How family offices are using GPs to access alternatives
While the recent turmoil in the post-Covid market has created a murky outlook for private markets which continue to be buffetted by rising interest rates, opportunities abound for agile family offices which have been able to cherry-pick opportunities ahead of the larger asset owners.
A panel at AsianInvestor’s Family Office Briefing in Hong Kong on March 28 heard how the recent crisis with Silicon Valley Bank and Credit Suisse was presenting family offices with investment possibilities for those quick enough to identify them.
“We are seeing all sorts of opportunities because people are going after these distressed assets and are picking up what they consider the gems within. It is difficult times, but there are interesting opportunities coming out of them,” said Lincoln Yeh, managing director of private equity at Sun Hung Kai & Co (SHK).
He said that when he speaks to fund managers, or general partners (GPs), engaged in private equity investments that focus on financial services, scouring the recent bank upheavals for opportunities is occupying much of their time.
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Because SHK has had a long working relationship with GPs, he said, the firm is able to to invest alongside them and take certain privileged views of the opportunities available.
Such long-term relations with experienced GPs are crucial when accessing the right investments or moving into new sectors with which a family office is less familiar, Yeh said, making it critical to identify and know the right GPs by doing due diligence on their capabilities in various sectors.
Diversification, however, is key in this market another panellist told the briefing.
“Family offices should ensure diversification when entering private markets to not only deploy capital into the same bucket," said Vincent Au, managing director and chief investment officer at ALPS Advisory, a multi-family office.
"It is important to ensure closer engagement with different asset allocators, leveraging their resources and relationships with GPs and companies to collect information.”
TANGIBLE PROOF
At Peterson Group, a family-owned company with an emphasis on the real estate sector, GPs are also relied upon to manage other private market portfolios that the company has built out, especially over the last decade.
No matter the sector and risk appetite, Peterson Group’s GP due diligence processes include looking at GPs with a longer operating period to see if they have holding power against volatility and market downturns throughout a cycle.
“We need to see the tangible path to rerating, scalability and finally the exit plan," said Elsy Li, chief operating officer at family office Peterson Group.
"We are not so big on biotech and new tech in general simply because we don’t have enough heritage and knowledge yet, so we rely on GPs but tend to favour a long operating history which gives us comfort that they can ride through cycles and crises,”
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She said that Peterson Group also used referrals to expand its GP network further into sectors, an approach that resonated with ALPS Advisory’s Au.
“Whenever a GP comes to you, they will undoubtedly tell you they are the best experts in their field. It then helps to check for references in your network in terms of history and business experience with a GP,” he said.
He said that ALPS Advisory uses its network of family offices in the US and Europe to get references to sift out those GPs with a strong track record. By not relying too heavily on big, established GPs with large funds and high fees, the network makes it possible to also assess newcomers in private market fund management, he added.
“It is a challenge when we can’t see a track record, especially in recent years where the number of new smaller private market GPs has been absolutely enormous - I see a new fund launch coming into my inbox almost like every hour.
"It is not magic, so you have to take your time ask the simple questions to your contacts to gather information,” Au said.
GETTING A STAKE
Private market investments contain a broad array of sectors - from private equity, private debt and real assets - capturing everything from venture to distressed assets or take-private control opportunities, SHK’s Yeh pointed out.
“So the definition of a gem investment in the current turmoil depends which subsector you focus on. The general investment principle is to have sector expertise by using trusted partners when entering new areas within those sectors,” he said.
Yeh also mentioned that while SHK is very experienced in private equity investments, in financial services, biotech is a newer sector for the firm. Here, the company relies on GPs with expertise and experience to help and guide investments.
ALPS Advisory, meanwhile, has adopted the investment strategy of taking a stake in GPs.
Au said that GP investment not only provided a different source of income stream from management fees, adding that becoming an owner of a GP provided the investor with better access to their information.
“For GPs, you want to understand how they source and get access to deals as well as how they execute and plan to exit them. You want to see real money coming back to you, not just numbers on paper,” Au said.