Family office direct investing

As family offices have grown in number, size and sophistication, they have increasingly looked to invest directly. The appetite of family offices to pursue direct investing opportunities has been driven by several factors, including the desire for increased control, better alignment of interests, reduced fees and expenses, and higher returns.

While the appeal of direct investing is clear, building a robust investment process and team to successfully source, diligence and execute on these opportunities is a challenging endeavor.

This webinar discussed:

• Direct investing during and coming out of the COVID-19 pandemic.
• Best practices in developing a direct investing program.
• Advantages and challenges unique to family offices.
• Emerging models for family office direct investing.

SPEAKERS:
Ward McNally, Managing Partner , McNally Capital
Mark Pinho, Managing Partner , St. Victor Group LLC
Richard Perez, Managing Director and Chief Strategist ,SVB Private

Transcript

Richard: Thank you everyone for joining us today on the call. I'm Richard Perez, managing director and chief strategist here at Boston Private. Today we have the good fortune of having two extremely accomplished direct private equity investors who combined at nearly 40 years of experience advising and directly investing on behalf of numerous multi-billion dollar family offices. On the call, we'll discuss direct investing during and coming out of the COVID-19 pandemic, best practices and developing a direct investing program, advantages and challenges unique into family offices, and emerging models for Family Office direct investing. We will also allow for questions as Kendall mentioned from the audience at the end of the session. So why don't we get underway with some introductions? First, we're joined by Ward McNally, founder, and managing partner of McNally Capital. The firm formed by the McNally family that provides direct investing and merchant banking services to operating companies and family office investors. Ward, why don't you give us a quick snapshot of your background and experience?

Ward: Great. Thank you, Rich. Also, thank you for inviting me to join today. Always appreciate the privilege to work with you guys and collaborate on areas in direct family capital. As Rich mentioned, we are a family-owned merchant bank. Our mission is to harness the financial, human, and intellectual capital of our family office ecosystem, which has over 800 family offices around the world, really to help all of us build value as investors and for our management teams. We work with families to collectively invest in founder and management-owned companies, helping together bring everyone's collective industry and operating expertise as investors and our capital to access deals and combine all that into an information advantage during our diligence process, as well as being management's partner during our investment period. As Rich mentioned, we've been doing this for the last 10 years as McNally Capital One. We opened up our doors to families outside of our immediate family to help them make and manage their private equity investments. And today, we've advised hundreds of families in all aspects of the direct private capital investment activities. We've also deployed over $250 million across 8 portfolio companies alongside our 55 Family Office Investment Partners. Pleasure to be here. Thanks for having me.

Richard: Thanks, Ward. Appreciate that. We're also joined by Mark Pinho, founder and managing partner of the St. Victor Group, a private investment platform focused on making longer durations structured corporate investments in partnership with management and family owners. Mark, why don't you give us an overview of your background and experience?

Mark: Sure. Thanks, Rich. And thanks, everyone over at Boston Private. My background, not dissimilar to Ward. I've been in the investment management industry for the last 20 years. Most recently, I'm out of my own with the St. Victor group, really doing what I'd done for the previous 12 years at Soros, which was a $30 billion Family Office investment on behalf of the Soros family and the related charities. And really the theme for the last 14 years of my investment career has been working with flexible capital to find interesting transactions that aren't necessarily easily addressed by traditional capital sources, whether private equity, hedge funds endowments, etc. And working with those companies, working with those management teams to provide financing in those scenarios. So focus a lot on long-duration, focus a lot on low leverage assets, with the idea towards using earnings growth and compounding to drive returns as opposed to financial engineering. My experience on the Family Office side with Soros was one of the four deal partners focused on all your liquid investing there for over 12 years. And we had probably one of the broadest Family Office mandates out there. We were a global business investing all across the capital structure and that was a terrific run with that group.

Richard: Thanks, Mark. That's great. I thought we'd get started given the unique environment that we're all living through and talking in more kind of a broader top-down view of the space. Ward and Mark, both of you have had long careers investing through challenging periods and direct private equity. For example, the dot-com bubble in the early 2000s, the financial crisis in '08, '09. Ward, why don't we get started with you? What are some of the lessons learned during those periods that you think are applicable today as we consider investing during and post the COVID-19 pandemic?

Ward: Sure. Yeah, thanks, Richard. Having started the firm, the McNally Capital in April of 2008, we had a bit of a front-row seat to how families were positioned in the last downturn, what different families were doing during the Great Recession, and how those families successfully navigated out of it. And this crisis is certainly different from several what I would say sort of well-documented macro aspects. I'm not going to go into those. However, if you look through the lens of our Family Office, making direct investments, here are a few observations that I'd provide. Family offices today have kind of a lot more direct private capital invested than they did back in 2008, also, mostly in the larger operating companies, not in early-stage venture deals, and what we all used to think of as, "club deals," most of which caused significant issues for families back in 2008. Those companies were at issues with liquidity and had issues with operating issues and had issues also, from a governance perspective as it relates to how the families came together and joined in those club deals. And so that's observation number one. The second thing that we've seen too in talking to families is most families have far fewer private equity fund commitments today than they had 11 years ago. That means that they have fewer potential liabilities on capital calls, on funded obligations, things of that nature. There was also awful a lot of scrambling in 2008, 2009, just to meet capital calls and the like. And that's a very different situation that we've seen in this go-around.

