With that backdrop, thinking about the best way to interface with a family office becomes a bit easier. The first takeaway should be obvious. Just as there is no uniformity to family offices, there will be no uniform way to deal with each family office. Each relationship will be predicated and influenced by the individual firm. That being said, there are some general benefits and considerations that should be measured.
One major benefit of working with a family office is the ability for the firm to bring more than financial capital to an investment. When thinking through investment partners, we often think about the “three forms of capital”: intellectual capital, relationship capital, and financial capital. In many cases financial capital is the most fungible of all. If the principal of a family office has extensive industry experience and relationships that are relevant, that can be a huge positive to a firm seeking investment partners.
Additionally, family offices can often operate with much more speed and flexibility than traditional investment firms. Unlike institutional funds, many family offices do not have a formal mandate or even an investment committee. The general goals come down to the determination of the principals, and as such, investments can be made much more quickly and unique structures can be deployed.
Similar to structure on the entry, family offices can be very flexible on the exit of their investments. As mentioned above, they are often longer-term holders, which can be a valuable asset to have in a capital structure. Furthermore, family offices are often natural buyers as companies scale and grow, especially to a family office whose principal has deep domain expertise.
Finally, family offices often make investments on metrics other than those that are purely financial. Whether it is a pet project in which they want to invest (e.g., a winery or golf course) or based on a relationship, family offices often make investments looking at overall utility to the principal, rather than pure IRR. This aspect is obviously a double-edged sword and can lead family offices to immediately rejecting very attractive opportunities. However, when approaching a family office it is always best to frame the opportunity in terms of their passions. Try to visualize the investment within the types of capital buckets that will exist in their minds.
As such, it is incumbent upon anyone who is soliciting capital to think seriously about approaching family offices. While this prospect will have to be much more nuanced than the “spray-and-pray” attitude generally adopted by many seeking funds, it can be very fruitful in the long run.