I am often asked by General Partners, which I will refer to as sponsors, for advice about raising money from family offices (“FOs”). Given the frequency of these conversations, I thought it would be helpful to have a written reference for raising capital from FOs. Much of what I will touch on won’t be novel or insightful for experienced sponsors, but less experienced individuals will likely find the information beneficial. I don’t pretend to have all the answers. Every FO is unique, circumstances will vary, and I encourage people to use judgment to determine what is best for them. Hopefully, the thoughts below will be helpful to those looking to court FOs as partners.
Navigating the Darkness
The FO world is fragmented and opaque. Finding and connecting with FOs can be a challenge even for people operating within the ecosystem. In my experience, making connections through the disjointed FO landscape is a ground game requiring an investment in time and persistence. Operating in the shadows is a point of pride for many FOs, with many having little to no web presence and striving to stay out of the press. I know of one group that didn’t even have email addresses on the business cards for the investment team. Working through connections and referrals can be critical to success.
Finding an initial FO contact or gatekeeper can get the ball moving, so where could you start? Personal relationships are great if you have them, though many will not be lucky enough to have an immediate path to the FO world. Intermediaries such as accountants, investment bankers, lawyers, or wealth managers often make introductions if a sponsor can make it through their filters. Ask around to see which people might be working with FOs in your area and try to get conversations going with those individuals. Other investment groups may be generous enough to make introductions to their investors, but I would expect other sponsors to have an extremely high bar for introducing people to their capital relationships.
Some FOs have digital footprints where you can track down contact information. Those really feeling desperate can always send a cold LinkedIn message if you find a team to target. I responded to interesting cold outreach, but fair warning, your rate of success with a cold message will be low. Assuming you make contact and get a meeting with a FO, that first conversation can be a potential conduit for other introductions.
If a sponsor able to have a successful meeting with a FO or gatekeeper, ask for one or two connections to other FOs that could be a fit for the strategy even if the opportunity is not right for that group. Having a little perspective on FO networks can provide expectations for what kind of potential connections you could receive from a FO and for thinking about FO networking. I tend to bucket networks between FOs into three categories: geography, industry, and investment strategy.
Geography – It is obvious to say FOs in a city will be interacting with other FOs in the same geography. I participated in local FO networks formed with the intention of sharing opportunities that had strong participation from the local members. Finding the right gatekeepers and connectors in a city can expedite building relationships with the FOs in an area because those individuals likely have access to local groups with several FOs. Generally, FOs in your backyard are more receptive to meeting sponsors earlier in their careers relative to FOs out of your market. I would approach my own FO networking with a land and expand mindset. Connect with a FO in a geography where you want to build relationships, go to see them, and ask if they have other contacts to meet with while you are in the area. Make the rounds a couple of times and you can cover several cities well.
Industry – People that made their money from an industry tend to know other successful and wealthy people from that industry. Targeting based on source of wealth works well for sponsors trying to raise funds for an opportunity focused on the industry, or similar industries, responsible for creating the wealth. Principals, especially those that produced the initial capital, often gravitate towards investments in the industry that help make them wealthy. Capital creating principals often believe their networks and individual experiences can add value to an investment or give them an edge to underwrite the opportunity.
Produce a list of people with industries ties your investment strategy and see if you can connect with those individuals. Don’t forget HNWs and UHNWs in those fields because they often share opportunities with wealthier individuals in their sphere.
Investment Strategy – FO teams with similar investment strategies and check size are one lane to explore when raising capital. Active FOs build networks to generate deal flow and often seek out other FOs investing in similar opportunities. In my experience, these FOs tend to group together based on check size and opportunity set. A FO with principal net worth of $5B+ might not roll out of bed for a potential investment under $25M and operate independently, but FOs with balance sheets of say $250M-$1B can collaborate frequently because their resources can push them to leverage the connections and work of other FOs. Finding a FO that fits your style and need of capital can also unlock touch points to land and expand geographically.
Conferences & Contact Lists
I can’t speak to FO contact lists that are for sale or provide much perspective on conferences where sponsors meet with FOs. Most FO conferences I’ve looked at attending seemed like an expensive excuse to socialize in some fantastic location and hear about new hot trends that are likely pump and dumps. I know of only one conference connecting FOs and sponsors that was spoken well of by FO attendees I respect. The local groups I attended were only for FO principals and investment staff, so while informal networks like that will not invite outside sponsors to meet the group, the meetings do provide connective tissue where a relationship with one member might create access to other members. I would be curious if any readers know of nationally organized FO gatherings focused on investments that are held in high regard.
