SFOs in Dialogue: Diving into private markets
Many SFOs look for opportunities in private markets, but picking the long-term winners takes experience, research and the right contacts. Two family offices share their insights.
At our SFOs in Dialogue event on private markets, panelists Frederic Wohlwend, managing partner of Forestay Capital, and Prashant Mehta, chief investment officer of KEF Holdings, discussed how they find opportunities, when to get in and when to get out.
Both SFOs have roughly half their portfolios in unlisted companies, invested either directly or indirectly, and both typically hold those investments for at least four to five years.
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Find out how two successful family offices identify winning private market strategies and get tips for building up a network of contacts.
The importance of contacts
SFOs rely on their networks to identify potential private investments. Forestay, which focuses on digital technology, develops relationships with other investors to stay in the loop about subsequent fundraising rounds, such as those aimed at venture capital (VC) and then private equity. Forestay has also made contacts at academic institutions, including MIT and Stanford, and does on-the-ground research at conferences. In addition, they have developed their own AI engine to scour the web for opportunities.
To give an idea of the ratio of potential to actual investments, Wohlwend said he scans roughly 1,200 start-ups a year to make three or four deals.
As for Mehta, a fellowship with the Kauffman Fellows Program gave him a valuable network of VC contacts, and he hears about opportunities from his fellow alumni. He has developed relationships with entrepreneurs and is introduced to deals by banks such as Credit Suisse and by his bankers in India. He can also be approached by entrepreneurs who have seen or heard about KEF as a potential investor.
Get in early
Both like to get in early, at the point where a start-up begins to show revenues and they see the potential to ramp these up fast. At KEF, initial investments start at about USD 1 to 1.5 million and can go up to USD 15 million. Forestay prefers Series A and Series B rounds of investing, when venture capital tends to be raised. That usually means putting in at least USD 15 million.
“The key is to invest at the inflection point,” Wohlwend noted. Once the company has revenues of USD 2 to 5 million, he aims to see if it has the potential to get to USD 50-100 million in three to four years. “It’s very important in the VC tech space to scale rapidly, otherwise you lose your competitive advantage and you will be eaten.”
Both Wohlwend and Mehta are positive about the 2022 outlook for private markets in the technology sector. Wohlwend sees more interesting opportunities in Europe than in the US.
Make a mark
Competition to invest in private markets is intense. SFOs that bring more to the table than just money, such as experience running and investing in other companies, can be more valuable and therefore more attractive.
According to Wohlwend, expertise in how to grow a company is often missing in the private equity or VC tech field – which is exactly where Forestay, KEF and other like-minded SFOs have a lot to contribute.
As Mehta put it: “Our differentiator? We have operational experience, have run large manpower pools, have access to human capital, and can make introductions to other pools of capital, for example to other family offices in different industries.”
Collaborate to generate more
This idea of working with other SFOs where appropriate is also proving a good way to stay one step ahead. Both Forestay and KEF see real potential for family offices to work together because they often share the same investment philosophy. What’s more, they understand the importance of being hands-on and the need to design growth strategies. Both SFOs believe they are getting more deals as a result.
“We are winning deals against big VC names because of what we can contribute in terms of growing the business,” Wohlwend said. And by joining forces with other family offices, “we can reinvent the VC model.”
Making an exit
When to take profits from a private investment depends largely on what sort of returns have been generated and whether further gains are achievable. Trade sales and IPOs provide the typical exit routes, although special purpose acquisition companies (SPACs) are a newer option. In the tech field, some of the most lucrative returns are made when a tech giant wants to buy a company for strategic reasons, even if the revenues are still relatively modest.
As for pitfalls, the advice from the participating SFOs comes down to this: don’t make emotional decisions and do get experience first via funds or co-investment opportunities before you decide to go it alone.
