The Complete Direct Investing Handbook: A Guide for Family Offices, Qualified Purchasers, and Accredited Investors

PRAISE FOR THE COMPLETE DIRECT INVESTING HANDBOOK

"In The Complete Direct Investing Handbook Dr. Rosplock and her contributing authors impart a wealth of global family office and investment expertise designed to educate affluent families and their professional advisors regarding the nuances of direct investing. This well–researched new resource will prove to be an invaluable tool in navigating the rapidly growing field of direct investments."
THOMAS J. HANDLER, ESQ., Chairman, Advanced Planning & Family Office Practice, Handler Thayer, LLP

"The family office space has long needed a comprehensive introduction to direct investing for non–specialists which it now has thanks to Rosplock and her co–authors. A great place to start."
GRANT KETTERING, 5th Generation Member of Kettering Family

"Kirby Rosplock has written an extraordinarily comprehensive ′owner′s manual′ for family offices already, or seriously contemplating, investing directly in illiquid private markets. The book cogently sets forth not only why these families desire to get closer to the source of private market returns, but more importantly how to go about identifying, diligencing, and structuring direct investments. Given the fast–growing proportion of family office capital in direct private deals, this book′s insights are exceptionally timely."
TOM MAHONEY, Senior Managing Director, Tangent Capital Partners

"The Complete Direct Investing Handbook is a wonderful read and the education needed in the family office world. We seek out direct investing to diversify risk while enhancing overall returns. However, with direct investing comes the challenges with sourcing, screening, and doing proper due diligence, structuring, and then monitoring these investments. Kirby Rosplock′s book touches upon all these areas, providing excellent education for families to easily understand and use in their offices. The book also touches upon other noteworthy areas such as the Millennial′s perspective and international direct investing, which I found extremely helpful. The book is very comprehensive, informative, and a useful source for our family office."
JULIO GONZALEZ, CEO, Julio Gonzalez Single Family Office

"There are many good books and articles about private investing in general but few that tackle the topic from the unique lens of the family office. Family offices have advantages and constraints relative to other institutional investors. They need to be understood. Kirby Rosplock′s book should be read by both family members and professional managers to better understand how to craft and advance a direct investment program."
SAM ALTMAN, President, Joddes Limited, Montreal, Canada