Third, a significantly less leverage across people's portfolios and greater access to liquidity. We've seen a lot of families reduce their exposure to hedge funds over the years. We've heard a lot less in this environment than you heard in 2008, 2009 around hedge funds throwing up their gates and causing chaos for the ability to manage for investors to get access to their cash. So that has also created a difference in the overall liquidity profile for families. And I think last is that over the past 30 years, the private equity sector has certainly outperformed most other classes, asset classes, and in a crisis has over the last 30 years have shown that it can be a safe haven to ride out a storm and really be in a position to take advantage when we do come out the other end of any crisis. And so, what does this all mean? As we look at it and as we look at some of these facts, in terms of where people are positioning their portfolios today versus looking back in 2008, 2009, it's likely that a family office with this kind of a profile is going to weather the storm better this time around than when compared to 2008, 2009. And being better positioned to invest for capital in the space and take advantage of certain opportunities that are now forthcoming. And I think personally will continue to be forthcoming over the course of the next 12 months. And I think the answer... The second part of your question, Richard, as the saying goes, "Never let a good crisis go to waste."

If you are a long-term Family Office investor and deploying capital into the direct family capital marketplace, here are a couple of key lessons that might be lessons learned from '08 and '09. Remain disciplined, first and foremost. I think what we saw in '08, a lot of people followed near term, what I would sort of call short duration investment opportunities. There are all sorts of acronyms that were out there from the health plans, and TIF, and structured equities, and all sorts of things that were thrown to family offices by different managers, and many of which were looking to try and accomplish quick wins. And I think where people were served well, coming out of the last crisis is that not to wade into unchartered waters, focus on fundamentals, industries that people had core knowledge and strength, and stick to your investment thesis.

Richard: Mark, you had a unique perspective, having sat within Soros, investing in private equity within a macro-focused firm. So maybe it'd be helpful to hear how you think about investing in light of the current macroeconomic landscape and also the lessons you learned because you weren't within a macro shop during kind of crisis period. No two crises are the same, but obviously, they're things that you can draw upon in terms of your experience.

Mark: Absolutely. And I had the benefit, Rich, of starting my career on the buy-side during the .com crash. So, definitely different experiences on different platforms living through one or two different crises. But a lot of the things that there are other takeaways from moments like this are everyone believes that in a moment of crisis the buying opportunities are plentiful and obvious. And I think that the biggest takeaway that I've had during my experience, operating through two crises are, that is in fact the case but unless you have unlimited resources and unlimited talent available to you, trying to get everything is really hard. And so, in my mind, what we did a great job of in '08 and '09 and the results kind of flew through that is, working together with the resources we had internally to figure out when it was the right time to play what part of the cycle and in what asset classes. So, for example, going into the crisis in '08, '09 the private equity team certainly had a lot of portfolio company at Soros. And what we realized was, it was our existing businesses that had the greatest opportunity because we knew the management teams were. We knew what the opportunity sets were. And so we were very opportunistic and aggressive in trying to build those businesses, whether through M&A or even organically because you didn't have to go out and meet a new team or look at businesses that were under different states of distress, and try to learn something new on the fly, while we're all trying to parse through the, was this the end of the world or not necessarily the end of the world.

And then, by the same token, it was leveraging the public capabilities as well as our own industry capabilities to figure out holistically as a firm where should we be spending our time and energy because it's much easier to trade public stocks and kind of pick bottoms or pick close to bottom for longer-term holds than it is trying to do so on the private side. Everyone came out of '08, '09, in the whole private equity community saying, "Oh, gosh, next time the crisis rolls around, I just want to be able to buy as many things as I can." Well, the reality is, things don't transact as often as we'd like at the bond markets because existing owners know what they have. So, the things that are being let go are either being let go because existing owners don't want them or can't keep them. It's the opportunity that's very different. And you need to have the resources and the patience to really wade through that, in order to make the goodbyes. From my perspective working with Family Offices now, and seeing... The great thing that all Family Offices have is flexibility. And I think leveraging that flexibility in times of crisis is really about keeping patient in making sure that you're not trying to conflate different asset class strategies into kind of one mega strategy, which just buy everything because it's cheap. But it doesn't work that way. And with limited resources, what you really need to do is focus on what is actionable, what can you get done, and honestly, where can you as a family, or as a fund, or as an investor, really drive the most value?

Because if you want to just gross by the market, there's a very cheap way to do that because we have the public markets to reference. If you're going to be illiquid and be dedicating time and resources to cater in moments like this is to figure out where those really juicy spots, not only within the market but for you specifically as a firm or as an individual, where you can drive the most wealth creation because it's going to be different for every group out there. Not everybody is good at everything. And in times of crisis, it's important to kind of really hunker down and figure out, what are the things we're good at and how do we drive value by focusing on those?

Richard: Makes a lot of sense. Very helpful. Thanks, Mark. Ward, I think we have you back on. Sorry for the tech glitch. You got cut off as you're going through lessons learned. So if you want to finish up that point or we can move on.

