FAMILY OFFICE PRACTICES/OPAL

Several presenters at the OPAL conference discussed matters of alleged importance to the operation of family offices and multiple family offices.

As with any enterprise, it is important to avoid cyber risk.  In 2017, reportedly 28% of family offices were attacked, particularly by phishing.  The greatest risk is penetration through third party vendors or employee failures.  A two-factor password protection is recommended.  You are not necessarily entirely safe in the cloud.

How to think about the U.S. political climate?  One investment advisor (not clearly of the majority view) pointed out that generally the public markets appreciate over time regardless of the person or party in power.  Although historically in U.S. politics the party in power is supremely advantaged by a strong economy, it is not quite clear that this is the current case as increased political partisanships may have promoted issues of governance and immigration even above the economy in the voter awareness.

There was a discussion concerning “drift” by advisors managing funds with a change in focus or in emphasized sectors.  To some degree, it was thought that you want a manager who is awake to trends.  In this regard, a couple of presenters noted that they always try to discuss, with potential fund managers where an investment is contemplated, the views of the younger people in the fund team to see what is going to happen in the future.  However, a drift in manager “style” may not be a recognition of requisite flexibility but rather a harder-to-analyze change in world view.

How else do you diligence a proposed investment in a fund?  You need to talk to all levels of management in the fund.  You need to talk to other investors to see if they pool their knowledge and diligence in order to provide broader insight.  Diligence is best done at the point in time that a fund is being formed as opposed to once it is up and operating.  Seemingly implicit consensus that a fund of funds is not how family offices should invest.  Indeed, there is some suggestion that family offices, at least if bonding together in “clubs,” can themselves handle their own investment decisions and avoid give-up of cash flow and equity to fund managers.

Check a fund manager’s ADV filings.  If a manager is involved in multiple funds, how are opportunities allocated, will the manager have enough time to spend on your fund, will you be afforded an opportunity to invest in parallel, in a side pocket (often reserved for people early to putting money into a given fund or for larger limited partner investments).

There was also discussion about assuring the independence of the LPAC (Limited Partner Advisory Committee which would resolve conflicts between the LPs and the manager), and how to handle the now-nondeductibility of the fees assessed by a promoter in setting up a new fund (a couple of ways work for this; giving the manager a profit interest instead, or paying the fee outside of the fund structure).

Key issues in due diligence on operating companies in which you are considering an investment:  Is there a clear plan of profitability?  Does the term sheet provide sufficient deal control to maximize preservation of principal?  Do the founders have “true grit?”  In evaluating companies, family offices were advised to have and completely follow their own due diligence protocols and due diligence questionnaire items, particularly in areas not covered by the PPM. 

Finally, consider the role and percentage of “impact investments” which have substantial social fallout; often a way to deeply involve children into the family office and business.  Consider flipping the standard family office emphasis on public market investments, which can be volatile and pricey; one presenter suggested at least 60% of investments should be in private deals.  Rely on public markets only for investments in volatile new technologies such as AI, genomics and cyber.  Consider using AI and machine learning to judge risk; in the market, most changes are usually for the negative and “velocity foretells losses.”  Keep two to five years cash available so you need not be forced to liquidate during dips, and so that you have dry powder for buying opportunities.


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