Foreword xv

Preface xvii

Acknowledgments xxi

PART I: DIRECT INVESTING AND THE FAMILY OFFICE TEST

CHAPTER 1 Introduction to Direct Investing 3

2008: A Wakeup Call for Investors 5

Role of the Family Office and Private Investors 6

The Opportunity 9

Best Practices 10

Key Considerations 12

Conclusion 15

Notes 16

CHAPTER 2 The Emerging Presence of Private Capital in Direct Investing 18

Contributing Authors: Nathan Hamilton and Sara Hamilton

The Family Office Marketplace 19

The Unique Benefits of Private Capital 21

Increased Interest in Private Equity 24

Conclusion 30

CHAPTER 3 Co–Investment Strategies in Direct Investing 32

Defining Co–Investing and Providing Context 32

Insights on the Popularity of Co–Investing 33

Interest in Co–Investment Strategies 33

Roles of the Co–Investor 35

Going Solo: Why Co–Investing May Not Be Your Choice 40

The Perils and Pearls of Co–Investing 41

Vetting Co–Investors 44

Club Deals 46

Mini Case Study 51

Conclusion 51

Notes 52

CHAPTER 4 Private Equity Strategies: Characteristics and Implications 54

Contributing Author: David McCombie

What Is Private Equity? 55

Real Estate 58

Venture Capital 62

Growth Capital 72

Buyouts 75

Mezzanine Financing 78

Distressed Assets 81

Conclusion: Putting It All Together 85

Notes 86

PART II: DIRECT INVESTING IN ACTION

CHAPTER 5 Family Office Considerations to the Direct Investment Process 91

Source of Wealth: Lens of the Family Office 92

SWOT Analysis for Direct Investing 93

Three Phases to the Direct Investing Process 94

AThree–Phase Direct Investing Process 97

Case Study 111

Conclusion 113

Notes 114

CHAPTER 6 Designing a Direct Investment Thesis 115

Defining the Direct Investment Thesis 115

Asset Mix and the Direct Investment Thesis 117

Family Pathways and the Direct Investment Thesis 119

The Barbell Approach and the Direct Investment Thesis 122

Entrepreneurial Orientation and the Direct Investment Thesis 124

Family Investment Style and the Direct InvestmentThesis 128

Case Study 132

Conclusion 137

Notes 138

CHAPTER 7 Sourcing, Deal Flow, Screening, and Deploying Direct Investments 141

Contributing Author: Euclid Walker

Industry Professionals and Thought Leaders 142

Investment Bankers/Business Brokers 143

Professional Service Providers 144

Commercial Banks 144

Private Equity Funds/Family Offices 145

Screening Process 146

Due Diligence 151

Investment Memorandum 154

Investment Decision Process 155

Conclusion 156

Notes 156

CHAPTER 8 Direct Investments: Deal Structures, Terms, and Portfolio Construction 157

Contributing Author: Jolyne Caruso

How to Get Started 158

Portfolio Construction 159

The Capital Stack 160

Equity Transactions 162

Types of Debt Instruments 165

Mezzanine Debt 166

Case Study: Early–Stage Solar Energy Finance Company 168

A Primer on Important Term Sheet Items 170

Conclusion 175

CHAPTER 9 Investment Monitoring, Exit Strategies, and Harvesting Returns 177

Contributing Author: Adam Goodfriend

Introduction 177

Alignment of Objectives 178

Monitoring Direct Investments as a Minority Stake Owner 178

Why Timing of an Investment Exit and Not Just the Investment Return Is Critical 179

Importance of Company Lifecycles with Respect to Timing and Harvesting Returns 181

Exit Valuations and Multiples 184

Maximizing Liquidity of Illiquid Investments through Pre–Negotiated Rights 186

Exit Value Drivers 188

Common Exit Strategies 189

Mergers and Acquisitions 192

Working with Investment Bankers and Key Advisors to the Exit Strategy 192

Conclusion 194

Notes 195

PART III: DIRECT INVESTING PERSPECTIVES

CHAPTER 10 The CIO Perspective 199

Contributing Author: Robert G. Blabey

Sourcing Top CIOs to Oversee Direct Investing in the SFO 200

What s the Edge? 202

What Defines Success for the CIO? 203

The CIO Fit 207

Risk Management at the Investment Level and Portfolio Level 209

CIO Compensation 211

Conclusion 216

CHAPTER 11 The Millennials and Direct Investing: A Look at Impact Investing 218

Contributing Author: Temple Fennell

Who Are the Millennials and What Do They Care About? 219

Millennials Respect for the Senior Generation 220

Growing Interest in Impact Investing 222

Making the Case for Impact Investing 222

How to Source Impact Investments 227

Experiential Returns: Intangible Benefits of Impact Investing 231

Common Challenges and Barriers to Impact Investing 232

SystemsThinking: Creating and Sustaining Family Knowledge 235

Conclusion 238

Notes 239

CHAPTER 12 SCIE: Sustainable Cycle of Investing Engagement 242

Contributing Author: Temple Fennell

The Purpose of SCIE 244

The SCIE Framework 246

Family Purpose, Values, and Mission 247

Framing Strategy 249

Developing Strategy 253

Implementing Strategy 259

Capture and Communicate Learning 264

Conclusion 269

Notes 269

CHAPTER 13 International Direct Investing 271

Contributing Author: Anna Nekoranec

Why Consider International Direct Investing? 272

Key Differences between Investing Abroad versus Investing in the United States 274

How to Determine Where to Invest 276

How Population Change Can Impact Target Market Opportunities 278

Keys to Success in International Direct Investing 282

The Role of a Partner in International Investing 284

Common Mistakes Made by Investors Venturing Abroad 286

Risk Mitigation 288

Foreign Families in the United States 290

Conclusion 291

Notes 292

APPENDIX A Private Equity Strategies Summary 293

APPENDIX B Sample Due Diligence Checklist 299

APPENDIX C Glossary 306

About the Author 316

About the Chapter Authors 318

Index 323

 

KIRBY ROSPLOCK, PHD, is founder and CEO of Tamarind Partners, a consulting firm that advises family offices, ultra–high–net–worth investors, and the wealth management industry. She is a researcher, scholar, educator, and well–respected speaker around the globe on family wealth, family office, and family business. She is also the author of The Complete Family Office Handbook. For more on Dr. Rosplock and Tamarind Partners, visit www.TamarindPartners.com.