On the one hand, co-investments make a lot of sense for Asian families, which may not have the resources or appetite to take on a deal in its entirety. On the other, they raise issues such as competition and which partner has control.
“[How you put a co-investment together] depends a lot on the deal, how much of that particular deal is available and whether the person putting the deal together is willing to have multiple investors,” notes Henry Lee, managing director of Hendale Advisors in Hong Kong.
By and large, families tend to be passive investors in club deals, he says. But there will presumably be instances where it makes sense for a family to retain active operating control in a deal.
Lee points to the LVMH family – owner of the luxury goods giant – as having strong domain expertise it can use across the capital structure. “They can bring their operating companies to bear, to help the businesses that they invest in, and then the businesses in turn also want to have them as investors as well.”
However, foreign family offices wanting to co-invest into a specific country are generally looking for someone who can guide the local terrain, says TK Chiang, managing partner of Orion Partners, which runs family and pension money. In that regard, having control of a project doesn’t make practical sense, he notes.
“It’s the same with sovereign investors and pension funds around the world,” he adds. “If they’re of enough scale, they are keen on some level of influence in the process, but ultimately they want somebody – whether a GP or a local family office – to get the transaction done and watch over it.”
The approach will also depend on the structure of a family office, notes Chiang, who is based in Hong Kong. A large separate entity will typically have investment-orientated individuals, but not business operating staff. If it invests in a shopping mall and the mall runs into problems, he says, the investment team will not start running the mall.
“So family offices usually look for influence over the governance of the investment process, rather than control over it,” says Chiang.
And yet co-investment begs the question: if the deal is that attractive, why wouldn’t a family take the whole amount? “You get some scepticism when it comes to doing club deals and co-investments in that sense,” says Hendale's Lee.
“Bite size” is sometimes an issue, says independent family adviser Steven Johan, pointing out that $100 million is just a start for an energy deal, for instance. He numbers among his client base several families based in the Middle East, which are often involved in energy-related investments.
Lee argues that Asian families should be writing bigger tickets. “You could be a large family office north of $1 billion, yet only want to invest $2 million per deal,” he says. “I really wonder if it’s worth doing, as it’s a misallocation of time and resources.”
“Maybe they think $5 million is something they can afford to lose,” adds Lee, “so rather than making one meaningful investment, they’ll make a whole bunch of small ones.”
Small bite sizes are certainly common for Asian families, at least initially for advisory accounts, as they get to know their capability, says Audrey Lo, managing director of Alps Advisory in Hong Kong. “But with familiarity, this changes.”
“Currently, 95% of our portfolios are discretionary, so the bite size can be adjusted accordingly. We don’t look for direct investment, or club deals in general. However, if something looks interesting, we would investigate.”
However, Chiang says Orion tends to work with families that are prepared to invest at least $50 million, and they tend to put in that type of capital when they know the space very well.
“Our specialities include retail malls and senior housing in real estate and consumer-related and food & agriculture in private equity, so we tend to attract families who are involved in those areas, and on a co-investment basis.”
Meanwhile, families may consider co-investing with private equity firms, but that can raise costs.
“Co-investments tend to reduce the layer of fees and give more visibility of the investment, and particularly in the private wealth space there are many layers,” says Lee. “There are layers of banks, intermediaries, fund of funds and feeder funds, for example. So the more the client can invest directly, the better.
“But families often underestimate the need to have professionals within the investment space aligned with their aims, because very often they think by dealing with a bank, they’re dealing with the end client. It couldn’t be further from the truth.”