Industry experts talked about how technology is changing the way family offices and other investors source and make private investments, touching on areas including online platforms, market volatility and strategy.

Although wealthy individuals and families have for a long time now made direct private market investments, it has been widely reported that the trend is accelerating, fueled by factors including emerging technology.

Entitled Delivering on Alternatives: Private market platforms for family, multi-family and other UHNW audiences, the final discussion at Family Wealth Report’s Inaugural Family Office Fintech Summit addressed a number of related topics and trends.

The panel consisted of Avi Sharon, principal at Blackstone (chair); Andrew Cialino, head of business development at Axial; Cynthia Mullock, general counsel at Artivest; John Rompon, managing partner at McNally Capital; and David Teten, partner at ff Venture Capital.

Rompon of McNally, the Chicago, IL-based private investment firm, started by highlighting that the notion of families investing in private companies is not a new concept; it is one of the oldest around, in fact. However, technology is becoming “ever more important” in deal sourcing, and this is manifesting in a number of ways.

Although most families have private equity fund investments in their portfolios, they have grown increasingly cynical about them, he said. Among other things, families view the fees these funds charge as too high, the interests of general and limited partners as inadequately aligned, and a lack of transparency in the reporting of such funds. Historically, these funds enjoyed an “information asymmetry” advantage over families and other direct investors, according to Rompon, “but technology and access to data is quickly eliminating this historical advantage.”

Turning to Mullock of Artivest, Sharon noted that the traditional process of investing in an illiquid fund can be extremely arduous given the sheer volume of paperwork and due diligence involved. Artivest, Mullock explained, provides qualified investors with access to leading private equity and hedge funds, powered by technology that simplifies workflows and provides education, investment due diligence and other pre-sale fund materials. “We've created a virtual pitch book that includes videos from portfolio managers, simplified terms and full fund documents,” she said. “It makes it easy for family offices, high net worth investors and their advisors to understand everything involved in an investment.” The firm has also simplified investment performance tracking, and provides integrated reporting capabilities.

Sharon then asked Rompon to detail some of the common “pain points” experienced by families today when looking to source a direct private investment opportunity. One problem, he said, is that “people often presume that if they have had success in one area of business they will be successful in all other areas of business.” This can leave a family that successfully managed an operating company believing – perhaps erroneously – that they will be successful as well at investing in and governing companies. He added that family offices also sometimes fail to appreciate the full cost involved in making private equity investments, including aspects such as expenses associated with lost deals, the interest expense from using lines of credit to fund capital calls, the allocated share of overall family office operating expenses, and the travel and other costs associated with monitoring portfolio companies.

Meanwhile, Teten of ff Venture Capital, which provides early-stage funding to technology companies, said there has been an evolution in the private equity world over the past 30 years whereby funds are no longer run solely by ex-bankers but are increasingly equipped with operators and consultants. “They realize that these are operating entities and you have to understand how to impact them,” he said. His firm also helps start-ups by providing additional resources including accounting and finance, PR and branding, engineering, recruiting, community management and business development services.

“We help our companies manage the universal risk factors: recruiting great people, raising their next round. The company can focus more on the idiosyncratic risk factors unique to their business. That model, which has proven successful in private equity and venture capital, can also apply in the family office world, with or without sophisticated use of technology,” Teten said. One example relates to how most organizations, including family offices, under-leverage their network. “There is a cliché in the VC industry that the number one value you bring is your network,” he said. “But how many family offices systematically track all the people in their family network and the networks of their employees so they can identify the potential investors and clients that can aid their direct investments?” He advocated using tools such as Relationship Science - as well as obvious ones like LinkedIn - that map the networks of independent contractors.

Another example, he said, is brand. “One of the reasons past performance is predictive of future results in PE and VC is the fact there is a 'brand effect' where better brands get better deal flow and can negotiate better economics.” The problem in the family office world, though, is that most don’t want a brand - they want to be discreet yet in the right place at the right time. How do they get around that? “One model we've seen...is VCs and other entities who are really family offices in disguise...so they can have a brand, maintain privacy but also attract better deal flow in the areas that interest them,” Teten said.

Q&A

With the discussion open to the floor, a delegate asked the panelists if they are seeing family offices increasingly looking to venture capital and private equity in light of recent market turmoil. Indeed as mentioned by FOX in its 2016 Global Investment Survey, direct investments can, in the face of volatility in the public markets, “seem a haven” for investors seeking transparency and those who prefer taking risks in situations where they can “investigate and perhaps control in some manner.”

Mullock said Artivest is seeing heightened interest in private equity and hedge funds as more investors gravitate away from turbulent markets in favor of more illiquid investments. “There is also an industry trend of wealth management moving toward the independent space, so we are also seeing more independent advisors coming to us because they don’t have access to large bank platforms anymore,” she added.

On a similar note, Cialino of Axial, the online network that connects CEOs, buyers, lenders, investors and advisors, said another trend he is seeing among family offices is that they are increasingly interested in connecting with independent sponsors. “Family offices like the flexibility and the idea of partnering with an expert both in the deal and at the operating level,” he said. Around 15 family offices have closed on transactions through Axial in the past year with a median EBITDA of $3-4 million, in sectors including consumer and business services, he noted.

Another question raised centered on the issue of adverse selection, so, for example, are there companies that join platforms like Axial and Artivest because they have failed to raise money through other channels?

“You’d be amazed at how many companies have revenues of $20-30 million - quality businesses that have been profitable for the last 20 years or so but are bound by their set of local relationships,” Cialino said. “There are a lot of people in certain areas of the country that just don’t have access to quality investors, or advisors. Axial is a platform that helps them efficiently make these connections.”

On a final note, a delegate remarked that with the traditional GP/LP structure it is clear that there is a fiduciary responsibility to investors, going on to ask the panel how new platforms such as Axial and Artivest approach this issue. “We do the preliminary checks on making sure that the businesses we work with...have a certain level of quality,” said Cialino. While the burden is ultimately on the investor, it is often a “very big question they have before they become members, so they are aware of that responsibility,” he said.