Management is the No.1 factor for family offices when they decide whether to invest or not.
An analysis by The Capital Express (www.TheCapitalExpress.com) of the investment criteria of six family offices - three U.S. and three European - found that all of them placed top priority on management in their decision about whether to make an investment.
"There is no substitute for the strength, drive and enthusiasm a strong president brings to an organization," explained a 100-year-old U.S. family office, which has 16 management executives and support staffers. It attributes its success to "acquiring companies with talented leaders."
Thoma family office, also based in the United States, prefers "established funds and management teams," in an attempt to ensure a fair return on its investments - upwards of 15 percent annually. It invests in private equity, distressed assets, real estate and venture capital.
Here is a roundup of how these investment entities that manage fortunes of wealthy families go about making investment decisions:
For DMS, superb management is top priority
DMS, a U.S. single family office, "places a high value on management and company culture. DMS is flexible regarding industries in which it will invest. Like most investors, DMS prefers businesses in industries which have good growth potential, which have high barriers to entry, which enjoy superior and consistent margins, which are non-cyclical and which have stable customer relationships and defensible market positions.'
"However, DMS has repeatedly seen businesses operated very profitably by talented management teams in industries not meeting these criteria. Thus, while DMS does generally avoid certain industries, it is generally willing to consider a wide variety of industries provided the right management partners will be involved."
"DMS seeks to acquire controlling interests in active businesses that will allow it to earn a return on equity of at least 20 percent over a business cycle." It prefers companies with pre-tax net income of $2 million to $15 million (current or potential earninings). Its investments range $2 million to $50 million. It has $100 million available for private business investing activities. "Available capital, together with prudent leverage, allows us to consider companies with an enterprise value up to $200 million in many industries."
While DMS mainly focuses on acquiring existing businesses with a success record, it will consider start-up businesses. DMS views management as especially critical in start-up businesses and generally looks for management teams with a track record of success in the type of business being considered.
DMS invests in turnarounds or distressed companies. It is especially interested in management buyout transactions where management is buying out a historic individual owner of a business or where a corporation has made the decision to divest a “non-core” operation.
DMS has expertise relating to family succession matters, which allows DMS to participate in a flexible manner in a recapitalization of a business undergoing a generational change in ownership.
Financial, industrial and real estate top Donadeu family's picks
The Donadeu family office, which has been in existence since 1930, focuses on financial, industrial and real estate sectors. In industrial, it renewable energy and pharmaceuticals; in financial, it favors banking, private equity and investment funds; while its real estate investments target both income-producing assets and "development projects of all kinds."
This European family office invests in "projects that have growth potential without any sector specialization, with a preference for significant miniority sharesholdings that allow" it to "participate actively in the decision-making process." It expects a 15 percent return yearly on its investments and invests $5 million or more in each deal.
Thoma applies diverse tools
U.S. single family office Thoma invests in private equity, distressed assets, real estate and venture capital. It prefers "established funds and management teams" in an attempt to ensure a fair return on its investments.
In the private equity arena, it makes "direct investments and provides financial assistance to growing companies." In distressed debt, it "buys pools of distressed residential mortgages." In venture capital, "Thoma will consider special situations in which it will act as a minority passive investor."
It "looks for companies with a proven management team and business model with proven profitability." In real estate, it "invests in flagged hotel development projects" and "buys distressed land at deep discounts with plans to hold the land for five to ten years."
Strong leadership is foundation for all YSV investments
The investment strategy of YSV, a U.S. single family office, focuses on the leadership of each opportunity, with the investment review process beginning with an evaluation of the management team. "A strong leadership group is the foundation for all YSV investment activities."
YSV will consider a broad range of investment categories, including venture capital, private equity, management buyouts and growth investments.
It has considerable experience in several industries. While YSV will consider investing in new industries, it prefers real estate, retail, franchise concepts, wholesale, distribution and financial services.
YSV has a special interest in the emerging sustainability industry and the triple-bottom line business philosophy. It will consider investments in “green” companies as well as companies dedicated to socially and environmentally responsible business practices.
YSV evaluates each investment on a case-by-case basis, without imposing internal restrictions on investments based on capital invested or geography.
Klesch takes opportunistic approach
Klesch & Co, a European family office, which has made investments worth $14 billion since its founding in 1990, seeks to make "control equity investments across a broad spectrum of industries" in Europe, Asia and the United States.
"Opportunistic in our approach, Klesch & Company is interested in acquiring businesses no longer considered central to the growth plans of their current owners. Such businesses may be non-core divisions of large corporations, secondary buy-outs, refinancings or disposals. The businesses can be stable or underperforming."
It has focused on "buying businesses that are largely exposed to the vagaries of the commodity markets, in particular, oil, gas, coal, electricity, aluminium and other base metals or alternatively making greenfield investments in commodity projects."
Ecos Sustainable Equity Fund is all green
Ecos Sustainable Equity Fund, a family office of Swiss origin focused on investments in South America, targets ventures active in providing tools for a more sustainable development. "We invest in cleantech (defined as environmental engineering and renewable energy) and sustainable forestry operations throughout Latin America."
"Our focus is based on three pillars: energy generation, biofuels and efficiency. On energy generation, we look at solar and wind energy, hydropower, biomass/biogas energy and geothermal energy, which we feel has been overlooked to date, but has massive potential. In this sub-sector you could be looking at technology developers, technology deployers and services companies. We look more at technology deployers and services. We believe that the U.S. and Europe have access to outstanding and experienced technology investors to look at the technology development side."
"Another area interest is energy efficiency. We are looking at smart grid applications. We are also looking at more niche technologies, such as those that can be installed at home but that are affordable and deployable for Latin America’s infrastructure."
Wind River approach: invest the time, chart the course, create the future
Wind River, a 100-year-old U.S. family office, which owns companies in banking, franchising, service and light manufacturing sectors, "is looking for control positions in companies that we believe can grow by" five to 10 times.
It "actively seeks to acquire companies that have strong opportunities for growth, a high-caliber management team, a leading and recognized brand in its respective market and annual sales of up to $100 million."
Currently, it is seeking to buy companies with $3 million to $10 million in earnings before taxes. They should be in business-process outsourcing, consumer services, environmental products or services.
Source: The Capital Express (www.TheCapitalExpress.com)