In this week’s issue, we break down the anatomy of a club deal. Amy Guttman spoke with several family office professionals about the labor-intensive process and the dos and don’ts of structuring such an investment. Family offices caution a couple of key points: spending enough money within the investment to make it worth your time and making the due diligence a top priority.
We also bring to you an exclusive interview with impact investing thought leader Michael Weatherley-White. He sat down with me to discuss his new role as CIO of Align Impact. It’s a surprising move for him, given that after retiring from Caprock after 30 years in the business, he moved to an eco-resort in Mexico with his young family. But the opportunity presented itself to work with Align’s CEO, Jennifer Kenning, and he simply couldn’t pass it up.
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: The anatomy of a family office club deal
By AMY GUTTMAN
“Club deals” are officially having their day.
The trend in direct investing among family offices has driven this rise of club deals or what’s more commonly known as co-investing. In 2021, club deals represented 92% of all family-office-funded startups globally.
Rob Follows, who established his own family office based in Barbados, has been doing direct investments and co-investing for years. “It can be a lot of fun," he said, "but it's only for the family offices that really want to roll their sleeves up and get involved in operating businesses.”
Follows takes a strategic approach when deciding whether to share a deal: “If we have enough equity, liquidity, the diversification fits our profile, and we have enough knowledge and expertise in the area, we'll do it on our own.”
The benefits of co-investing are about more than money, Follows said. Co-investors can spread risk on a large deal. Those who bring expertise and networks can add overall value. There are also scenarios where synergy between investors makes a deal viable. Follows points to a recent co-investment he made.
“It’s a life insurance deal in 14 jurisdictions. We don’t want the whole thing. Our intention is to sell off the U.S. asset because the compliance is too high. One of our co-investors will benefit from first right of refusal. It's value-add for them and for us.”
Due diligence is another core pillar of a club deal. Samira Salman is a family office adviser and lawyer with a background in corporate tax and deal structuring. Salman advises clients to use three elements to perform rigorous due diligence on both the opportunity and co-investors: a checklist, human intelligence and intuition.
“A diligence checklist is critical," she said. "If you don’t have one, Google it and ask other families to share them with you. The checklist is a living, breathing thing. It needs to be added to and refined on a deal-by-deal basis. This becomes really important when something goes wrong. What could you have seen differently or asked about?”
Co-investors can benefit from group due diligence, since each will draw on different experiences and networks, Salman said. The human factor, she said, is often the most valuable. If you lack expertise, Salman advises calling other families who have done deals in the space.
But in the end, you have to trust your instincts.
“There are times when we check off everything," Salman said. "It looks like an amazing opportunity, and you've run it by other families in that sector, but you feel in your gut that something's a little bit wrong. I've never met an investor who said, ‘I regret trusting my gut.’ ”
When co-investors reach the deal table, Salman said, it’s important to be tactical about appointing board members, rather than handing out seats to family members. “Search for board members who have experience managing during bad times, not only good," she said. "You want to make sure you at least have somebody that understands the nitty-gritty numbers. You also want someone with experience in helping grow companies or turn companies around.
"It's not always the person who wrote the biggest check that has the best expertise to direct the board.”
Managing Director Tommy Mayes of SunGate Capital, a single-family private equity and investment office based in Florida, cautions family offices to understand and ensure that they have the resources for the heavy lifting involved in direct and co-investments. “It's a common misconception that an LP investment and direct or co-investing in a deal takes similar resources," Mayes said. "The talent and time required to diligence, underwrite, close and manage a direct investment is infinitely greater.”
After the deal is done, the administrative burdens increase — monitoring, management, tax and board meetings. That's why Mayes focuses on two things when first considering a deal: a check size that matches the resources required, and core competencies.
“A lot of times, families will want to put $1 [million to] $2 million," said. "I advise a minimum direct investment of $5 million with direct or co-investing. You've got to put enough money in to justify the extra work.”
Investing in a family’s core competency is another critical factor for both Mayes and Follows.
“A lot of families that venture outside things that they're good at tend to have less robust outcomes,” Mayes said. “I'm a big fan of families finding their core competency and zeroing in on that.”
Follows suggests family offices investing outside their competencies develop their own group of one to two sector-specific experts who source and perform diligence on deals, participate in equity and support leadership to ensure alignment.
“First-generation family offices have an advantage because they’re experts in the industry they created their wealth in," Follows said. "That person will often be very interested in deals they understand because they know everybody in the space. It’s easy to diligence and hire leadership they trust.”
Weatherley-White joins Align Impact as CIO
By KRISTEN OLIVERI
Align Impact has hired Matthew Weatherley-White as chief investment officer, effective immediately.
Weatherley-White is an influential leader in impact investing. He brings more than 30 years’ experience as an investment professional and thought leader, harnessing the power of the capital markets to create a more inclusive, sustainable planet.
“My goal is to bring 30 years worth of experience and leadership in financial services to a firm that’s growing quickly; that’s young, passionate and dedicated to impact investing,” Weatherley-White told Crain Currency.
Most recently, Weatherley-White was a founding partner of the Caprock Group, the wealth advisory firm serving a small number of families and foundations around the world. After leaving Caprock, he had all intentions of leading a quieter life.
“I thought I was going to retire,” Weatherly-White said. “I am under contract to write a book, and my wife and I bought an eco-estate in Mexico where we now live.”
But after reading the job description, Weatherley-White felt compelled to learn more. After several conversations with co-founder and CEO Jenn Kenning, he knew this was an opportunity he wanted to pursue, as he believed in its core mission.
“It is self-evident that Align is committed to diversity, equity and inclusion, and that’s really exciting to me,” he said. “Impact investing went from hope to proof 20 years ago and has been going through the process of proof to scale ever since then.”
Weatherley-White’s addition allows Align to offer more clients a highly customized experience that places their values and portfolio needs at the center, Kenning said.
LOOSE CHANGE
Hedge fund billionaire Paulson sued for securities fraud by Puerto Rico partner: John Paulson’s longtime business partner, Fahad Ghaffar, alleges that the hedge fund billionaire made fraudulent claims to persuade him to invest $17 million in a luxury automobile dealership on the island.
Sotheby’s unveils royal jewelry collection that was hidden away in a bank vault for decades: In Geneva on Nov. 6 and 7 during Sotheby’s Luxury Week, 200 pieces from royal houses linked to the Austrian Hapsburg dynasty will go on display for the first time in nearly a century.
Billionaire Peugeot dynasty hires new CEO to manage fortune: The French clan’s Etablissements Peugeot Freres, which oversees a fortune centered on the eponymous carmaker, named Nicolas Huet CEO to replace Thierry Mabille de Poncheville, who has held the job for 18 years.
Help us with a story: We're working on a story about investing in the sports and entertainment industries. If you have any comments on the topic, reach out to [email protected].