Brian Lucareli, Director of Foley Private Client Services (PCS) and co-chair of the Family Offices group, sits down with Nate Christensen, Of Counsel and member of the firm’s Transaction Practice Group and Family Offices team in Dallas, for a 10-minute interview to discuss trends in direct investing. Nate drew from his own experience as a general counsel in the Family Office space to speak on the growth of direct investing by family offices, the competitive advantages and challenges for them, and advice for both family offices and those working with them.
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Lucareli:
Hello I’m Brian Lucareli, Director of our Private Client Services Group and co-chair of our Family Offices team at Foley & Lardner, and today I’m here with Nate Christensen a member of our Transactions Practice Group and Family Offices team in Dallas. Welcome, Nate.
Christensen:
Thanks, good to be with you today.
Lucareli:
Good, thank you and today we’re going to be discussing trends in direct investing, but Nate before we get started it might be helpful for our audience if you would just share a little bit of your professional background and then we’ll jump right into it.
Christensen:
Yeah, sure Brian so I’m a corporate attorney as you say in our Dallas office. I have a broad practice representing investors, family offices, private equity groups, all kinds of different transactions including you know buy side, sell side, direct investing, and I come from a family office where I spent 10 years really focused on the direct investing you know part of the business in that family office and have a kind of specific interest in this topic.
Lucareli:
Well that’s good, well we’re glad to have you today and so I’m going to jump right into it. I know you helped me create some questions so to get us started I think this is absolutely critical, how would you differentiate direct investing from other private market investments because I just think that’s a great place to, kind of level start, so I’ll turn it over to you.
Christensen:
Yeah, yeah, exactly you hear this phrase all the time and I think different people think about it different ways. I think from a practitioner’s standpoint you really have to differentiate between deals that are done in a single asset or single company whether that’s venture or traditional private equity style, as opposed to handing money to a manager, whether that be a money manager a private equity sponsor or someone else who has discretion to make decisions and really what we see in the marketplace today is a very well developed um direct investing activity in the private Equity space that ranges from minority to majority deals across venture growth, you even see some leverage buyouts and you’re starting to see a lot more direct investing that is part of the private equity ecosystem that’s more integrated.
Lucareli:
Well that’s helpful, so alright, based on your experience you mentioned you were GC or general counsel of family office, what trends uh do you see in direct investing today?
Christensen:
Well, I was lucky to witness the last decade and I think that look direct investing has been around for as long as there have been individuals interested in investing but what we’ve seen in the last decade is really an explosion and I think that the trends are an increased allocation to specific direct investing, not to the exclusion of traditional private equity or alternative assets, but more just an appetite to lean in and be bigger, you know, take a bigger role in making decisions on individual investments, participate in auctions, and sometimes in some cases really acting as an institutional investor looking a lot like a private equity firm.
Lucareli:
So, you know, what would you say is driving this trend or trends right now?
Christensen:
You know so I hear in the marketplace sometimes people talk about well family offices don’t like to pay uh fees or to you know they don’t like the two and twenty management fees and carry, I really don’t think that’s the case I think that you know all of all the different ways to invest have their own you know attended costs and direct investment itself is, has its own cost structure, so I don’t think that’s it. I really think that it’s a little bit of, you know combination of the market was there with more opportunities as we all saw lower middle market and midle market deals explode over the last 10 years. Some of that was because of just the number of deals financed with inexpensive debt, maybe it’s a demographic thing with a lot of families that are that were nearing exits there’s a lot of consolidation in the market so there’s a lot more deals to be had. And then I think you saw a lot of entrepreneurs who were who had an exit or otherwise wanted to play capital and they saw an edge in their own deal sourcing in their own underwriting and they really wanted to take a little bit more control and be a little more active and not be subject to some of the things they don’t like in a traditional closed-in fund where investments had a five year, seven-year life, they really want to create value over the long term.
Lucareli:
So you mentioned an interesting word that I picked up on when you were giving your answer and that’s you make this interesting point that family office is leveraging their own edge in direct investing. Where do you see that working or not working so well?
