Families have a history of building successful operating businesses, and many seek to re-energize the wealth creation engine for later generations through direct investments in operating businesses. In recent years, there has been increasing interest among families to build out direct investment programs with meaningful resources and expertise—as they seek strong returns, more control of assets, and longer investment time horizons—often through co-investing with other families. This session provided a framework for families getting started with direct investments and discussed key governance considerations.
- Nate Hamilton
- There are fewer public companies than at any time in the last 20 years, and today there are over 30,000 successful private businesses in the U.S. that are owned and operated by people over 60 years old. Average private equity acquisition multiple has gone from ~6x in 2001 to ~10x in 2018, with banks driving prices higher. However, private equity is still an attractive investment vehicle for long duration assets and compound, tax-deferred returns.
- According to recent Family Office Exchange research, direct investing families appear to be quickening the pace of their investment, with over three-fourths expecting to maintain or increase their current pace of investment over next two years.
- Co-investing with other families creates complexity in governance and risk which should be thoughtfully considered. Building a direct investing business is time consuming and complex and families should consider the following:
- Roles/functions to outsource vs. manage in-house.
- The amount and duration of capital to commit as well as the holding period and target return and the timing in the market cycle.
- Compensation targets for investment team. It is also advisable to have a sound and clear investment process for direct investment opportunities in place, given the need to move quickly.
- Co-investing with other families allows a family to leverage the power of their network, share expertise, and spread capital across a broader base of deals. Having shared values and common views on risk-taking allows for sustained trust in your investing partners.
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(FOX Members only)