Ward: Sure, yeah, no, appreciate that. Sorry about that. I'm a victim of our new technology that we're all getting used to. So just to piggyback off of what Mark said, I think one of the areas that we saw as key lessons learners is start to become... Increase your level of activity with your investments, both with fund managers and with your indirect investments, because inherently each of you as families, as owners of businesses, as operators of businesses, have both the operating experience but also the connectivity to leverage your relationships to support these companies. And while even though you may be a passive, non-controlling shareholder, in all likelihood, there is something you know or someone that you know that could be helpful to one of your investments. And I think what we're seeing too is a lot of management teams. And not every management team has been through a crisis and certainly, none of us have been through anything like we're going through now. And so your ability to provide advice and wise counsel is now welcomed by a lot of management teams and something that you may not have thought of in terms of your ability to roll up your sleeves and help create value. And then the last thing I would suggest too is most of us have a little bit more time than we may have had two months ago, as we have come through this and spending more time at home, spending more time thinking, learning.

It's a good opportunity to think about what the future operating environment would look like, both for your investments, but also, as it relates to your investment thesis and thinking about what comes next. And I think a lot of the families that we've seen over the last 11 years that have done a great job coming out of the last recession, really spent the time to think about their position as a family within the direct family capital marketplace and how can you best position yourself to invest the unallocated capital as the M&A markets begin to reopen. So beginning to really think about those things and make sure that your thesis is either sound. And if not, then reinvent the thesis so that you're prepared to move forward.

Richard: It makes sense, Ward. Thank you for that insight. Maybe taking a step away from the current environment and maybe talking more about, generally, starting a direct investment platform from the Family Office perspective or give a unique perspective kind of with family capital and working with other Family Offices. It may be great if you could talk about some of the advantages and challenges unique to Family Office, we're trying to develop a direct investing app.

Ward: Sure. I think there's certainly a lot of challenges that families face in building out a private equity program. And I think for those folks who have done it well, and this is really coming out of thinking about 2008, 2009, and using the last 11 to 12 years as a proxy, those who have done a great job started with the development of a well-thought-out strategy. How are they going to deploy their capital? How are they going to deploy it differently than they had before? And then following that, really, with building out a world-class team, a team of people who have experience in making direct investments, have the ability to effectively source diligence and manage, which aren't always inherent in the same person, but have that expertise to be able to lend that capability to you and whatever team you're trying to build. I think what we saw is that challenges people had was, I would refer to it as the family that decided to sort of "dip your toe" into the water. Families who did that tended to under-hire, tended to not put the time, talent, and treasure necessary against their allocation into direct family capital, and ended up being understaffed. And that led to not only immediate issues, but we're now starting to see some of those issues too because the capability set of the people on their team to weather a storm is not something that those individuals have. And we sort of refer to this world of direct private capital as not being a spectator sport.

You really need to be involved on a daily basis in order to successfully compete in the marketplace. And that from everything, from being able to sufficiently find sufficient quality deal flow, being the first thing being able to conduct thorough due diligence, and then the constant feeding and nurturing required of you into the management teams of your investments. And that requires a lot of people and a lot of consideration and is really thought of as a separate business. It's a very different activity set than what a traditional Family Office might have, either one that's focused on investments, which may be focused on more traditional equity bonds, real estate type investments, more passive investments, and less direct investment system might have in the direct family capital. And I think what we saw in 2009 to 2011, 2012 is a lot of families gravitated towards making direct investments, in part, because they saw their friends getting involved. They started talking about transactions. They started seeing a lot of buzz around getting into the direct family capital arena. And I think a lot of people have realized that it's much, much harder to do this and I think have gained respect for a lot of the private equity firms who have, over the last 20, 30 years continued to compound wealth in a way that is in excess of the marketplace and starting to treat their private equity activities truly as a separate business, as I mentioned before, because of the complexities around engaging the team, engaging in the process of doing deals and the complexities associated with that versus the complexities of selecting a bond manager or a long, lonely manager. In that way, there are just a lot of challenges that family faces and the need to have the right people around the table is required to be successful.

Richard: You know, that's helpful, Ward. Thanks. Mark, piggybacking on that, and I know you and I've discussed in the past of Family Offices, they consider building out the platform, just really understanding what they want today and how they should think about what's the best way for them to implement. You can talk a little bit about what you think, where things that family offices should consider when they're trying to build out a direct investing platform from scratch.

Mark: Yeah, I think a lot of the themes that we're hit on are kind of universal. And I'll pick one that I think in my mind is kind of universal across any business and very important when kind of thinking about it from a Family Office platform perspective, which is just really having the clarity and communication about what it is you do and what you don't do. The parse of any Family Office or any flexible capital pool is you can kind of do anything. If I come to market and say, "Hey, I'm a $300 million lower middle market fund focused on consumer," super easy to really communicate internally and externally. What is it we're trying to do? What don't we do? What will we do? If you sit there and say, "I have a $300 or $400 million Family Office," well, the world is your oyster. However, the ability to get things done is really going to resonate around what is the focus towards point? What kind of people and resources do you have to go and kind of execute against different opportunity sets? So just like any business, it's about everybody internally and externally having the clarity and communication around, what is it we're doing? What is it we're not doing, which lets you parse through the opportunities? I think a lot of people get lost in the shuffle there because oftentimes folks will say, "Well, we've got the flexibility to do anything. So we will." Even on a platform as large as Soros, we had to figure out what we were good at, what we were going to focus our time on.

