It was an invitation too good to resist.
Matthew McCarthy was asked by KKR to fly to New York from Ohio, where he manages money for the founders of a consumer-products company. First he had dinner with KKR’s billionaire co-founder Henry Kravis. The next morning, he met David Petraeus, the former director of the Central Intelligence Agency and current chairman of the KKR Global Institute at the company’s headquarters.
“They didn’t really pitch products,” said McCarthy, 43, whose firm Rockside Capital Partners intentionally stays under the radar. “They brought out General Petraeus.”
McCarthy is the type of investor that KKR and its private equity competitors including Blackstone Group and Carlyle Group are increasingly courting. Family offices and their advisers manage an estimated $US4 trillion, including for the newly rich in Silicon Valley and China, Midwestern entrepreneurs and old money in Europe.
The money managers are responding by adding staff, holding conferences and offering sweeteners, including reduced fees on investments.
PRIVATE WEALTH AN ‘UNDER-TAPPED SEGMENT’
Efforts are paying off. Blackstone, which last year started reaching out directly to family offices and hosting forums for them, has $US43 billion of its $US310 billion under management from private wealth, more than triple the amount five years ago. Across private equity, family offices account for about 6 per cent of capital, up from 4 per cent in 2010, according to research firm Preqin.
Industry executives say the percentage should be higher.
“The private wealth side is such an under-tapped segment, and way under-invested in alternatives,” said Brendan Boyle, Blackstone’s senior managing director of private wealth management.
The firms are seeking new pools of wealth to lessen their reliance on state and corporate pension plans. They’re also reaching out at an opportune time. Globally private equity firms reaped a record $US428 billion by selling holdings last year, a 30 per cent increase from 2013, according to Preqin.
Cracking the network of rich families isn’t easy because it requires uncovering people who don’t necessarily want to be sold to, said Lawrence Calcano, a managing partner at iCapital Network, an online marketplace for private equity funds.
“They don’t have to buy things, unlike pensions that may need to hit a specific return target each year to fund payouts to retirees,” Calcano said.
MORE THAN MONEY
Private equity firms want wealthy families for more than just their money.
Family offices bring expertise in buying companies, usually have fewer regulatory restrictions and can take bigger risks than pensions or endowments, Michael Arpey, a managing director at Carlyle who oversees fundraising, said in an interview.
William Heitin, who works for families including the founders of fitness company Reebok International and Stacy’s Pita Chip, was invited by Blackstone last year to an event at the Waldorf Astoria hotel followed by time in the company’s New York headquarters with senior executives.
Many of his clients are entrepreneurs who have built and sold their own businesses so they can help private equity managers vet deals, said Heitin, whose Waltham, Massachusetts-based Windrose Advisors manages more than $US2 billion.
“We have a client that started and sold a major food company,” said Heitin, Windrose’s chief investment officer. “If the private equity firm is looking at a deal with a food company, we put them in touch and then there may be a co- investment opportunity for the family.”
‘A VERY, VERY VIBRANT AND GROWING INDUSTRY’
Private equity firms – once they track down family offices – face intense competition to woo them from both larger and smaller rivals.
BlackRock, the world’s largest asset manager, has amplified efforts to serve the group by hosting summits with speakers including its chief executive officer, Larry Fink. The company has more than 20 people dedicated to working with them in the US and has added staff in London, Hong Kong and Australia, said Brian Feurtado, who leads the group for the New York-based firm in the US.
“There’s been an explosion of family offices,” Feurtado said. “It’s a very, very vibrant and growing industry.”
Kayne Anderson Capital Advisors this month said it raised more than $US1 billion for its latest real estate fund, with half the money from family offices and high-net worth investors.
There are an estimated 4000 family offices globally, according to London-based researcher Campden Wealth – with the latest addition a familiar face. Doug Ostrover, co-founder of Blackstone’s GSO Capital Partners unit, announced last week he’s leaving to start one of his own.
Heitin’s Windrose met with more than 400 investment managers last year and ultimately made just five investments, he said. McCarthy of Rockside passed on investing with KKR in part because the family he represents – whom he declined to name – can team with other wealthy investors to buy companies themselves.
FAMILY OFFICES ‘DON’T NECESSARILY WANT TO BE FOUND’
Some private equity firms are enticing family offices to invest with the promise of co-investment opportunities. That’s when families invest alongside the firms rather than through a pooled vehicle, and are charged reduced or no fees. While it sounds good to investors who are more sensitive to costs, the offerings may not result in better returns, according to a 2015 study by professors Josh Lerner and Victoria Ivashina of Harvard Business School and Lily Fang of INSEAD.
For Jim Burns, who leads KKR’s individual investor business, outreach is just ramping up. KKR hired Burns four years ago from Morgan Stanley’s private wealth management unit to build a team focused on sales to the wealthy. Burns hired two people in the past six months to reach more family offices in Europe and Latin America, he said.
“You really have to go door to door,” he said. “Most family offices don’t necessarily want to be found.”
Bloomberg via AFR Weekend