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DIANE HARRISON 1

What Family Offices Want From Alternatives Managers

What Family Offices Want From Alternatives Managers

Competition within the alternatives sector for family office investments is at an all-time high, as these
investors get more comfortable with the range of assets available to them and their general understanding
of alternatives rises. Fund managers want to win these wealthy investors over, but often find they are unsure
of how best to pursue them. The family office client is increasingly demanding a more tailored approach to
wooing them over. Managers who can adapt their prospecting tactics stand a better chance of winning a
partnership with these prized investors.

THE RELATIONSHIP SOURCE IS SHIFTING

In a recent article on Forbes.com, “Single Family Offices and the Ultra-Wealthy are the Keys to Raising
Capital for Smaller Hedge Funds,” Russ Alan Prince made an interesting observation about the broadening
range of advisors who influence family office investment activity. Increasingly, other high-net worth
intermediaries beyond traditional financial advisors, such as lawyers and accountants, are weighing in on
investment decisions for the wealthy.

In order to maximize the chance of getting a review from high net worth investors, fund managers,
particularly smaller hedge funds lesser known overall, can widen their contact efforts to include private client
attorneys and accountants who specialize in providing alternatives guidance, and in so doing, tailor their
marketing communications to appeal to these professionals Topics of appeal to these individuals include
favorable tax implications of fund structures, risk modification to portfolios including alternatives, and
uncorrelated return characteristics to traditional asset classes, among other subjects. Endre Dobozy,
manager of FTM Limited, a firm specializing in low-volatility alternative investments, agrees with these last
two points, in a recent article on Kiplingers.com, “The Five Best Investment Deals You Can Make In 2018:
”Equities remain diversified until they aren’t. By including an alternate investment in your portfolio that has
little to no correlation to the market, you are able to offset a portion of any market losses and reduce the
overall drawdown of your portfolio.”

FAMILY OFFICE 1.0 VERSUS FAMILY OFFICE 2.0 — SOME INTERESTING DIFFERENCES

A Q4 2017 research study, Single-Family Offices and Alternative Investments, by Institutional Capital
Network, provides a framework for the changing dynamics in family office activity within the alternatives
space. Some of the research findings that stand out in particular include:

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DIANE HARRISON 2
What Family Offices Want From Alternatives Managers

First generation founders have a ‘stay-rich’ mentality, while second-generation are more likely to have a ‘get-
richer’ perspective. iCapital Network’s survey found that, as many first-generation family office individuals
created the family office with wealth derived from their other business ventures, their overall goal is to
preserve that wealth. In contrast, second-generation family office members view the wealth capital of the
family office as their primary source of wealth accumulation, even if they have other professional careers,
and therefore are more interested in an active investment stance to grow the family office assets through a
variety of investments, including alternatives.

The investment numbers tell the story. The investment allocation figures compiled by iCapital Network seem
to bear this out. In general, investments being made into alternatives by second-generation members have
increased substantially. About 40% of second generation single-family offices are investing 15% or more of
their total portfolios into alternatives, compared to 20% of first generation single-family offices that are
investing at similar levels. In addition, the second-generation members tend to make allocations along the
full range of alternative investments, with a particular interest in direct deals. In 2017, 71% increased their
direct allocations relative to 2016, and 82% intend to do so in the future.

The direct route is gaining popularity among the wealthy. Two-thirds of family offices surveyed indicated they
will participate in more direct deal transactions going forward. The survey findings suggest that one potential
reason for the heightened interest in direct investments is the long history of entrepreneurialism within the
family office community and the desire to preserve that legacy for future generations. Most family wealth is
created through entrepreneurial means.

The desire for internal control is also growing for family offices. Formerly, family single-family offices were
largely content to rely on using third-party managers to build alternatives allocations and renegotiate fees in
cases of substandard performance. The survey found that more often, today’s organizations are seeking to
hire portfolio managers directly to create in-house funds. The line between family offices and asset
managers continues to blur as these investors focus on optimizing their allocation mix and maximizing
returns.

RETUNE YOUR SALES PITCH TO CATCH THE ATTENTION OF TODAY’s FAMILY OFFICE

The investment trend towards active investments, streamlined fees, favorable tax implications, and
transparency and control is not necessarily a new path for family offices in alternatives. However, the
approach to selling these aspects of alternatives has evolved. Peter Sasaki, managing member of CGS
Associates, elaborated on this in the previously mentioned article on Forbes.com, “Single Family Offices and
the Ultra-Wealthy are the Keys to Raising Capital for Smaller Hedge Funds.” Sasaki stated: “For smaller
hedge funds, the strategic positioning of investment talent is often critical. This is all the more important
when the smaller hedge fund lacks a well-established and impressive track record. Being seen as a thought
leader, for instance, concerning the type of investing they’re doing can be instrumental in not only sourcing
single-family offices but also getting them to commit funds. It plays a big role when I’m looking at hedge
funds.”

For managers looking to gain a greater foothold in the family office space, crafting a clear and compelling
description of the alternatives value they bring is priority number one for whatever investment offering they
are marketing. Next is to structure that offering with an alignment of partnership interests that are appealing
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What Family Offices Want From Alternatives Managers

to these family offices, including co-investments and separate accounts. And third is to carry that message
to the broader universe of third-party constituents, who serve this growing family office segment of the
investment community,

Diane Harrison is principal and owner of Panegyric Marketing, a strategic


marketing communications firm founded in 2002 specializing in alternative assets. She has over 25 years’ of expertise in hedge
fund and private equity marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables.
2018 AWARD WINNER: Acquisition International's Sustained Excellence in Specialized Marketing Communications - USA |
Corporate Insider's Excellence in Marketing Communications – USA. 2017 AWARD WINNER: Global Fund Awards 2017 Financial
Services Marketing Firm of the Year - NY, USA | Corporate Insider Business Excellence Awards 2017 Financial Marketing Firm of
the Year - USA | M&A Insider Awards 2017 Financial Services Marketing Firm of the Year - USA | Corporate LiveWire Innovation &
Excellence Award 2018 shortlisted. A published author and speaker, Ms. Harrison’s work has appeared in many industry
publications, both in print and on-line. To read more of her published work in alternatives, please visit www.scribd.com/dahhome.
Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

PANEGYRIC MARKETING | FEBRUARY 2018