Having that much capital, we have the luxury of saying, I'll pick kind of an esoteric concept, which is, we had a lot of traders on the hedge fund side or on the private equity side that looked at different countries. But if you had a very focused view on Brazil for a period of time, the last thing you want to do is pick a generalist private equity or hedge fund guy and say, "Go figure out Brazil and let's be good at it." It was much easier to simply pick an outside manager to say, "We do on Brazil and express it through an expert" versus trying to develop expertise on the fly, which might be fleeting. So, again, the flexibility that you have in a Family Office platform can work for you and against you. The key is putting some parameters around that capital base and that flexibility that says, "I'm going to use my flexibility as a positive driver of value by focusing that flexibility across these two or three axes or paradigms," and not try to take it all on. And I think that also goes back and ties into kind of what Ward was talking about with the time treasure and the talent, that also lets you really focus that, right? Which is if you want to be a direct investor and you say, " You know what? My background is X, so we will try to piggyback off that experience," that lets you build a team, that lets you build outside connections and networks around an area that you can truly leverage, as opposed to trying to be everything to everyone. Given my interactions with the market with a lot of Family Offices is I look at deals, one of the interesting pieces of feedback I often get is intermediaries get very frustrated with certain Family Offices because they don't know what they're trying to accomplish.

So, therefore, deal flow stop showing up or really interesting things that should be done in the wheelhouse, where somebody don't show up because the reality is the market is kind of tired of saying, "We're trying to put everything against you." So, like, any business I go back and I say the more clarity the more communication there is around what is it that will do it not do, that self-reinforcing loop that produces more and more opportunities, and again, I think drives the ability to generate really good returns and to get the best kind of capital opportunities out in the market. So, to me, that's kind of the first and foremost thing about... If honestly, if that can apply to any investment platform, I think as Family Offices think of themselves as LPs, we force that kind of view from our GP relationships, which is, don't show up and say, "I want you to be an LP and I get to do whatever I want with the money," our expectation is you wouldn't get a lot of capital and you wouldn't allocate a lot of capital that way. And I think it's justifiable to turn that lens around and say, "If I'm showing up to the market and saying, 'Show me everything,' it's really hard for the market to take that seriously," or even be good at bringing the opportunity. So, again, bringing that focus to bear, understanding where the skill sets are on the existing resources or being able to build out resources around the things that you want to be able to do, it all really starts with deciding what your focus will need to be and where are you going to spend your time, your energy and the resources?

Richard: Thanks, Mark. Yeah, that resonates with my experience as well sitting in those types of seats within Family Offices. I think one of the challenges you both touched on, but on the sourcing side, given the flexibility and the breadth that a Family Office can have can make... The world is your oyster, you can kind of do anything. It also means once you've implemented it you're open for business for direct investing, you get a wide array of deals coming your way. And it's hard to one, source quality deals and to sift through them. Maybe, Ward, you could touch upon, how do you see the challenge of sourcing quality deals and separating the wheat from the chaff and trying to navigate that process? Because it can be overwhelming, particularly within a family that may not have as larger team of some other private equity firms would have?

Ward: Sure. Yeah, I'll piggyback on what Mark said. He's spot-on in terms of one of the big challenges. And if you take that to the next level down, I think that one of the things that a lot of families will say to us is, "I'm very selective. I'm very picky, right? We're okay." That's great how many deals do you do out of how many deals that fit your criteria? What's your batting average? A lot of people will say, "Well, we're very picky." We do one out of every 10 deals. And I look at them and I'd say, "Well, that's great because the private equity firms that you're invested in and do 1 out of 100, maybe 200, that meets your criteria set. So that I think there's a myth that's in the marketplace that a lot of families think that they are very selective but the reality is the people that they're competing against in the private equity sponsors and some of the larger families have huge teams to evaluate transactions. And I think when you dig into two aspects of that, one, I would say, piggybacking off of what Mark said, around what is it that you really want to be focused on? And I think what we've seen a lot of families struggle with are two arrays. One is what I would suggest to sort of internal. And by that, I mean, they've had a challenge getting buy-in from all the stakeholders internally. And that could be family members, but then also, the deal teams themselves and coming together and really understanding what is it that we're looking for and being on the same page because the family members tend to want to have utmost flexibility, as Mark mentioned, where the deal team, if they're worth their weight and gold, they're used to being more discipline. They're used to having the thesis.

They're coming out of an institutional environment. They're used to talking to intermediaries in a very specific way and also being able to provide appropriate feedback so that they can get higher quality, more appropriate deal flow as time goes on, and create that feature-capability set. So what we've seen is a lot of family is just unable to get together and say, "Do we want to look at small deals? Do we want to look at co-investments? Do we want to look at early stage? Do we want to look at the stress? And it's really, the excitement of any deals coming across the transom are exciting to family members. And that leads to not only challenges of sourcing, but also challenges of actually making the investment decision. And so, part of what we see happen is that families need to get tight around the strategy for many reasons, not just overtly looking to the market but internally, being able to respond and react in an institutional way, having a true investment committee made up of appropriate stakeholders, having the proper communication that families need to have internally so that when the opportunity comes up to actually make a decision, that there's a process and that process is followed and it's appropriate. No different as I think Mark alluded to what your expectations would be of a private equity firm that you made a commitment to. You're expecting them to have that process, therefore, you should have the same process. And then secondarily, our nuances. We've seen families that simply...they have a hard time articulating things that bother them about companies.