Christensen:
Yeah, it’s a word that’s used all the time you know in this in the family office circles that I’m around you know folks are looking for edge whether or not that edge resides in their investment manager and private equity manager or a money manager, but I think that what they found is that they themselves, in the in their own sector in their own operating business, see a tremendous amount of edge and that is sector expertise they know what they’re looking for if they acquire something they know how to grow it they know where to go for strategic partnerships they know where to go to find a management team and in a competitive auction they really have an advantage with certain sellers, especially sellers who themselves are privately owned maybe family owned maybe you don’t want to exit 100% and you know the family office principles, if they’re operators, can speak the same language, can be very flexible with the structure and can have that long-term aligned a vision. Now the flip side of all of this is that there are challenges just as the family office may in a competitive auction present some unique capabilities. A lot of family offices that are looking at direct investing do show up a little bit differently and sometimes the way they show up is not productive if they aren’t able to make decisions quickly, if they don’t have the resource to, you know, conduct diligence and negotiate and so I think it’s incumbent on family offices if they want to really use their edge you know it’s incumbent on them to organize themselves in a way where they have those resources and can be a good deal participant.
Lucareli:
…to leverage their infrastructure yeah, so again I want to draw upon your experience at a family office what advice would you give to family offices in line of these advantages and challenges that you just kind of mentioned?
Christensen:
Well, I think it all goes back to people and so developing the right team is absolutely number one and there’s no one size that fits all it’s really a matter of the family office determining what is their objective, what do they want it, what types of deals do they want to do, do they want to do a labor-intensive control deals, do they want to do less intensive minority deals, what does their underwriting look like? And we see in the marketplace a lot of different models being used some are a full in-house institutional style, you know call it 5, 10, 15, 20 people, then there’s a totally outsourced model, and in the middle is a hybrid and I think what we’re really seeing a lot of success is a hybrid model where there are some dedicated investment professionals, maybe they reside in the operating business that the family has, maybe they’re brought in, but they really lean on outside resources for deal diligence and execution. And so having a cohesive set of outside advisors is really critical. I would say secondly I think just having good partners, knowing who to team up with, and sometimes that’s traditional private equity sometimes that’s other family offices. We’re seeing a lot of success in people just investing in what they know back to the edges I talked about before.
Lucareli:
그래.
Christensen:
And then I think just from a practitioner’s deal, you know, deal negotiation perspective, those that are successful show up as very smart investors that make comments that have asks and articulate what they need and they do that because they do that up front and don’t wait till the very end. You know, you recently had our colleague Glenn Singleton on and he talked a lot about good kind of minority protections and folks that articulate those early can have a lot more success in getting those. But I think that what family offices are all trying to avoid is engaging enough in the deal terms so that it’s not a what I call a good asset bad deal problem where you really fall in love with the business or the asset but somewhere in the structuring you really are too attenuated from the value and it doesn’t work out well.
Lucareli:
Great, a lot of information. I’m going to hit you with one more question before we sign off so what advice would you give to a party interfacing with one of our family or a family office?
Christensen:
Yeah, I think that what we’re seeing again in the marketplace as family offices are integrated into the larger ecosystem is folks are trying to find ways to work with family offices and everyone says the same phrase which is true that if you’ve met one family office you’ve met one family office.
Lucareli:
That is very true.
Christensen:
That and that is certainly true, but I think if you were to take some generalities and say there’s a common thread among a lot of family offices, because they’re not time-bound I think that it’s smart to speak to them in terms of compounding value in terms of multiples on invested capital not in terms of IRR, and then really alignment of the way they want to participate in the deal, not asking them to show up like a institution that they’re not, understanding their resources their unique resources and they want to add, how they want to add value. And I think it can be a beautiful relationship if everyone kind of custom builds something that fits everyone.
Lucareli:
Well that’s great. So, Nate, I want to thank you for your time today and certainly your insight. I know I learned something. I also want to thank everyone that tuned into our presentation, and for more information please visit us at foley.com under family offices. Thanks again, Nate.
Christensen:
감사합니다.