Alignment of Capital Needs
Sometimes I have conversations with sponsors who ask questions about targeting large FOs for fundraising when the sponsor has a current need of say $5-$50M of capital. Building relationships with deep-pocketed investors is a wonderful thing to do, but these types of investors need to deploy larger amounts of capital for the investment to move the needle. Having realistic expectations about the size of investments a FO makes can help a sponsor manage their time effectively and target the types of investors that are most likely to invest in the opportunity at hand. If the opportunity arises, take any meeting with a large FO because who knows where that relationship might lead over time.
The Chicken & The Egg Problem
A challenge prevalent among emerging managers (“EMs”) courting FOs is finding the right kind of FO at the right time in the EM’s fundraising journey. There can be a chicken and the egg dynamic of needing to raise money to raise more money, with first time or second funds mostly likely experiencing this pain (individual deal dynamics are different in my experience). For example, a FO might only make investments of $1M or more and won’t be more than 10% of the capital in any given vehicle. To unlock this type of investor, a sponsor would need $9M committed to bring this hypothetical FO into play for their raise.
Cobbling together a bunch of money from HNWs is a bear but can be necessary. There are some FOs that will be more aggressive about being an early check and are less concerned about concentration. Reduced fees, preferred access, and potentially investing in the GP are possible outcomes for this type of check. The reality is these FOs are less common. The more assertive FOs can accelerate the fundraising process and could be excellent partners, but its wise for an EM to assume this type of investor won’t be walking through the door.
Expect Slow Decision Making and Stay in Touch
Decision making at FOs is inconsistent with different organizations having different processes and structures for allocating capital. Some FOs can and do move very quickly. Others move at a glacial pace. Those courting FOs as potential capital partners should assume the decision process will take every minute possible but be pleasantly surprised if a commitment is made earlier in the process. An investment could be the beginning of a multidecade relationship, and the prospective investor wants to understand the sponsor and their capabilities as much as possible. There might be a smaller introductory check, but that means a sponsor is in the door. These relationships can scale significantly over time when things go well.
In my experience, many FOs will wait until the deadline to make a final commitment. Deadlines can help drive action and final decisions. The risk of time pressure is the sponsor’s ability to complete the raise with the stated deadline. Too much slippage in a close relative to the communicated close date is a negative signal unless there are meaningful reasons for the delay. Consider the momentum with your potential capital providers and confidence in ability to close to use a commitment date to drive action.
Even if the current opportunity does not result in an investment from a FO, create reasons to stay in touch. If you find FOs that have interest in your strategy but didn’t invest at that time, make sure to keep them on appropriate investor updates, try to get time with them when you’re in town, and let them know about meaningful milestones. Making deposits into the relationship bank can yield results over time.
Understand What They Do & Staff Incentives
Sponsors can be more successful targeting FOs that have a history of investing in deals similar to the sponsor’s strategy. One might not have the luxury to manage their fundraising process in this way, but those that can are likely to be more effective with their time. For example, trying to convince a FO to change their view on an asset class is a heavy lift and success could take years to change their opinion. A venture capital sponsor courting a FO primarily focused on cash flow generating real estate likely has a bigger lift if there is little interest in non-real estate deals. Talking to a FO that has no experience investing in that strategy probably means your odds of a commitment for the current opportunity at low because the FO could take years to get comfortable with that kind of opportunity. Ideally a sponsor can find an audience that has some experience with the deal genre at hand.
Each FO has unique objectives and views on how to balance wealth creation with wealth preservation. Depending on the risk level of the investment needing capital and the funding need, a sponsor might be appealing to a smaller or larger pool of assets from the FO. While an obvious statement to some, those less experienced in raising capital can better understand their prospects based on how much of the FO’s strategy emphasizes increasing wealth vs preserving capital and how the sponsor’s opportunity fits into those objectives.
