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Direct Investing by Family Offices: The Barbell Challenge


September 16, 2021

The direct investing process for family offices is an ever-increasing “barbell” challenge. Initially there is the process of evaluation and due diligence around the proposed investment, and then once the investment is made the perils revolve around data and maintaining the investment “reality”: IRR, ownership, reporting, etc. Investment on one side and operations on the other — this can be a big-lift for a family office.

Family offices are often portrayed as ideal investors for investments like operating companies because they have a “patient capital” approach. Also, many families made their money by building and selling a successful company, so the focus on direct investments is often driven by families’ desire for a more direct role in the management of their investments in order to increase control and net returns. Such investments can also play a role as a shared experience, with older family members encouraging younger members to get involved in the type of business they are familiar with.

When an office pursues the direct investing route it needs expertise, whether internal or external, to manage sourcing deal flow, conducting due diligence, negotiating direct investments, analyzing market trends, understanding transaction documents, or providing management support.

Once a deal is finalized, the office needs expertise around performance tracking, expense tracking, the aggregation of data reported by the investment, maintaining partnership allocations, reporting of the investment at a family entity net worth level, etc.

In many family offices both sides of these “barbell” challenges are managed using spreadsheets, which is often a mistake. There is an argument that if the office is only managing one or two of these investments then a spreadsheet works fine.

In the last few years, data from organizations like FINTRX, Family Office Exchange, Campden Wealth, the Financial Times, and others have shown that this is not the case. A quote from a Barron’s article (2020) referencing the FINTRX report claims that “more than half of the approximate 3,500 to 5,000 family offices around the world invest directly today, according to the study, which draws on the firm’s database of more than 3,000 individual family offices globally and the 13,000-plus direct investment deals they have tracked.” This figure is probably on the low side, but even from this information, the average could be five direct investments in a family office and the industry sector could be anything, from service and manufacturing, to restaurants and sports teams.

The complexity on the operations side of the barbell depends on how the investment is structured, such as which entities managed by the family office invested and under what terms. Is it a loan that must be tracked, what percentage ownership, is there a flow-through to another entity like a trust, how will the investment company supply data like a balance sheet, when will they do it, how will it impact the reporting schedule the office has, and so on. These jobs are part of involved business processes and workflows needed by an office to produce a report like this example for a loan:

statement of net worth spreadsheet showing direct investments

In this case, some of the data the office must track includes how the loans are being tracked and amortized, where the documentation regarding the loans is located, how the investment is being valued, whether this investment is reflected correctly at the trust beneficiaries’ level, etc.

There is a pattern forming on both sides of the barbell: the need for a best practice business process and workflow in dealing with the type and amount of information coming to the office when dealing with direct investments. The nature of the data and the manual processes involved call for a best practice approach, transparency, consistency, accuracy, efficiency, and effectiveness — and this is not easy using spreadsheets! The loan example above is a case in point, as it needs to be recorded, tracked, adjusted and reported on in an auditable system.

Very often people in a family office of “high value” are doing tasks they should not be doing but are forced to do them because of the importance of getting the task done right. What would the office gain if these people had an integrated tool that provided operational efficiency so that they could do real analysis around direct investments instead?

It would revolutionize the management and operation of single and multi-family offices when dealing with direct investments and beyond. To have a truly integrated platform, one that can facilitate the implementation of best practice business processes and workflows across multiple disciplines would solve challenges like having all the information for the loan example (documents PLUS accurate financial transaction information), in one place. It would be an enabler for planning and a strategic tool where the office has all the information to coordinate tasks and solve problems ahead of time.

A family office typically has great, dedicated, talented people, so if one single technology platform could provide the enterprise class processes, reporting, automation, and client delivery capabilities they need, then they could REALLY be in the business of managing the family’s affairs effectively, like direct investments. The end result is what the clients want: a highly engaged staff delivering excellent, timely reporting and service execution that is driven by automated, integrated best practices to provide best-in-class risk management.


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