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Co-investing – be the leaders of the pack

The growing maturity of the family office sector is resulting in businesses increasingly coming together to implement more sophisticated investment strategies.

Over the last three years, a rising number of family offices have co-invested in a dizzying array of deals in areas as diverse as private equity buyouts and commercial property transactions.
The benefits of co-investing are manifold, enabling family businesses to diversify their asset mix, gain access to investments that would otherwise be out of their reach and build a degree of risk-sharing into their portfolios.

Christian Wells, managing director of Carne Global’s Swiss office, says: “Family offices are generally run by like-minded individuals that are often not competing against other in business and we are seeing them getting together to co-operate on deals more and more.”

David Kilshaw, a partner at KPMG, adds that the growing number of family business forums has led to informal network building that facilitates this collaboration.

“A lot of these businesses have got to know each other and many share the same advisors who will bring them together in partnerships or for pooling reasons,” he says.

A number of specialist investment management houses now receive significant flows of referral business from family offices’ bankers, lawyers and accountants. Pierre Rolin, founder, chief executive and chairman of US-based Strategic Real Estate Advisors, says family money is a growing source of funding for the property development market.

His firm has tie-ups with property companies across the US, Europe and Asia and both funds construction and manages existing assets.

StratReal has the exclusive rights to the flagship Heron Tower office development at 110 Bishopsgate in London, and has structured a number of deals that have enabled several family businesses to co-invest and take stakes in it.

“Family businesses tend to favour trophy properties and prestigious high-end investments or developments. It is very common for families to club together either through family offices or directly and we did a club deal with Heron Tower for a number of family businesses in London,” he says.

“These transactions are typically carried out off-market and in the utmost confidentiality,” he adds.

The nature in which most family businesses operate underscores their appeal as a source of funding for developers and their banking syndicates.

Wells says that the banks increased targeting of family offices as a source of capital to back major projects is due more to both their private ownership structure and typically longer-term investment horizons than just their significant wealth.

“Commercial property construction is a long-term strategic investment and obviously quite illiquid. But, because of their private ownership and investment objectives, family offices typically work to much longer time horizons,” he says.

Similarly, with private equity, family offices can hold these assets without worrying about shareholder concerns or meeting the Sarbanes-Oxley requirements.

The attractions can also at times be less tangible. Karsten Langer, a partner and head of European deal origination at US-based private equity specialists The Riverside Company, has co-invested with family businesses for altogether more strategic reasons.

Last year, Riverside partnered with the Champalimaud family to acquire the Portuguese mobile and fixed line telecoms operator, ONITelecom Infocomunicações.

“The deal had a few characteristics that caused us to look for a co-investor. Firstly, it was quite a large deal for our range and secondly, it was a politically sensitive investment because it is infrastructure,” he says.

“So we partnered with the Champalimaud family as it made sense to us to work with a well-connected local partner. They used to own one of Portugal’s largest banks and co-investing with them also added a lot of value in terms of sharing the management of the company.”

There is little doubt that local connections can go a long way but the most common reason for co-investing is for firms to pool their resources to enable them to gain access to strategies that would otherwise be out of their reach.

William Drake, a co-founder of Lord North Street, says that as a multi-family office, the firm regularly brings clients together to buy assets.

“We offer a bespoke service but if a number of clients want to do the same thing it is sometimes better to do it through a combined approach,” he says.

“Often this is to enable access to hedge funds that have such high minimum investment levels that single family offices can reach them alone or to be able to negotiate better terms.”
Drake stresses that it is imperative that any family offices considering co-investing ensure they all have the same objectives at the outset.

Although it may sound like a secondary concern, Kilshaw says it is also important for the parties to get to know each other as they may find that they do not wish to work together.

“Everyone wants to make money but issues over values, for example, or issues surrounding governance, tend to go beyond business,” he says.

Where agreements are struck and significant assets, such as property or private equity buyouts, acquired, the investors will need to put in place a comprehensive shareholder agreement.
This will typically involve the appointment of a general partner to manage the investment and the building in of an agreed timeline and payback period.

Langer adds that the terms of the shareholder agreement are also key to managing exit strategies if one of the parties is forced to divest early or unexpectedly.

“Generally the idea is to exit from the investment together but if the circumstances change for one party the terms of the shareholder agreement will allow for a sensible resolution,” he notes.

This may involve one of the remaining co-investors taking up their partners share. Where this is not possible, Kilshaw says that intermediaries will often be able introduce a third party investor.

He says: “If there is a well-documented legal process in place we will tend to know other firms willing to step in.” This tends to be easier for assets with a substantial secondary market, such as in private equity and commercial property, although in the current economic climate liquidity is strained.

What it does not ensure, however, is that where a buyer can be found it will be the kind of company that the remaining investor would have chosen to get into bed with in the first place.

Furthermore, it can be even more problematic and perplexing when one of the parties is looking to prematurely divest from property development deals that have ongoing funding requirements.  

“In some real estate deals, the family makes a certain amount of capital available upfront and commits to providing more over a period of time, effectively providing a facility for the developer,” Wells says.

“Because of these capital commitments the original investor may have to pay someone to take this off their hands.”
The flipside of this is that many family offices with capital to invest may be able to pick up attractive assets at knock-down prices. This is because of the longer-term view that their structure naturally enables them to take.

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