Another potential challenge that can be strategy specific is the incentives of the investment staff for the FO. For example, if a sponsor is raising a healthcare buyout fund and the FO investment team also does healthcare buyout deals in house, the FO likely has greater incentives to do those types of deals in house compared to allocating capital to a similar fund. If your strategy has overlap with what the staff is there to execute on, your strategy potentially removes capital from their portion of the portfolio for their deals. I will bet the staff get compensated better for their in-house deals than allocating to a similar fund. If you were on the investment team, would you rather be spending your time working deals where you might get carried interest, or allocating to a fund that might have a small outcome in a smaller bonus pool? Be cognizant of what kind of incentives the investment team might have.
Ethos
I tend to broadly describe the character of investment family offices by saying they come in three styles. Knowing the mindset of the FO can improve a pitch and identify which organizations might be the most likely to partner with the sponsor. I recommend trying to discern what kind of mentality the FO has and leaning into how your opportunity fits within their motivations and view of the investing world.
Absolute Return – These groups focus on return profile more than anything else. Sell them the enticing returns you are going to deliver.
Diversified Asset Allocation – Groups with this north star can be pitched on a strategy providing exposure to an investment that is under-represented in their portfolio satisfying unmet needs with the current portfolio construction.
Deal Junkies – They want to be part of the action and love looking at opportunities. SPVS, one off real estate deals, and buyout opportunities really gets them going. Let them know, and show, you can provide great opportunities for them to evaluate.
Sensitive Questions
I would discourage sponsors from asking personal questions about the family including topics related to family members and net worth. Keep the conversation focused on the business at hand. FOs are notoriously secret by design. Employee responsibilities include protecting the privacy of the principals. Asking personal questions or how much the family is worth is rude when you consider helping manage the privacy of the family is part of the employee’s job. A more productive question to ask in terms of your fundraising endeavors is to inquire about the investment activity in a typical year and what is the range of check size. A perceptive individual could estimate a range of net worth if you really cared, but the scope and pace of deployment is most relevant to your conversations. Expect a nebulous answer, but a detail or two will likely be shared that helps set expectations.
I consider inquiry about the source of wealth as fair game because the wealth creation could tie to potential value add the FO can bring to your opportunity. You might learn more about the organization and individuals over time, but that disclosure is controlled by the principals and team. You might torpedo your chances of a commitment by asking too many personal questions.
A Word on Liquidity
Some see a Bloomberg or Forbes net worth estimate and use that number to project the size of investment that FO might make. That number can be enlightening to a point, but I would temper expectations because the net worth number and liquidity available often don’t line up. Even if a family has hundreds of millions in company stock, either from founding a business or inheritance, some families are not going to touch the position for a variety of reasons including taxes or control. There are FOs that will not borrow against the core foundation of their wealth even if that cornerstone is liquid securities and there isn’t meaningful excess cash for investment. Capital available for deployment is potentially a small fraction of the family’s net worth. But there is almost always money to be found if the family or investment team really likes the shiny object in front of them.
Courting Family Members
One tactic used by sponsors that comes with risk is targeting a family member as their connection to the organization. Based on the 2020 UBS Family Office Survey, only ~50% of family members participate in investment management choices. A sponsor is looking at a coin flip if the family member even cares. Getting a family member to even forwarded a deal to the investment team might not happen if the principal does not have interest.
Thinking a connection with what you assume to be the end decision maker might not guarantee a smooth relationship with the organization. If the investment team is doing the diligence and managing the investment, but the sponsor insists on trying to communicate through the principal, that sponsor might not make the Christmas card list of the investment staff. Running a relationship through the principal, especially one that is lightly engaged in investing, has the potential of creating internal challenges for the investment team for managing the sponsor relationship. Strange relationship management dynamics can build frustration with the investment staff over time, and they could reach a point where they are looking for every opportunity to find a different partner.
Try to understand the chain of command and decision making as best you can to guide your contact with that organization. Remember the investment staff is there to steward the assets and manage the deals. A sponsor is likely to be working with the investment team more often than the principal. A better working relationship with the investment team can make your life easier. The counter argument is if the principal cares about the opportunity and likes the sponsor, the sponsor’s opportunities can become an auto-invest and the investment team will be there just to process deals that are inner circle. Choose your path wisely.
Luck Can Snowball
To be successful courting FOs for capital requires persistence, creativity, follow through, and luck. Those who are not fortunate enough to run in those circles by virtue of birth or professional circles have a tougher journey to navigate. Sponsors who are able break in and get the networking machine functioning will have ample opportunity to build relationships with capital that can end up being an excellent partner for decades. Good luck to those embarking on the journey.
Cowboy Investing 