{"id":157,"date":"2020-01-25T19:23:47","date_gmt":"2020-01-25T19:23:47","guid":{"rendered":"http:\/\/enlightblog.com\/?p=157"},"modified":"2020-05-12T12:47:21","modified_gmt":"2020-05-12T12:47:21","slug":"does-your-family-office-have-the-right-stuff-how-having-the-right-experience-and-the-right-reasons-are-critical-to-successful-direct-investing","status":"publish","type":"post","link":"https:\/\/enlightadvisors.com\/blog\/2020\/01\/25\/does-your-family-office-have-the-right-stuff-how-having-the-right-experience-and-the-right-reasons-are-critical-to-successful-direct-investing\/","title":{"rendered":"Does Your Family Office Have the Right Stuff? How Having the Right Experience and the Right Reasons Are Critical to Successful Direct Investing"},"content":{"rendered":"

\"Seamless<\/p>\n

In our article, How To Start Direct Investing In Your Family Office<\/a>, we outlined five key success factors that contribute to successful direct investing for family offices: \u00a0Right Experience, Right Reasons, Right Strategy, Right Team and Right Discipline. So, let\u2019s jump in…what do we mean by Right Experience and Right Reasons?<\/p>\n

RIGHT EXPERIENCE::<\/strong> The family\u2019s ability to successfully execute direct investments in companies based on prior business and investing endeavors.<\/p>\n

Family offices that directly invest in companies typically begin in one of three ways:<\/p>\n

1. The family is courted by friends and acquaintances to invest in their half-baked start-up ideas.<\/strong> \u00a0These opportunities come out of the woodwork for families of wealth, and oftentimes neither the family nor the family office professionals have the fortitude to say no.<\/p>\n

As you can imagine, this scenario is a recipe for disaster – at least from an investment perspective. \u00a0These deals rarely involve any sort of due diligence and often lack ongoing fiduciary oversight, all without appropriate communication. \u00a0Coming back to the well to secure funds to survive the latest \u201crough patch\u201d often becomes the sole investee interaction.<\/p>\n

2. The family or family office has been investing as an LP in VC or PE funds, and they decide to go it alone.<\/strong><\/p>\n

This scenario has mixed results. \u00a0The biggest mistake I see is that the family and their family office professionals treat direct investments like another financial asset. \u00a0They expect higher rates of return for their investment dollars, but don\u2019t recognize that direct investments are different from other financial instruments. \u00a0Direct investors become co-conspirators in the work of the company, and the family may face important decisions about how to intervene when there are problems with the business. \u00a0Interventions can range from additional investment to help the company buy time to assuming some degree of hands-on management. It can be very difficult to walk away and risk losing an entire investment. \u00a0It\u2019s even harder if the family considers the potential implications of business failure on employees. Ultimately, these investments can become a huge financial and emotional strain impacting the fabric of the family.<\/p>\n

This approach can work – but, it\u2019s harder than it appears. \u00a0And, both the family and their family office professionals have to get the other four factors right to make up for their lack of experience.<\/p>\n

3. The family\u2019s direct investment aligns with the primary driver of the family\u2019s wealth – either in the same industry or a new application of the existing capabilities or technology.<\/strong><\/p>\n

You probably guessed that the Right Experience I recommend relates to this approach – where the family has a right to win based on its prior experience. \u00a0As the former CIO of a family office with a large portfolio of direct investments pointed out to me, you can\u2019t expect to earn outsized returns unless you\u2019re deeply focused on something you know more about than everybody else. \u00a0This requires a combination of a significant concentration of resources (investments, talent, etc.) and a strong commitment to the topic.<\/p>\n

RIGHT REASONS::<\/strong> The family office pursues direct investments that include aspirations beyond financial gains.<\/p>\n

It bears repeating that direct investments are not simply another asset class of financial investments. \u00a0Direct investments in companies have broader implications and should include more than financial goals. In my experience, the Right Reasons include two factors:<\/p>\n

1. Sophisticated families of wealth establish a Vision, Mission and Values statement to coalesce what is most important to them.<\/strong> \u00a0It\u2019s crucial the entire family contributes to setting, refining or recommitting to the statement as it serves as the \u201cnorth star\u201d that guides your family\u2019s decisions and actions. \u00a0The family office professionals need to understand and embrace them as their \u201cnorth star\u201d as well. The importance of the Family Vision, Mission and Values increases with every generation and each additional family unit.<\/p>\n

2. Even though direct investing shouldn\u2019t be primarily motivated by finances, it remains important to consider financial goals and risk tolerance.<\/strong> \u00a0The family should assess the financial needs of the family. \u00a0While direct investment may be a good tool for creating wealth, it is a high-risk (and mediocre at best) way of protecting wealth. \u00a0If you seek to create wealth through direct investing, you\u2019re more likely to be successful if you invest in areas where the family already has intimate knowledge. \u00a0However, keep in mind the risk of additional exposure to industries or technologies where the family is already heavily invested.<\/p>\n

If you have the Right Experience and the Right Reasons, your family office is well on its way towards profitable direct investing. \u00a0Look for future posts that go deeper into the other three key success factors – Right Strategy, Right Team<\/a> and Right Discipline.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

In our article, How To Start Direct Investing In Your Family Office, we outlined five key success factors that contribute to successful direct investing for family offices: \u00a0Right Experience, Right Reasons, Right Strategy, Right Team and Right Discipline. So, let\u2019s jump in…what do we mean by Right Experience and Right Reasons?<\/p>\n","protected":false},"author":2,"featured_media":241,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3],"tags":[27,30],"class_list":["post-157","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-family-office","tag-private-equity","tag-strategic-planning"],"acf":[],"_links":{"self":[{"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/157","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=157"}],"version-history":[{"count":2,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/157\/revisions"}],"predecessor-version":[{"id":296,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/157\/revisions\/296"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/media\/241"}],"wp:attachment":[{"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=157"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=157"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enlightadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=157"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}