By AMY GUTTMAN
After Austin, Texas-based entrepreneur Nick Gray sold his startup, Museum Hack, for seven figures in 2019, he joined a peer network of high-net-worth individuals and family-office members. Applicants who pass a vetting process are invited to join the existing 1,200 members for a fee of $30,000 per year.
Gray’s choice, TIGER 21, seemed obvious because it was conceived to fill the very same need Gray had: Learn how to preserve and grow newly created wealth within a trusted and objective group of peers. It is part of an ever-crowded field of investment clubs forming to meet the needs of a growing number of individual investors, family offices, and next-generation family-office members who are taking more active roles.
Dennis Caulfield, vice president of research at FINTRX, which gathers private-wealth and family-office research and data, has witnessed the demand. “You’ve got a totally new generation coming into decision-making seats at these family offices, and they're taking a new approach,” Caulfield said.
“One of those things is networking more aggressively with other family offices.”
In 1999, Michael Sonnenfeldt and six other founders, all of whom had just sold their businesses, set up TIGER 21 to create a forum to share advice and knowledge. TIGER 21 has grown to encompass more than 90 groups of about a dozen members who meet for a full day each month in more than 40 cities.
The club provided Gray a regional network of high-net-worth peers, access to deals and education that helped him set up his own family office.
Critical to Gray was TIGER 21’s cornerstone: its mandatory annual portfolio defense, in which each member discloses and defends the allocation of all of his or her assets in a presentation to a small group. The defense includes the member’s investment philosophy, criteria and in-depth analysis and is guided by a 20-page questionnaire. For Gray, it was what set the club apart.
“One of the most valuable benefits of being a member is the portfolio defense,” he said. “It's straightforward, but it's rigorous; you have to disclose every dollar you own, where it's invested, how you acquired it and your allocation plans.
“Many people say the biggest benefit of membership is simply the preparation. There aren't a lot of places like it.”
LEARNING FROM PEERS
Clubs operate differently, with overlapping offerings and various business models. Some are structured to collect membership fees, while others charge commissions on club deals. Other clubs generate revenue through advertising and selling services to members. Though some are strictly offering co-investment opportunities, many are structured to provide a combination of networking, education and best practices, along with access to vetted club deals.
Swen Lorenz, CEO of Sarnia Asset Management, a fund manager serving high-net-worth individuals and family offices, said demand is partly driven by pragmatism.
“There is something intrinsically valuable about working with peers instead of those generating a salary from an investor’s wealth,” Lorenz said. “There’s also value in being able to follow someone more inclined to take the lead investor role than yourself, spreading the share of risk and getting access to expertise from people who created entrepreneurial success rather than being an employed analyst.”
Data gathered this month by FINTRX found that the number of single-family offices globally that are considering co-investing alongside other family offices is up from 43.8% in 2020 to 47.5% for the year to date.
Increasingly, Caulfield said, newer family offices are looking toward groups that have more experience with direct investing and share their investment principles, which are typically longer-term than those of funds.
“In 2020, just over 5% of all direct transactions that took place were co-investments by two or more family offices,” Caulfield said. “This past year alone, we’ve seen that rise to about 7%, which is fairly substantial when you consider that this is all transactions across direct real estate and all industries. We’re seeing co-investments grow hand in hand with direct investments.”
RBC Wealth Management’s 2021 Family Office Report said that the average family-office portfolio of direct investments included 10% club deals and 24% co-investments, which includes investing alongside a fund.
Growth in club deals and co-investing prompted Tim Draper to go beyond his VC fund, Draper Associates, to develop Draper Decentralized, a platform for networking, co-investing and accessing vetted deals. “Family-office investment clubs are popular because they've wanted to avoid paying a fee to VCs,” Draper said, “so we figured out a way to bring them direct deals. Some of them have not done well and have come back to Draper Associates. But some of them say, ‘I can do it, I'll create my own deal flow.’ ”
CLUB DEAL CHALLENGES
The challenge of sourcing, evaluating and managing direct investments can be daunting. A 2022 survey by First Republic reports that while family-office co-investment is increasing, only 35% of those polled have the in-house resources and infrastructure to vet and monitor co-investments.
Lorenz of Sarnia Asset Management cautions those seeking club membership to conduct the same due diligence applied to investing. “Over the past 20 years, I have seen more hot air and even fraud in this sector than I can keep track of,” he said. “Few of them truly have the membership base, operational platform and access that they claim to have. Go for established names, and do your homework.”
Deals done through even the best clubs, Lorenz said, carry risk. “Investment clubs are incredibly useful,” he said. “I run an informal network of this kind myself, but investing successfully is incredibly hard, no matter what model you choose.”
Sage advice for a trend set to continue. “Investment clubs are here to stay,” Caulfield said. “The family office is a lonely place. There aren't really any other investors who can really relate to the positions that a lot of these family offices are coming from.