And it could be as esoteric as a company that has a union. It could be as simple as, well, that company ended up being more than 100-mile radius from my house and I really don't want to drive that far to go visit a company. It could be nuances within certain operating metrics that they believe that certain companies ought to have a greater than 10% EBITDA margin. And sometimes they have a hard time articulating that because it may have been ingrained in how they ran their business or how they think about things. But articulating that, getting those types of things on paper, help create that strategy and help create the ability to communicate externally to the marketplace, what they're looking for. The last thing I'd say is the communication part is families have spent a lifetime trying to stay below the radar screen and not be overt, and not be transparent and communicative because they want it to be devoted to the cloak of secrecy and confidentiality, when in fact, if you want to increase your sourcing in a disciplined way and you want to be able to effectively deploy capital in direct private capital space, you have to be transparent with the outside world about who you are, and what you're trying to accomplish, what you bring to the table, that's going to be different from someone else. And that's a big leap for a lot of families. Some families can't overcome that. And others look at that and say, "Okay, I'm comfortable having a website. I'm comfortable putting my team out there. I'm comfortable putting my family out there" because that is a leap of faith that a lot of families have challenges overcoming. And in order to get your team and get the outside world thinking of you as a legitimate source of capital. You need to do some of those things.

Richard: It makes a lot of sense, Ward. I want to touch on one of the parts that you were talking about, which was that the sponsors, the private equity firms, who not only have the teams but obviously raised a tremendous amount of capital. And I think one of the questions and concerns that I hear from families, and certainly, in my feed, I've had concerns is the quality of the deals that you're getting, is it a crowded space? How are valuations? This environment might change that. But Mark, maybe talk about the amount of capitalists and raising private equity, how does that affect, one, the quality of deals that you get to see and families are seeing? And two, does that cause you to start fishing in areas where maybe it's less populated? Whether it's going down market or certain industries. How do you think about that, given the dynamic, in terms of assets in the space?

Mark: Yeah, no, a couple of different prongs to go down there. So first, I'll start by just addressing the biggest picture, which is the amount of capital in the markets now, there's really no space to swim. It's not crowded in the pool. So, I think it's one of these things, it's the kind of the European beach analogy. If you don't like people, you'll probably not making it into the water here. That's something we all need to accept it and understand. And then look, I think from a deal quality perspective, this is the reality of the world right now is for whatever macro reasons, the demographics where we are the U.S. specifically as this massive attractor of foreign capital and domestic capital the reality is, is that good businesses are going to start here. Good businesses are going to flourish here, that the competition to invest in those businesses is going to remain extreme, right? It's just the reality of the world that we all have to accept. And so, as I think about how does that change your strategy or tactics, it really just goes back to the things you want to do and then how do you differentiate yourself, right? Capital is a product and you are a product as an investor. And at certain points in time, you need to understand the audience that you need to be focused on in order to get a deal done. And so, this is the part of being a Family Office or having the ability to be more flexible capital, actually benefits you, right? Because at the end of the day, our pension systems, our Family Offices, our individuals, we've all given money to all these alternative managers just as, like, we put money in the markets to go out there and be invested. Right?

We're not paying people as an LP to say, "Hey, just sit on this capital and do something episodic," if that's what you think. Our goal was to say, "Okay. We trust you to go make the best kind of return you can for this period of time. It's why we focus on vintages. It's why we think about benchmarking. It's why we think about absolute versus benchmarking." So at the end of the day no one can complain about the opportunities that's changing. I've got a lot of friends where I live here in New York, that I'll talk to their private equity folks that were doing stuff in the '80s. And the mindset always starts with like, "Oh my God, you guys had so great. You can lever things up 96%, only put in 4% equity." And it always comes back to the same comment, which is, like, it was so competitive. It was so hard to get deals and some things work, some things didn't. So, I actually view it as... Ward, I think said this before, and I think it's exactly right, this is a full-contact sport, and it has been for a very long time. Then you've got a pivot to say, "How do you get in front of the good deals and how do you differentiate yourself?" Well, here's where having that flexibility can be helpful because at the end of the day, as an asset manager, you've got your hurdle in place, you have to make a certain return, that generally means that if you're buying larger assets or doing things, you will have to use leverage and that precludes you from being involved in certain assets.

So, I know my own personal focus since I've left Soros has been, I do prefer playing where it's harder to deploy capital, not that because there's a lack of capital, but because I think it's a different constituent who you're playing with. So, deals that are harder leveraged, deals that will take a little bit longer to realize, those aren't things that fit well into the generic asset management class. So, can you differentiate yourself more there? Yes. Is it less competitive? I'm not sure that's the right answer. But the key becomes being able to look at management teams, being able to look at owners and say, "I can be the right partner for you and here's why." And I can tell you, it really resonates with the management team when you understand their business well enough to say, if a traditional asset manager and investor comes in here and says "Can you get us out for years? What does it look like?" Your typical investment horizon as a manager is, I'm focused on five to eight-year returns because maybe I'm in a market or an industry that doesn't let me get two to three-year returns back. You're deploying new capital for longer tail returns. Well, that's a place where if you have duration, flexibility, you can play, and maybe it's a little less competitive. And by less competitive, I mean, maybe you can achieve better return rates than what gets priced down by a broader market. But again, it's all about positioning. It's all about understanding, the what are we good at? What are we telling people?

