By Co-Founder & CIO, Ross Iverson
Global investors are turning to their “trusted” relationships and referrals more than ever. Willing to take less risk on new relationships or investment opportunities that can’t be served by someone in their trusted network.
Niche managers may start to include geographic focus as a key differentiator to serve global family offices who want a “boots on the ground” partner to help manage their direct investments.
If you are building a global network to expand your financial services firm, think deep vs. broad. The concept of “social license” is the depth of trust you can develop with your partners that will allow you to be a go-to source for co-investments during COVID and beyond. Anyone who “spins” through relationships to just raise one-off capital will not gain the long term acceptance of the global family office network.
We are approaching the seventh month of limited travel due to COVID-19, and I have recently checked in with some of our global investors to see how they are navigating due diligence and deal flow in this virtual world. I wondered if all of the effort to attend global conferences, quarterly in-person trips to NYC, London, Geneva, etc. could now be quantified in their operation value. Many family offices rely on networking events and social gatherings to identify club deals or introductions to new managers. With this type of activity on pause, is this affecting deal flow?
Ken Grewal, CEO Forthlane Partners in Toronto, says,
“I am observing wealthy families who would typically not need to invite other partners into deals to become more open-minded about the value of outside capital as a way to increase returns through complementary networks. Due to the closer geographic proximity of the partner to a deal.”
What I found most fascinating about my discussion with Ken was his concept of “social license.” To be invited to the table for these deals, you must have a stellar reputation with rock-solid intent. Just having the capital won’t cut it when significant investments are being made during the pandemic. Ken is observing a shift in the pace of investment for innovations in forming new supply chains that will be resilient during and post-COVID. He said the political will right now to act is as high as he has seen in 20 years, contributing to an acceleration of deal opportunities.
In Geneva, Switzerland, a global financial hub for private wealth. Adam Said, the CEO from ACE & Company, manages staff in multiple regions to provide a boots on the ground approach for his investors. I asked Adam how he maintains his footprint during COVID-19 to serve his investors, who view ACE & Company as a leader in sourcing alternative investments.
“When it relates to private investments, nothing quite replaces face-to-face relations. However, with the current travel restrictions, I think we have been blessed to have forged partnerships at a global level with people that we can count on in different regions and that we can put full trust in to support us during those times. This really puts the power of a trusted network to the test.”
In Dubai, where investment professionals would historically flock to London, New York, or San Francisco looking for new deals to invest in, Filmon Ghebrihiwet, CIO of KAAF investments, says,
“Besides market volatility and general uncertainties caused by the pandemic, travel restrictions have also negatively impacted direct private equity investments. In our case, as part of DD, to do a couple of site visits and meet management face to face is vital. In this age of Zoom, Teams, Webex, and the like I believe we will see an uptick in co-investments between investors outside of the region, a target company is in with investors on the ground who can visit the company. Where a partner on the ground will be responsible for DD and others depend and trust his/her work in addition to relying on virtual meetings.”
Over in London, Heleen Van Poecke, who is a second-generation family office investor at Atlas Invest, has reduced her travel from travel roughly 75 days on the road in the first half of the year to fewer than five. Typically, she would spend 50% of her on-the-ground time stewarding existing investments, 30% meeting with new opportunities, and the remainder meeting with her team and father face to face to manage their investments. When I asked her how a one-year international travel ban may affect her ability to source new opportunities, she replied,
“It is challenging to evaluate new opportunities without travel. We find that although introductory meetings and diligence calls can be done digitally, it is still important to meet a management team in person as their involvement is key to the success of our investment thesis. Site visits, specifically when acquiring a business that has significant physical assets, are essential as well.”
Although direct investing has become a broader mandate for families and institutions, we may be setting ourselves up for a future where groups lean heavier on regional managers. These managers will be charged with on-site diligence and ongoing in-person board representation. Due to this level of management, family office direct investing vs. fund investing may also slow due to the workload of managing direct investments around the world during travel shutdowns. In my conversations, it was clear that all groups are being thoughtful about “who” will be the lead in managing the portfolio investment.
Global networks have expanded dramatically over the past 20 years, where the average investment professional may interact with hundreds of global investors annually. Based on the investors in my network, they all appear to maintain a healthy deal flow. Still, the travel shut down will create a challenge for those looking to build “new” global networks since investors (post-travel ban) may be more selective on who and where they select new meetings after becoming accustomed to a vastly different schedule and approach.
We know times of uncertainty produce many opportunities, and investors will not be willing to wait out the travel restrictions. Instead, they will innovate to find new deals. Private equity has always been able to provide outpaced returns due to the inefficiencies of a sector. This unique travel-based inefficiency can be capitalized on based on the network strength and the ability to be nimble when the right opportunity presents itself with a trusted manager. The operational value of choosing the right partners will allow offices to continue to grow the direct investment portfolio without adding headcount or worrying about travel restrictions.