Family offices weigh club deal pros and cons

Family offices can often struggle to access the best investment deals on their own, so are now seen to be increasingly clubbing together, but this creates its own challenges.

Helen Wong, CEO of Hong Kong-based investment firm Lapis Global, said she was seeing a growing number of families partnering to form investment syndicates. “This is the way to decrease fees and costs and to build out the back office,” she said during a panel discussion at the PERE Global Investment Forum in Hong Kong last week.

Clearly this helps smaller family offices get involved in deals that would be impossible otherwise, something Neeraj Karhade, managing director of Das & Co in Hong Kong, is well aware of. His single-family office (SFO) invests in a mix of real estate, venture capital and passion projects, and its principal problem is that it has “a lack of capacity for the better deals”. Karhade cited as key issues a lack of manpower, an inability to move quickly, fees for due diligence and other expenses.

One way of combining firepower is by investing under a fund structure. Timothy Tsui, managing director of Arbutus Capital Partners, a Hong Kong-based multi-family office, takes this approach. With real estate investments in New York and San Francisco, his firm has found it was particularly tax-efficient to use a fund structure than to go direct. “It is very difficult to mitigate tax in the US,” he noted.

There are also other benefits of setting up a fund, added Tsui. “Funds are a useful way of getting exposure, but you also have structure, due diligence and back office, and you’re only a portion of the fund. You can pool your family’s wealth rather than fighting over it every single day.”

However, getting several families to combine on a deal is often easier said than done. For instance, with club deals one of the partners has to lead, said Wong. Agreeing that is in itself a challenge.

For one thing, “the partners have to really like each other”, said Karhade. “We’ve been 90% down the road and then ‘social issues’ get in the way.

“When [private equity firms] Blackstone and Bain get together to do a deal, it’s going to be an emotion-free situation,” he said. “With family offices, you have egos and a high degree of emotion.”

Even within the same family, sibling rivalry can make a family’s affairs difficult to manage. One of the panelists cited the example of three brothers who didn’t always see eye to eye and had different interests and priorities. A real estate deal was presented to them, and the eldest brother insisted on being the ‘face’ of the project. “But he was obnoxious,” said the panelist, “so I had to keep him away from the deal.”

Then there is the fragmented nature of many SFO investment strategies. ‘Opportunistic’ is one way of describing them; ‘scattergun’ is another.

Wong said: “A lot of the families I meet don’t have a strategy. In many cases, the family’s approach to investment is on a case-by-case basis.” She cited one example where the family patriarch told her: “I just buy things when people come to me with them.”