And how do we get ourselves positioned to partner with the best businesses, the best management teams, etc.? And that's really about putting yourself out there and then being willing to execute when you find those things because at the end of the day, I think Ward's right, it's the batting average or how many balls you're swinging out, or whatever the right analogy is for that piece of it when you get a fastball down the middle and you don't swing, you tend to not get the fastball down the middle all that often. So, a lot of this is about building the process, building the capabilities, so that you can generate those kinds of opportunities that fit you well. And then when you get that pitch, you can swing at it.

Richard: Makes a lot of sense. I'll piggyback off that last point and go to you, Ward. In terms of execution, we talked about families have often evolved, in terms of how they've executed on deals. It may start with co-investing with their private equity partners spanning to club deals and also to doing direct deals solely on their own and anything in between. You and your firm have evolved as well over time. There's the club deal structure, this committee club, maybe talk a little bit about what you've seen in the sort of the evolution of structuring private investing efforts, along with their Family Offices?

Ward: Sure. I think that... And certainly, it's alluded too, Richard, there's many alternatives. And I think each alternative that you mentioned has to be considered primarily across maybe three different components. The first component is cost, which though all Family Offices are concerned about. The second, which we've talked about here is to time how much time and effort do you want to put into this? And then the last thing is sort of control. And I think all of those components lead into what's the overall risk you as an investor are willing to take on? And if you think about the spectrum of options and you layer in those three components, you think about, on the one hand, you could just invest in a private equity fund where you don't have control. There's certainly costs and that's there. There's certainly some time that's there. But you follow that spectrum of options from private equity fund commitment to co-investment next to private equity fund to maybe investing with an independent sponsor, doing a club deal, vesting alongside of another lead Family Office or maybe it's not an equal partner but you're a more passive partner. And then all the way to the other end, where if you are making direct control investments, where you have full control, you have a lot of costs, and you have to spend a lot of time. And I think over the last 11 years as we've seen families evolve, there's a clear pattern that has emerged in the world of direct family capital. And that's an evolution that we've seen almost every family travel down at different times over that period, but they all tend to go through the same, what we would sort of, say, five phases.

And the first phase is really, do you want to make versus buy? Do you want to just simply build an in-house team or would you rather just outsource the investment on direct family capital to a private equity fund or to an investment, to an independent sponsor? How do you think about going through that? The second is, and I mentioned this before, is overcoming the internal tag of war as we would think of it. And that is appropriately aligning your governance, your staffing, your strategy, the decision0making, really getting everybody on the same page. And that takes time. And usually, that phase of people's evolution is around the same time where they move to hire an individual. And so they dip their toe in the water phase. And so most families go through that and they learn from that. Maybe they get a deal done, maybe they get two deals done, and now they're in their into a third phase where they're trying to learn how to multitask. They're trying to learn how to source deals, how to diligence them, how to manage them, how to manage their team, how to properly incentivize the team. They're out maybe starting to get in management fees from their portfolio companies to build out a team of more individuals. And they ultimately make some of those decisions internally to continue to build out their capability set, frankly. And then they get to phase four. And now, all of a sudden, they've got a portfolio companies. They're tapped out of capital. They sort of run to the point where enough is enough, and they recognize that they as a family and their team may start to have a disconnect.

For example, the team may be getting compensated based on deals that they do and carried interest. And if the family says, "Hey, we're tapped out, we have no more capital to deploy," what are we going to do? Well, the next logical phase in that evolution is if you want to continue in this business, you have to support the team. You must support your portfolio companies. And in all likelihood, that means you need to bring in third-party capital. And we've seen folks do this in the last several years. We've seen MSD do this. We've seen the Preschool group do this. Ourselves have done this. But that's a natural evolution in this model of direct investing, whereby each of these firms and many others have found their way and evolved over time through going through all of those phases in a similar way, maybe over a different time period, some faster than others. But ultimately, that's where you get. And I think a lot of families need to think about that evolution because just the sheer cost of putting in a team of three people, a very simple starter team of three people, it's going to cost you more than a million dollars. And in many instances, the direct family capital group that you put together is going to far exceed the cost of what the rest of your office might cost you because the people, the talent are really expensive because of the backgrounds and the jobs that they're leaving to come to do this for you.

And so, being conscious of what that evolution looks like, we're starting to see some of that over the last couple of years now, where some families have reached reach their capacity of capital and made decisions. And we've seen those, such as Pritzker and MSD bring in other capital. We've seen others just begin to slowly wind down their activity set because they realized, geez, I need to become a registered investment advisor. Now I've got all sorts of compliance things that I deal with. I've got disclosure issues, all those things. A family needs to go eyes wide open because most families if they go down this process, will eventually get to the point where they are capacity constrained by people and capacity constrained by capital.

Richard: Got it. Yeah, very helpful. We have about 10 minutes left and we are getting some questions. So, I'll start picking up some questions that folks have sent in. Maybe I'll start here and this one touches upon top of Supra before me. Mark, you can take this. Periods of extreme dislocation and stress, typically, to unique investment opportunities, are there any particular industries that you're focusing on or you're seeing people focus on coming out of the pandemic, one? And I guess, two, another question that's related and maybe both of you can touch on this, do you believe like the life science Medtech or biotech area is going to be more interesting post-COVID-19?? It's been a challenging space directly because of the specialized expertise. So, do you think folks are focused there or is it going to be mostly in partnership with other private equity firms?

