promising still are those families outside of the region you are investing.  If, for example, a US real estate family is investing in the UK it is probably easier to attract other US families than UK families.  Although not impossible you will have to get over the idea that a local is conceding a foreigner they know more about his market than he does.

Some family offices have a good network of other family offices to approach while others have almost none.  It’s not easy to build this network up from scratch when most family office conferences in the sector continue to run on a broken model.   The “free entry for families” model, with an agenda set by sponsors and dominated by service providers, is failing fast. As they say about Facebook, “if the service is free you are the product”.  This is not conducive to meeting genuine families and having open conversations.

Ironically, good relationships with service providers can be essential for reaching out to potential co-investors.  Private bankers, private client lawyers, accountants and trustees all have clients seeking opportunities from time-to-time.  If you have a good relationship with them they may refer these clients to you as a value-add. Of course, unless they are already retained by you, the quid pro quo is that they may then consider it only good manners to use them if you can in any future transaction.

There are a number of families who regularly co-invest.  They do so clubs and informal networks. Once families get to know each other and understand their risk appetites, psychological preferences and time horizons.  But, like almost everything in life, it takes patience and hard work to get off the ground.

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