Entrepreneurial direct investments by family offices

In the case of direct invest­ments, the inves­tor is much better infor­med about the target company and the work of the team entrus­ted with its deve­lo­p­ment than is the case with indi­rect invest­ments by means of clas­sic private equity (PE) funds. This gives the inves­tor the oppor­tu­nity to make very infor­med invest­ment decis­i­ons on a case by case basis. Of course, trust in the invest­ment team is an important factor — as it is with the clas­sic PE fund. Howe­ver, the inves­tor has the possi­bi­lity to evaluate invest­ment hypo­the­ses by himself.

This proxi­mity to the target compa­nies allows private inves­tors, who often have a (family) entre­pre­neu­rial back­ground them­sel­ves, to become actively invol­ved in the invest­ment and deve­lo­p­ment process. Many private inves­tors are attrac­ted by this intellec­tual chall­enge in addi­tion to a good return.

The main disad­van­ta­ges are the longer holding period and the higher illi­qui­dity of the invest­ments. In addi­tion, diver­si­fi­ca­tion in direct invest­ments usually requi­res very high total assets. These possi­ble disad­van­ta­ges are miti­ga­ted by joint inves­t­ing in club equity (see 3rd question).

For many sellers of medium-sized (family) compa­nies, in addi­tion to the finan­cial secu­rity provi­ded by the sale, it is often very important to deal with the company and its long-serving employees. When selling to a compe­ti­tor, they fear that the compe­ti­tor will leverage syner­gies through strong ratio­na­liza­tion or will prima­rily seek access to custo­mers or tech­no­lo­gies with the purchase.

In the case of clas­sic PE funds, sellers often worry about the limi­ted holding period due to the busi­ness model. They fear short-term thin­king and action here. — It is ther­e­fore easier for these medium-sized sellers to place their entre­pre­neu­rial legacy in the hands of one or more expe­ri­en­ced private inves­tors who will conti­nue to deve­lop the company sustain­ably and in the long term.

The clas­sic family equity inves­tor owns his own port­fo­lio of majo­rity and mino­rity share­hol­dings in compa­nies. We support these private (FO) inves­tors in an advi­sory capa­city in all matters rela­ted to direct invest­ments. Our services range from the iden­ti­fi­ca­tion of suita­ble target compa­nies to support in the acqui­si­tion and struc­tu­ring process, the search for suita­ble mana­ging direc­tors and the deve­lo­p­ment of the company on the share­hol­der side. We often have to consider cross-gene­ra­tio­nal family issues in the usually highly indi­vi­dua­li­zed finan­cial, legal and tax matters of family equity inves­tors. Our part­ner Chris­tian Drewes is ther­e­fore speci­fi­cally expan­ding our range of services to include family stra­tegy and family-inter­nal succes­sion consul­ting (“GFEP baton”).

In the area of club equity, we join forces with private inves­tors to jointly invest in compa­nies and deve­lop them over the long term. GFEP is respon­si­ble for the tran­sac­tion and the deve­lo­p­ment of the target company. Club equity combi­nes advan­ta­ges of family equity such as long-term nature and indi­vi­dual deve­lo­p­ment of the invest­ments with the advan­ta­ges of PE fund invest­ments, as private inves­tors can also parti­ci­pate with smal­ler invest­ment amounts and thus achieve a higher degree of diver­si­fi­ca­tion. Addi­tio­nally, club equity can be a deve­lo­p­ment path for inves­tors toward their own family equity port­fo­lio. GFEP’s part­ners also always parti­ci­pate signi­fi­cantly in Club Equity with their own funds to ensure equa­lity of interest.

About ALEXANDER TEWAAG
Part­ner at GFEP in Munich

Alex­an­der Tewaag joined GFEP at the begin­ning of 2014. Within the part­ner­ship, he is parti­cu­larly focu­sed on tran­sac­tional busi­ness and quan­ti­ta­tive analysis.

Previously, he worked for KPMG in the Nether­lands in corpo­rate finance, where he also had a strong focus on valua­tion, mode­ling and number-based stra­te­gic decis­ion making.