Mark: So taking that first piece first, so what's interesting today? So, I think right now, when you look at the market and you try to figure out where are we? A lot of people will say, "We're halfway into something." Some people will say, "Okay, maybe we're leveling off." The best investment opportunities come still from the relative risk-return. And so, part of this goes back to risk appetite. For a higher risk appetite, taking a look at a world where consumer spend is going to be changing and where you're getting a lot of people coming out of the market, they're going to be buying opportunities, especially at the kind of the regional level, where consumer-focused businesses whether restaurants or specialty retail or leisure and entertainment, things that folks will ultimately end up coming back to, those assets can be had relatively cheap. The ISP can had be relatively cheap. I put that on the caveat that you must manage through the real estate exposure as well because that's certainly something in this cycle that I'm sure you're all very keenly focused on as am I. Those adjustments haven't necessarily happened yet. But from a dislocation perspective, this has been the continued bifurcation of kind of consumer spend. And in the U.S., consumer spend is obviously such a huge part of the economy. Those are going to be where the opportunities are for winners to kind of emerge from this.

So I think, if you're looking there, it's definitely an interesting space. A lot of other sectors, I think you're seeing healthcare, otherwise, the valuations are obviously down on absolute basis, but on a relative basis, things are still expensive. So the question becomes, if you're paying a growth multiple for things today, what do you think about that growth? So, from where I'm sitting, I'm focused more on where the distress and where the devalue plays are, as opposed to the relative opportunity strategies, because I think their problem plays will be there through the cycle.

Richard: Got it.

Mark: On the biotech side, it's interesting that that's a question because we've spent a lot of time recently. The reality is, that's a sector that seems relatively agnostic to what's happening macro because so much of it is venture style risk, that there's going to be businesses today where they're going to make just as much money as they would have made the top of a bull market because it's kind of a binary outcome on the value creation. So we used to have a saying, which is, "Try not to be a tourist in a place that's hard to understand." And my general view is if you need a Ph.D to be competent in an area, I personally don't have one, I'm stuck on an MBA, so I stay within my area. But that is an area where I think partnering or finding the right fund structure can lead to better results because there are folks out there that have the expertise and honestly take enough shots on goals to get that portfolio effect. With anything that's got that development or that R&D risk to it, it's hard to take a rifle shot approach and feel good about it just because of the way the returners version work.

Richard: Makes sense. Ward, do you have any thoughts on that topic?

Ward: Yeah, I would just add one thing from an area that we're spending a lot of time on, is in the defense and intelligence space. This is an area that seems to at least from a public standpoint, hold up quite well. We have a thesis in the space that we've been executing against for the last three years and deployed a bunch of capital across those companies and in the fund that we're in the process of launching one of our industries of focus is in the Defence Intelligence space. And that is an area where I think nothing's immune to a crisis. But certainly, when you think out over the next 10 years, the U.S. is going to continue to be national security. And some would argue maybe differentially an increase national security going forward as we look at things such as the COVID-19 pandemic and the different issues that it has caused on our national security apparatus and our national security policy going forward. And so that is an area where we haven't seen a whole lot change in pricing. However, it is an area of interest.

Richard: That makes a lot of sense. We've been seeing that as well and also increased interest in cybersecurity. And I think this has thrown that into stark relief, given the remote working and kind of things like this, doing work from home and WebEx and the like. So that's really helpful. Another question that came through, when do you choose to pivot on a focus strategy? Any institution that thinks they'll be doing the same thing for 50 years will be obsolete. Ward, do you have any thoughts on that, having evolved and kind of expanding into different industries, and when is the right time, and when do you have the right resources to make that change?

Ward: Sure. So, I think for us, we tend to be more thesis-driven around the areas that we look at. I'll use an example for party logistics as an area that we have made an investment. It's an area we continue to look at. It's an area right now that amazingly enough is in a unique environment given the COVID-19 situation. But over the course of last year, the three PL space has been in a bit of an industry recession but it's had a resurgence here, as all of us continue to buy as if it's Christmas time in the last 60 days. But that's a thesis. And I use it as an example that it's a strong thesis because of the size of the marketplace, the increased demands, going into three PL as it relates to how we all in the world buys goods and moves goods across the world. And I think for us, it's a thesis that when we entered our investment about a little over five years ago, a couple of years after that, the market began to change. It's continued to change and adapt. And we look at that as an area where we can be in that industry for a very long time, 10 plus years. And it's a thesis that holds true over that time period but there are times in which you actually want to be a buyer and times you want to be a seller. And so, we tend to look at thesis that can endure the test of time. Now, that doesn't mean that you're always a buyer every day and year over that period of time because there may be some times where you want to be that seller.

And so we tend to take a much longer view on things and pay attention to when there are changes, either structural or otherwise, within certain industries where we can pick and choose the time in which we may want to reevaluate that thesis and re-enter the marketplace. That's one of the things that we've been looking at in the last year in the logistics space where there might be some opportunities, given where it has been and certainly where it is now to find another opportunity to invest in this space.

Richard: Yep, makes sense. Here's another question. This one might be tricky. It might be the magic bullet. But Mark and Ward, how do you turn families with plenty of capital from being shoppers of private deals to creating a sense of urgency to invest in private deals? And also, how do you overcome the objection of families not wanting to invest in a blind pool fund versus direct deals? I don't know if any of you have a particular insight into that for families.

