Direct investing is not a new trend among family offices, but the demand for thorough due diligence continues to rise. This week, Andrew Cohen reports on how family offices approach direct investing and how many families collaborate like syndicates to achieve the best long-term outcomes.
I also spoke with Özge Doğan, founder of Turkey’s first independent multi-family office, about the expanding wealth management market in that country. With a strong connection to family-run businesses, Turkey is seeking guidance for the next generation of family members who will eventually take over their families' operations.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: Family offices face growing due diligence demands in direct investing
By ANDREW COHEN
Direct investing can provide family offices greater control over their investments and higher rates of return than private equity or venture capital funds. But the proper due diligence to make the right direct investments can be a challenging resource commitment for many family offices.
“What you learn really quickly is, with a lot of investments, a lot of the return is made at the point of purchase,” said Tommy Mayes, managing director and executive adviser at SunGate Capital. “You have to buy right, you have to do your due diligence, you have to price the deal correctly, structure the deal correctly.”
Director investors can often avoid excessive fees associated with joining private equity and venture capital funds and gain more oversight of a company’s operations.
“There are very few firms that will either have the competency or the capability to [conduct due] diligence at a level that we expect as a family office,” Mayes said. “When you plug it into an existing family office apparatus, it could suck the life out of the office. One deal can dominate the dialogue for months.”
SunGate Capital is a Florida-based single-family office with investments in real estate, medical imaging and insurance businesses. Their investments include South Dakota-based Investors Preferred, which Mayes formerly ran as president and is now a board member, showcasing the hands-on role family offices can plan through direct investments. SunGate will typically underwrite a target of a 25% to 30% return on its direct investments.
“There's part of the process where you hire a firm to do a quality-of-earnings report,” Mayes said. “You’re looking at the financials to see what’s really going on with the company and whether or not what they’ve shown can be validated. A lot of times that will flush out that the business was not as profitable or as cash-efficient as they found it to be.”
Families fond of families
BNY Mellon’s July 2024 study of 189 single-family offices found that more than half — 62% — made six or more direct investments over the past year. Family-owned businesses will often look at family offices as a better-fitting investment or acquisition partner than a private equity firm.
“A lot of times, founders take such pride in their business that the notion of selling to a purely financial buyer like a traditional private equity firm, it’s not really attractive,” said Mayes, who also described a recent diligence discovery of a family-owned business.
“We just looked at one that had every family member on the payroll. They weren’t all working there, but they were on the payroll. So we had to validate that to add this expense back.”
The Boston-based investment consulting firm NEPC employs a 74-person research team to build portfolios for its ultra-wealthy clients. “What’s become a little more common is families that are investing more like a syndicate, where they’ll put a consortium of six, eight or 10 families together,” said Dan Gimbel, a principal at NEPC private wealth. “Oftentimes those families will have varying backgrounds in different industries where they created their wealth. They may source a business in real estate, another in manufacturing and another one in oil and gas.”
Fernando de Leon is the CEO and founder of Leon Capital Group, a Texas-based family office whose wealth originated in real estate and now oversees $10 billion in private capital. Leon Capital has made 700 investments in the past 17 years, with significant expansion into health care.
“We don’t go into anything thinking about the exit,” de Leon said. “We think about whether or not we like the industry and whether or not we could see ourselves investing in it for 30 or 40 years
“Some groups that want to just sell out entirely may just want the highest price. But I do think if you’re interested in your life’s work being protected, if you want to roll over some equity alongside us, I think most sophisticated company owners understand that if you sell it to private equity, it’s probably going to be resold multiple times later.”
Focused on building, not selling
Other family-owned investment firms, such as Chicago-based Pritzker Private Capital and the Naples, Florida-based Hoffmann Family of Cos., also see their internal stories of family legacy being paramount to connecting with the family-owned businesses they look to acquire through direct investments.
“We bring a long-term approach and capital base to our investments,” said Michael Nelson, managing partner of Pritzker Private Capital. “We’ve really taken an approach that’s focused on building great businesses first versus this mentality that many traditional private equity firms take, where they’re thinking about selling the business the day after they invest in it.
“That doesn’t mean we’re not focused on generating good returns, but we do it by building great businesses for the right duration.”
The Hoffmann Family of Cos. owns about 200 businesses headquartered in 13 states, Canada and the UK, including Vikings Plastics, multiple ferry services in Michigan and the Midwest ice cream maker Oberweis Dairy.
“We don’t have the same sort of constraints that institutional investors have in delivering results within this specified period of time,” co-CEO Geoff Hoffmann told Crain Currency. “What’s most important is that cultural dynamic, especially when you’re dealing with family-held businesses, we are not coming in and changing the culture. If there’s an earnings miss, the whole team isn’t going to get fired.
“We don’t want to take over and operate the business. We want to be your partner for the long haul.”
Multi-family office Karman Beyond taps into growing market in Turkey
By KRISTEN OLIVERI
Özge Doğan, the founder of Turkey’s first independent multi-family office, was inspired to create her own firm based on her own family's wealth management challenges.
“I wanted to diversify my family’s assets. And as I consulted with various advisers, bankers and tax experts, I realized that managing everything had become a full-time job,” Doğan told Crain Currency. “I couldn’t find a local adviser whose interests were aligned with mine.”
In 2022, she launched Karman Beyond to assist families and family-owned businesses with a range of services, including wealth planning, succession and governance strategies, international asset acquisition and even relocation support.
Turkey’s private wealth sector is expanding rapidly, with a 9.7% increase in ultra-high-net-worth individuals in 2023. That's the fastest growth rate globally, surpassing the United States and India, according to Knight Frank data. “This growing wealth needs to be managed in a way that makes families feel secure,” said Doğan, pointing out that the family office concept is still relatively new in Turkey.
Another distinctive aspect of Turkey’s wealth landscape is that affluent families are closely tied to family-run businesses, which make up 95% of the country’s companies. With a significant wealth transfer on the horizon globally, Doğan sees a substantial opportunity to guide the next generation as they navigate their unique needs, which often differ from those of their predecessors.
LOOSE CHANGE
Six Senses plans Telluride resort: The luxury hospitality brand plans to open the resort near the Colorado mountain town in 2028, marking the first luxury property in the Mountain West region for IHG Hotels & Resorts, the parent company of Six Senses.
NFL to play long game with private equity: The premier sports league in the U.S. will allow institutional investors, including private equity firms, to take up to 10% stakes in its teams, after lagging well behind Major League Baseball and the National Basketball Association.
Family office promotes vaccine to treat dog cancer: “The breakthrough technology behind the dog cancer treatment is called the Canine Autologous Cancer Vaccine or K9-ACV,” said the vaccine’s backers, GSD Venture Studios.
Help us with a story: We’re working on a story about luxury interior design for ultra-high-net-worth families. If you have any comments on the topic, reach out to [email protected].