The joy of missing out, or 'Jomo', as Yash Mishra, head of private clients at Taurus Wealth, put it, was her philosophy of investing in private equity when she allocates her multi-family office’s capital to the asset class.
At least this is how she felt, after passing on an opportunity to invest in Wework three years ago.
“To me, I have never understood the business model. You rent out short-term, you take long-term leases. The mismatch in itself never makes sense,” she said at AsianInvestor’s seventh Southeast Asia Family Office Forum on December 4.
Despite its unicorn status, the co-working space company’s valuation has been written down as it has come under fire for its shoddy governance and cash flow management that saw the firm splurging millions across the globe to expand rapidly in recent years.
“When something looks frothy and fast and high and moves too fast... if I don't understand something basic, I don't have a compelling need to invest in it, and we just say no,” Mishra told the forum’s delegates.
Her views echoed with those of Noli De Pala, chief investment officer of multi-family office Trilake Partners, who said he needed to be clear about the purpose of investing in a particular company.
“I always ask a question: why are we doing this? Why does private equity belong in a portfolio that's trying to make 6% to 9%?” he said and added that his family office’s private equity investment has been on hiatus for the last 18 to 24 months."
“In that process, have I missed out great investments? Most likely. Do I have regret? Absolutely not. To me, it's better to be safe than sorry,” Mishra added.
What they said makes sense, as placing their eggs in the wrong bucket comes with a consequence when family offices have fiduciary duties to protect their families’ wealth.
“What if I am wrong? What happens is that the clients will look at all the investments you have when you talk to them and they will zero in on that one,” said De Pala, “Forget about the fact that you have done 20% elsewhere, they will zero in on the one that lost 5%. It's just the asymmetry of the investor experience and we are very cognisant of that.”
Having said that, when a family’s wealth or the bedrock of their wealth is challenged by potentially disruptive companies, allocating to companies that capture new trends may make sense.
“There may be families who have made their money in hotels. It's important for that family to understand who is Airbnb,” said Mishra, whose multi-family office is an investor in the online lodging broker.
More importantly, Wework’s ordeal has reminded family offices why due diligence is a must.
“Wework doesn't change our method of due diligence, it stays the same. It's just a reminder of why we are doing this in the first place,” said De Pala, who added that making the effort to verify these companies’ claims is key, even if investors are taking part in a manager’s subsequent funds.
“It really stands that you have to do your due diligence. You have to understand the company well, regardless of what sector: private or public,” said Rachel Troublaiewitch, chief executive of Gateway Private Markets, whose family has also historically been active in private investing.
ACCESSING THE RIGHT COMPANY
For family offices, however, accessing the right opportunities is not easy due to the lack of private equity talents who would be better off elsewhere, said Mishra.
“That's the real issue. It's the lack of understanding inside an asset class, where understanding is key, because risk is real and you are playing against the big guys,” she added.
When Taurus’s private equity programme started five years ago – since when Mishra has done 11 deals – she spent close to a year developing the right access, she said.
She now has partners on whom she relies to help source specific deals at specific price points: “If I have an interesting company in my mind, I reach out to my partners and then they make it happen. That to me is how it should be.”
The reason why family offices should be cautious about their access to private companies also stems from potential legal risks.
“My philosophy is: you need to have bought it from somebody on the cap table, you need to have complete see-through so that the block of shares will never go missing because you are working with the board of the company,” Mishra said.
Overall, finding the right access requires effort: hiring the right team, building the right network and platform, Troublaiewitch said.
“But the best deals, I would suspect for family offices, would be the one you identify yourself and then figure out how to get to it,” De Pala concluded.