Mark: I think Ward has got a little bit more experience on this one.

Richard: Nice, Mark. Ward, I think it's tricky to do this but any thoughts on that?

Ward: Yeah, let me just make sure I... Repeat the question, Richard, just so I understood. The last part of that question was how do you overcome the challenges as a family office to investing in a fund? Is that the question?

Richard: Yeah, I think the second part is folks looking at a pool fund versus really wanting to take control whether they're ready or not, right? And I guess the previous one is, to your point, there are a lot of folks who are shopping, but they actually never execute on deals. And I think that's a challenge but that may be one insurmountable. It's very family-specific but I think those are the two points.

Ward: Yeah, I think it is a challenge. It's a big challenge. And we've seen that as we come into market pricing, raising capital for one of our direct investments, and now it's raising capital as a fund. On the other direct investment side, I think it goes back to some of the things that Mark alluded to earlier, which is really having your thesis, it helps you have conviction. And having that conviction helps you align effectively your stakeholders. And that's not only all family members and people who work in the office but are also part of the deal team. And having that ability to not just be a shopper, but to be prepared to make those investments. I mean, obviously, you as a family spent significant time thinking about allocating capital to this space. And I've always said that families do one thing very lightly, and that is spend their own money. Families hate to spend their own money. We all do. But at the end of the day, when you build out a team to be in the direct private capital space, you have to spend your own money at first until you build a big enough team and you have enough companies to support that team. And so, you need to have that conviction as a family that you're willing to do that. If you're not, then just outsource. And I think that make versus buy that I mentioned earlier is an important component. And I think that as you think about allocating capital to a private equity fund, I think the difference in thinking about the choice that you have between doing it internally and doing it as a fund, at the end of the day, what we all think of paying fees and carry of 2% and 20 to a fund vehicle, to a blind pool vehicle versus the cost of doing it your own.

Unless you're really, really large, and I'm talking about maybe 250 million of capital to just direct private equity investments, it's really hard to save money at the end of the day because of all the things required and that many people don't even think of. And I mentioned being a registered investment advisor. It's pretty hard to get to a point where you can say, "I'm going to save money by going direct if I'm only going to deploy $50 million or $100 million. It's really hard to find that trade-off. And I can assure you having gone through the pain and agony of becoming a registered investment advisory and doing all those things is a challenge to it. And so you look at, should I make a fund commitment? And if you make a fund commitment, there are lots of funds out there... And there's a fund for every one of your needs, right? There's a fund to look at life science and MedTech. There's funds to look in Brazil. You can use to go almost anywhere but if you really want to be engaged and you want to be more active than passive, then it might behoove you to find a fund where you can create a longer-term, more intimate relationship with that fund, with those managers, with the people on those teams that think the way you do and that you can lend your advice, your counsel, your knowledge to help support that lender deal flow. Frankly, you'd benefit from that as an investor. And I think that's overlooked by a lot of families who say, "Boy, how will I pick up the phone and call that fund manager and talk to them?" Pick up the phone.

You're an LP. You have a right to pick up the phone, understand the portfolio, and be willing to contribute. And I think that contribution really comes in the form of your intellectual capabilities, your background, your experience, your relationships, all of those things that you can leverage your industry experience can be leveraged and provided to a fund, which is only going to help you and everybody else achieve higher quality returns.

Mark: I would actually echo that because one thing that I think is also important is because of the popularity and the propagation of Family Offices here in the last 5 to 10 years there are a lot of folks who haven't started one yet that look at it and say, "Hey, I need to snap my fingers and have 10 people and be in 12 asset classes and be kind of everything everyone." So a lot of this also has to do with most families started and create a lot of wealth through one business, right? Concentration risk was off the charts. Now at this point, if you're starting a Family Office, you're probably now pivoting towards more of a diversified approach towards risk. And like any asset allocator or asset management when you're doing different things, you usually start by seeing something to see how it works. So, it might very well be that you take 5% or 10% of the capitalist say let's go by something that we understand, and maybe we partner with somebody that we know to do it, and we'll see how that goes if that works. Maybe we like this better than we thought. There's nothing wrong with logging into these things because like any good trade, just jumping in, you have to have a lot of conviction. If the conviction is not quite there yet, there's ways to risk adjust by taking it slow. So, there's absolutely nothing wrong with that approach. And people had a lot of success, I think by doing that. Just, get into it slowly. And Ward mentioned the Preschool group previously or MSD, they didn't start as 200 person conglomerates investors. They started much smaller and worked their way up.

Richard: Great point. Great point. Now, that's really helpful. Well, we're running a little late but lots of talk about in this space, and we really appreciate you both, Ward and Mark, for taking the time. Really thoughtful insights. And I know we can continue talking on this for plenty more time but for the folks on the call, if you'd like to get in touch with either Mark or Ward, or have any other questions, please feel free to send us an email at familyoffice@bostonprivate.com and familyoffice@bostonprivate.com, and we can make those connections or answer any additional questions that we didn't get to in the call. And I also recommend that you check out our website, where you can find numerous resources, sign up for our newsletter, and get other information. And the website is bostonprivate.com/familyoffice, bostonprivate/familyoffice. Well, that commercial aside, again, thank you so much Mark and Ward for joining us and taking the time, and for the audience for taking the time out of your day. We hope you all stay safe and healthy in this environment. And hope to hear from you guys soon. Take care.