Family dos and don’ts for club deals
More of Asia’s rich families, or the offices they have established to represent their interests, are teaming up to make investments.
Banks – investment banks or private banks, which are often the same thing – are busy pitching deals to families. Tycoons are either joining forces with like-minded families in club deals, or they are co-investing with third-party fund managers, such as from the world of private equity.
But club deals and co-investments are no easier to manage. The terms agreed on paper may not mean much if conditions get ugly, and traditional due diligence isn’t enough. The families have to rely on more than legal contracts to protect their interests.
Based on discussions at AsianInvestor’s recent conference for family offices in Singapore, here are some dos and don’ts around club deals and co-investments.
* Do let someone lead and take responsibility for the deal. This may be one family’s office, if it is staffed with people with the necessary experience. Club deals should be done on an equal basis but a knowledgeable team has to get things done. However, a family office that takes on a complex project but which lacks the right capabilities will make everything worse – so pick the leader wisely.
* Don’t take a family’s claims of independent, long-term commitment at face value. There were plenty of cases in the fallout of the 2008 financial crisis when such claims turned out to be illusory. Ethical behaviour went out the window when families felt threatened.
* Do work with investment banks if the seller of an asset (be it strategic or a private-equity fund) prefers to transact via an adviser. Investment bankers have their place in the ecosystem.
* Don’t be naïve about investment banks, however: they exist to extract fees, and when bringing a deal will seek to embed advantages over information, exits, liquidity and fees.
* Do check if a deal that is being shopped to you by a bank has already been looked at by that bank’s own senior executives, its proprietary investment bodies or its affiliated asset management company.
* Don’t touch over-shopped deals.
* Do consider deals in which access and transparency is equal among all parties.
* Don’t overcomplicate a passive investment with strategic partners: you may just require a lawyer to structure it properly.
* Do partner with families that you already know. Such relationships may be social, or within an industry, or among members of the same generation. This makes it easier to enforce the unwritten rules of due diligence, and to know the track records of a family’s behaviour in previous investments. Reputations are better enforcers of openness, transparency and fairness than legal contracts when it comes to rich families working together.
* Don’t co-invest with third parties without knowing their relationship with other investors. Those dynamics will matter when it comes to capital calls and drawdowns. Similarly, don’t co-invest unless your coffers really can meet future calls on capital.
* Do initiate any club with a common minimum agenda: not necessarily documentation but a strategic agreement, stated up front. This should cover key areas such as who can exit a deal and when, what is the target internal rate of return, and what is the accepted level and manner of risk?
* Don’t allocate so much money to a deal that it could jeopardise the family if it was completely lost. Club and co-investment deals are for surplus capital. In 2008, some families found themselves over-extended and faced extinction.