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Direct investing families are driven by more than financial returns. Direct investing requires a significant investment in time, energy and resources; therefore, families that enter this space often seek other benefits as well. For many families, direct investing can be an opportunity to leverage the family’s entrepreneurial roots, engage the next generation or achieve social impact more broadly.
2. Broad and Opportunistic Mandates
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Families typically prefer a few select sectors, but mandates can be broad and opportunistic.
Those who are focused on capturing a knowledgeable advantage through their direct investments favor sectors they know well. However, many are open to exploring new areas, especially if accompanied by other families who are experts in those areas.
3. Co-Investing with Other Families
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While some larger family offices prefer to do deals on their own, most families are open to co-investing with peers. Families are typically looking for more than expertise; they also want to invest with families they know, respect and trust.
4. Flexibility Around Control
While some families remain focused on control deals, there’s growing comfort with minority investments. Especially if a deal is in a favored sector and comes from a trusted source, families are open to flexible structures and don’t need to be in the driver’s seat all the time.
5. Personal Networks
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Personal networks are the primary sources of deals for most families. Families typically shy away from auction processes, and they place a lot of importance on proprietary deal flow. As a result, they increasingly look to leverage their personal networks for deal flow versus relying on traditional deal sources, like investment banks and professional advisors.
6. Private Capital
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Many families are gravitating towards deals that are uniquely suited for private capital.
In screening deals, families typically apply multiple filters. If a deal is in a favored sector and if it comes from a trusted source, it’s likely to stand out in the sea of business plans that are flooding family offices. Another filter that can be equally important is the situational dynamics behind the deal. Unlike a traditional private equity fund, families can leverage a long-term investment horizon and stay committed to a company until a strategic vision is fully realized.
7. Awareness of Partnership Challenges
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Successful families appreciate that there are practical challenges associated with partnership. Because relationships are extremely important, and it takes time and effort to build quality ones, it can be challenging to move forward on a deal that doesn’t come from a trusted source. Given the many new entrants in the direct investing space, there’s a perception that best practices aren’t being universally applied, and better provisions for minority rights need to be incorporated into legal documents.
8. High-Quality Pipeline
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Although rising valuations in the market are a source of concern for many families, it doesn’t appear to be significantly impacting the pace of investment activity. Finding quality deals and prioritizing which deals to spend time on is of greater concern for most families.
9. Strong Relationships with Management Teams
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Successful families focus on building strong relationships with management teams and finding ways to support them as value-added partners. Several FOX members have noted that the real work begins once the investment is made. This is typically true irrespective of the actual ownership position taken. Even families that take a more passive role want access to key decision makers and the ability to influence them.
10. Invest in Private Businesses
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Families offer unique advantages as investors in private businesses. They are well positioned to support invested companies as current or former owner-operators themselves. But they’re being sought out as buyers of private business for reasons that go beyond industry expertise and operating skill. They also offer capital that’s both patient and flexible, and this is very appealing to business owners that take a long-term view on their companies.