Family offices — the secretive investment teams that manage personal fortunes — are beginning to sour on private equity funds, according to experts at advisory and financial services firm CohnReznick.
Many of these investors have instead turned to a new middleman for deals: independent sponsors. Unlike traditional private equity firms —which raise capital en masse for a fund, then deploy it to various investments over several years — independent sponsors often work deal-by-deal. They source opportunities and facilitate group investments through tight networks, so that investors get a slice of the deal rather than a tranche of a pool. It’s riskier, yes, but also far less costly.
“If you look at the traditional private equity model, family office involvement has been as a limited partner,” said CohnReznick’s Jeremy Swan, managing principal of the financial sponsors practice. This typically means paying the standard 2 percent management fee and 20 percent performance charge. Family offices, which tend to be the smallest institutional investors, rarely have the negotiating power of large pension funds or endowments. “It’s a bit of a black box model; fees can be fairly onerous and there’s a lack of control,” Swan told Institutional Investor in an interview.
“Family offices are chasing alpha,” he added. “The independent sponsor model has become much more attractive.”
[II Deep Dive: The Allure of the Family Office]
Independent sponsors often have backgrounds in private equity or are looking to build a track record and raise their own funds eventually, Swan said.
A source close to the sector provided a list of some leading sponsor firms: VisioCap, Tygon Peak, Fletch Equity, Valley Ridge Investment Partners, and Cornerstone Capital.
The sector has matured from somewhat shifty roots, when so-called “fund-less sponsors” acted as deal brokers rather than investment partners. According to Swan, “a lot of those less desirable firms have been weeded out.”
The successful ones have contacts in the family office world — but getting those is a major hurdle. “Many of them would give their right and left arms — and probably a leg too — for introductions to the right family offices who are looking to put money to work,” Swan said. “A lot of them are relying on their law firms, and family offices are all talking to each other. The biggest challenge for independent sponsors and family offices is making that connection.”
Family offices have traditionally avoided public visibility at all costs. The organizations tend to operate under vague names and many won’t disclose the source of their funds. (Michael Bloomberg’s operation, for example, is called Willett Advisors.)
Investing directly can put family offices in a tricky position.
“The nature of the beast is that they’re forced to be a little bit more open,” Swan said. “I was having this conversation with a family office a couple of weeks ago at a conference. You want to keep the family name out of view of the market, but at the same time, you have to be out in the market. One of them has to give.”