One of the fastest growing trends within the family office sector is leveraging venture capital in long-term planning and strategy.
Expert Brett de Bank, a former wealth manager based in London, helps family offices and investors navigate the private capital marketspace through his company Capitama, a direct private investment network and platform for investors and Sponsors. He specialises in the relationships between private capital and private deals: the world of direct investing.
Recently, Tharawat Magazine had the opportunity to sit down with Brett de Bank to discuss how venture capitalism intersects with family office strategy, the most significant trends in direct investment and the unique value family offices bring to the table.
Why are more family offices incorporating venture capitalism as part of a long-term strategy?
Over the last decade, the venture capital space has witnessed a growing trend towards more direct equity investment. Both the volume of transactions and the amount of money committed have increased significantly. Higher education and the financial sophistication of the investor class have led to more people engaging in these activities. Direct investing offers families greater control and more flexibility and is arguably better aligned to the family’s long-term interests.
Direct investing has grown every year. In 2018, the US and Europe saw records broken, reaching new highs for money committed to the venture capital space. Despite a slight downturn in the number of deals done, the total volume and transaction size hit record levels.
What contributes to this trend?
Confidence in traditional fund managers eroded as a result of the 2008 financial crisis; the subsequent recession changed the way people invest their money.
Secondly, investors were dissatisfied with the level of service. In some instances, managers were not able to and did not react and adapt to their client’s needs – they didn’t respond to the market in a satisfactory way. There was an erosion of confidence in the whole process.
The third element involves pricing. Traditional fee models no longer represent fair value based on some of the problems experienced above, so if you leverage your family office properly, you can invest directly and avoid or reduce paying management fees.
Fourthly, we’ve seen the proliferation of a new wave of entrepreneurial fund managers. They are building up their portfolios without the formality and infrastructure that supports traditional regulated fund managers. These are smart people with a track record in growing companies, executing strategy, exiting businesses successfully, returning capital to core investors and then reinvesting their funds in the next deal.
What impact has this latest trend had on the marketplace?
This new type of financier brings an increased level of competitive tension to the market. Their connections with investors run deep; they’re putting their own capital at risk. Investors respond differently to them because they are exposed too – they’re putting their credibility and money on the line. This resonates with other stakeholders, building confidence and increasing the likelihood of investment.
Also, angel groups and syndicates of sophisticated professional investors have become more commonplace as a function of this trend towards entrepreneurial investors.
Do family offices have more opportunities for direct investment today than they did previously?
We’re seeing more opportunities in diversity as we continue towards globalisation. Digitisation has made it easier for businesses in Asia to work with investors in Europe, for example, and vice versa. Scaling globally is easier today than it ever has been, and many businesses are flourishing as a result. The world is expanding for the tech and businesses sectors in particular. New markets are opening up, and more deals are taking place.
Regulatory landscapes are changing as well, and in many cases, governments are trying to stimulate direct investment to help generate market growth. For example, the UK has a tax relief programme, the Enterprise Investment Scheme, which incentivises early-stage investment.
We’re at an incredibly exciting juncture: the pinnacle of a decade defined financially by direct investment. The practice is by no means new, however. Family offices have been doing this for centuries. They’ve always existed at the forefront of direct investment. The difference is, family offices are more abundant today, and their investment infrastructure is becoming more sophisticated. They’re building up proper teams staffed by people coming out of traditional financial institutions and banks.
We’re at an incredibly exciting juncture: the pinnacle of a decade defined financially by direct investment. The practice is by no means new, however. Family offices have been doing this for centuries.
From a portfolio management point of view, what do you think of family offices investing venture capital in their next generation start-ups?
There are many success stories when it comes to families supporting next-generation enterprises in one way or another. For me, the deciding factors must be the thought process and drivers behind these initiatives.
In many cases, next-gens want their businesses to generate social impact at the same time as achieving profitability. They see this as a way to create long-term sustainable companies that add to the family portfolio or build upon the family legacy.
Historically, younger family members have been expected to enter the business, but that’s no longer the case. Increasingly, the next generation is interested in finding their own path to success, which is accepted and encouraged by families. As a result, there is a growing emphasis on individualism and innovation.
Does this not go against the traditional approach to family wealth management characterised by keeping wealth in the family for generations to come?
Family offices can take an evergreen approach to investing. They don’t need to recycle money over a short period; they can sit on an investment for 50 years and act only when the time is right. Such innovation and individualism then complements the existing approach to overall wealth management, as it changes shape to reflect the aspirations of the next-gen.
This highlights an interesting point about risk: venture capital investing is risky by nature. The question is, how do you minimise or attenuate that risk? You build good teams, incorporate strong governance structures, carefully scrutinise the provenance, track record and historic and forecast projections of potential investee companies. Key considerations are also existing shareholders and potential future investors.
Essentially, you have to exercise due diligence, look at the potential longevity of the business and ask yourself, will this company still be relevant in the future?
Is there a trend towards certain sectors in the family business venture capital space at the moment?
We analyse a lot of data from our investor base and across the family office investor relationships that we have, and the top three sectors of interest at the moment are fintech, software and retail-consumer disruptive.
Fintech and software both fall under the umbrella of tech businesses, which makes them highly scalable geographically, demographically and from a product offering perspective. Even with low margins, scaling has the potential to create a lot of revenue.
In terms of the investment lifecycle, it’s quite clear that across the family office space, opportunities for growth are the most desirable. Injecting more capital in businesses with demonstrable traction enables companies to accelerate, scale up and internationalise, catapulting them to a new level. That’s the most significant analytical trend we’ve seen.
Are you seeing much early investment by family offices?
Family businesses are typically binary when it comes to early-stage investment: some have a mandate for it, others do not. Generally, family offices engaging early are spreading risk. For example, they’ll invest across ten companies in a year.
From a portfolio perspective, they’re operating as a traditional venture fund manager by diversifying their risk. When family offices do not invest formally through a mandate, the principals behind the family firms tend to invest in early-stage businesses on a personal basis, taking individual decisions.
Family offices have the potential to add value synergistically, driving new business and traffic at the same time. Often, their input is more than just purely monetary, and any further involvement has a multiplying effect on their underlying investment.
Why are family office contributions in the venture capital space so significant and what trends do you anticipate going forward?
Family offices have the potential to add value synergistically, driving new business and traffic at the same time. Often, their input is more than just purely monetary, and any further involvement has a multiplying effect on their underlying investment. Of course, their capital is also flexible and more responsive than institutional money.
The most significant trend at the moment involves fundless sponsors. These agents usually have a background in traditional venture capitalism or private equity funds, but they’ve left those organisations and no longer have their financial backing or support.
They actively search out, make tentative deals with promising new businesses and then approach family offices with these investment opportunities. The last decade has seen a significant increase in fundless sponsors – a practice that essentially acts as a catalyst for family offices looking to engage in venture capitalism.
Companies are increasingly concentrating on the private space when looking to raise capital because family offices are inherently flexible, adaptive and dynamic. They can make quicker decisions without the rigorous processes and siloing that typifies conventional venture capitalist funds. Their ability to respond quickly, countering the unpredictability of the modern marketplace, is a tremendous asset going forward.