Right Here, Right Now:  Crafting A Successful Family Office Investment Strategy and Assembling The Team To Support It

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In our last article, we detailed the first two factors for successful family office direct investment:  Right Experience and Right Reasons.  Today, we’ll cover the next two factors:  Right Strategy and Right Team. You can see the complete list in our intro post on the topic.

RIGHT STRATEGY ::  The family office develops a direct investing approach that fits their needs.

While defining the Right Experience and Right Reasons grounds the investment office and acts like a moral and decision-making compass, defining the Right Strategy helps your family office actually get moving.  There are at least three considerations for developing the Right Strategy:

How Much Can We Invest?

This is essentially a math problem that considers:

  • Total Investable Assets – Assets readily available for investment
  • Future Capital Needs Of The Family – Capital needed to fund the family’s future, such as education, lifestyle, future generations, new ventures, etc.  
  • Target Portfolio Returns – Returns required from the family’s assets to fund future capital needs
  • Allocation By Asset Class – Appropriate investments by asset classes to achieve the target returns given the family’s risk tolerance (from the “Right Reasons”)

What Is Our Current Portfolio Risk?

It’s important to understand the risk exposures inherent in the current portfolio to help set boundaries for future investment.  Commonly overlooked considerations include:

  • Macroeconomic factors
  • Political and geographic factors
  • Currency
  • Legacy business assets
  • Legacy financial investments

What Direct Investment Mechanism Will We Use?

There are several ways family offices make direct investments in companies:

  • Buddy System – Family offices join other family offices to invest in companies.  This is often an entry point for direct investing because family offices can share the burdens of due diligence and governance.  There are definitely pros and cons to this approach; it can work, but it’s hard.  All the challenges that come with direct investing from a single family office grow exponentially with every family that added to the mix… and when things go wrong it gets really messy.
  • Shotgun Approach – These family offices make a large number of direct investments with little due diligence or governance oversight.  Investments are typically in response to solicitations and rarely strategic. Sadly, family offices that take this approach are the “dumb money” in the deals they do, and investments rarely pan out.
  • Surgical Approach – Cautiously enthusiastic about direct investing, these family offices place a high priority on diligence while skimping on deal flow generation.  They’re usually patient, and may only do a single deal in a three-year period.
  • Dream Team – From the outside, these family offices look like a boutique investment firm, leveraging a full team of investment professionals (typically 3-20 people) to generate deal flow, conduct due diligence and provide ongoing oversight of private equity or venture capital investments.

Synthesizing the work above helps determine the Right Strategy.  Given the family’s overall moral and decision-making compass, how big is our direct investing pool, what returns do we require, how do we integrate new investments with our existing risks and what mechanism will we use to execute the investments?


RIGHT TEAM:: The family office assembles the right professionals and advisors to support its direct investing efforts.

You don’t need a team of strong rowers if you’re buying a powerboat.  The composition of the Right Team is driven by the Right Strategy. The team may include family members, investment professionals and external advisors.  Here are some considerations:

What Expertise Do We Need?   Distinct skills include generating deal flow, conducting due diligence, contributing industry-specific expertise, providing ongoing governance oversight and engaging with the family.

How Big Is Our Team?  The size of the team is related to the number of deals you’re targeting.  One deal every three years can be supported by a lean team of 1 or 2 people but closing a deal every few months requires more bandwidth – and therefore a bigger team.

What Points Of View Should Be Represented?  A team that captures specific points of view regarding direct investment decisions may include family members, investment professionals, experienced entrepreneurs, the CEO and others.

How Do We Structure Compensation?  Even the best teams struggle if their wallets aren’t aligned with desired results.  Appropriate compensation and incentives support the Right Strategy by aligning family and employee priorities – and attracting and retaining high-quality talent.

The family office factors we’ve talked about so far – the Right Experience, Reasons, Strategy and Team – focus on groundwork and planning.  There’s one more key family office factor to nail and that’s having the Right Discipline. You can have amazing plans, but without solid execution, you’ll be disappointed with the outcome. In an upcoming post, we’ll talk about the importance of discipline.

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