How interim PE talent can invigorate Family Office investment

Ross Gordon, Head of Odgers Interim’s Europe, Middle East and Africa (EMEA) Private Equity Practice, explains how Family Offices can boost value creation by working with and learning from private equity.

As the famous aphorism has it, a rising tide lifts all boats. For most of the past decade and a half since the Global Financial Crisis it was commonplace to make annualised returns of 10%-plus through investing in private equity without applying a meaningful level of hands-on operational involvement.

But with the rise in interest rates spelling the end of the easy money era, PE firms have seen their cost of borrowing go through the roof and have had to work harder to make investments pay off. For example, by cutting costs, improving supply chain efficiency and stimulating organic and inorganic growth within portfolio companies. And of course, in these more testing times they have not always been as successful as they would like in this respect.

“Leverage and rising asset prices have accounted for up to 70% of private equity returns in the last 20 years,” says investment specialist Maximilian K. E. Mayr. “With the market changing to a ‘new normal’, a lot of institutional PE firms have intensified their focus on operational improvements to their portfolio businesses’ bottom line as the new main driver to meet their return targets.

“What happens in the PE space has a direct bearing on Family Offices, the entities that handle investment management for high-net-worth families. Typically, the family money stems from entrepreneurial success – often through building a family business – and Family Offices may represent the interests of individuals from several generations.”

Maximilian, a PE and Family Office specialist who has worked on projects for both Family Offices and institutional Private Equity firms, has some illuminating insights to share on value creation, transformation and turnarounds in this area. However, before going any further it may be useful to provide some more background on Family Offices, given that there are huge variations in their size and sophistication.

Some of the entrepreneurs who have set up Family Offices will be household names, albeit that they also tend to value their privacy, preferring to keep their successes (and occasional failures) under wraps. At the lower end, which we can define as an investment portfolio of circa US $50m, the structure might entail one semi-retired investment banker supported by a junior analyst and maybe also a part-time accountant. While at the upper end of the scale there are Family Offices managing assets running into the billions. They may have balance sheets stretching up to $5 billion and more, and can invest $300-400m in private equity companies in a single transaction.

It is also worth noting that there are some cultural differences between regions around the world. Europe and the US have historically been dominated by ‘old money’ - the family could have been wealthy for 100 years or more and the focus may now be on the fifth or sixth generation. Obviously, in such circumstances, the founder’s generation is no longer around and at least one cycle of generational handover has been completed. Hopefully, the current generation is still adept at growing family wealth.

“In the United States, Family Office organizations are increasingly adopting a prolonged perspective on their investments, often retaining portfolio companies for extended periods,” says Glen Johnson, an Odgers Interim Partner based in Atlanta, Georgia. “This strategic approach has led to a surge in remuneration, driven by the ongoing competition for top talent. Candidates with prior experience in Family Offices are particularly sought after, prompting an upward trend in compensation packages. Despite the importance of understanding the cultural nuances within Family Offices, there is a notable skills gap in value creation across various roles. To address this deficiency, interim executives with PE experience are being brought in to fulfil crucial roles and bridge the expertise gap within these organizations.”

There is also a rapid build-up in both Family Office expertise and investment activity in Asia. “Singapore-based Family Offices have become a driving force in dealmaking in the last 10 years,” according to Maximilian. “If a Family Office is big enough to participate in major private equity deals, they will look to have a presence there nowadays to gain access to the best opportunities in Asia.”

Private equity is an attractive asset class for Family Offices. Indeed, many have longstanding relationships with PE companies that have evolved over the years. They may have begun by investing in PE funds and then moved on to co-investments – putting money directly into a portfolio company (rather that though the fund) alongside further investment from the PE company.

“We cannot put institutional PE on a pedestal considering it has had its share of disappointments over the past 18 months, but there is much that Family Offices can learn from PE,” explains Maximilian. “Similar to real estate, it is a far more complex asset class than it at first seems. Nuance and knowledge must be mastered in the context of fast changing markets. It is no longer possible to take a passive approach to investment.”  

Big consultancy firms are well-equipped to advise on transformation and value creation Unsurprisingly however, Family Offices often balk at the hefty price tag that comes with such assignments. This is where interim specialists come in with an analytical yet affordable approach. Able to hit the ground running, they can swiftly diagnose where change is required. In Maximilian’s case, his aim is to be able to tell clients the necessary key measures within a week of starting work with them – and implementation can begin within a month, at a fraction of the cost of retaining a large consultancy.

Even so, there can be no cookie-cutter approach. Every Family Office is different and there are subtleties to address in many areas such as overlaps with philanthropic interests and synergistic investments – i.e. companies that relate in some way to the main family business.

Sometimes boards need to replace a CEO, CFO, CTO or another key member of the leadership team, and here interim talent may offer the best immediate solution. Experienced executives with a strong track record in value creation are available to drive activities in a wide range of areas, from ESG and DEI to digital transformation – and much more. When all is said and done, in these challenging times Family Offices need to be more on the ball than ever before.

If you would like to have an exploratory conversation about how interim executives can drive value creation and support you in other ways, please get in touch.