Investment Strategies

Direct Investing And Specialised Fundraising Rounds Attract Family Office Clients – Stonehage Fleming

Tom Burroughes, Group Editor, London, 25 November 2022

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The UK-based multi-family office recently discussed direct investing – a hot trend in the sector – how its clients and partners get involved in a series of fundraising, and the prospects for this part of the investments space.

Allocation to direct investments is increasing, while investment in late Series A and early stage-B rounds of fundraising are popular, with real assets and a focus on wealth protection very much on people’s minds, Stonehage Fleming says.

The multi-family office talked about its direct and co-investments business during a recent briefing of journalists. The idea of cutting out the fund route to invest and secure potentially greater returns and get more “hands-on” involvement in deals has been gathering momentum among certain wealth management players for some time. The MFO itself doesn’t invest but individual partners of the business, including its direct investment team, invest alongside clients. Average return on capital invested is 3.1 times.

“Clients are interested in investing in a platform like ours because they feel closer to the action,” Richard Hill, partner, head of corporate finance and direct investments, Stonehage Fleming Advisory Ltd, said. “A lot of these people are successful entrepreneurs and not used to giving up access to decision-making.”

So far, $430 million of client money has been invested via Stonehage Fleming’s platform. Historically, the firm has executed on a total of about $1.5 billion in private equity (that figure includes individual direct investment and PE funds). Across the whole firm, including funds and other ways of holding investments, the London-based group oversees about $21 billion in assets under management, according to its website.

Stonehage Fleming’s comments appear to chime with analysis from a number of wealth management firms in recent years, noting a large secular shift towards private markets and out of listed equities. Morgan Stanley recently noted that between 2000 and 2019, the number of publicly traded US companies collapsed by almost 40 per cent to 4,200. Conversely, the number of private US companies backed by private equity firms surged by almost 500 per cent, from 1,800 to 8,900.

The interest in such activity speaks to the continued appeal of active management, arguably even more in demand as global markets have turned more volatile and a need for “Alpha” has grown. “We have definitely seen a shift…clients are definitely taking more of a direct interest in what they are investing,” Hill said.

In fact, this is part of a “barbell” approach in which at one end, clients hold passive, Beta-tracking entities such as exchange-traded funds and similar structures, and at the other end, high-conviction, Alpha-pursuing specialist investments in private markets, Hill said.

Family offices have contrasting views about markets. Looking at family office and high net worth clients in general, some have been burned in late-stage venture capital deals and reduced their VC allocations as a result; others in the sector have been worried by the sharp falls to equity markets this year and stopped allocating to public markets, he said.

Overall, Hill said that in his experience, high net worth individuals and their families tend to be under-allocated to private markets.

Size matters
Asked about the size of private market deals that Stonehage Fleming gets involved in, Hill said the firm does not typically get involved in the very largest deals where it would only be one of many investors. There are also areas it avoids because Stonehage Fleming might lack knowledge. In those cases, the firm would rather hire a specialist manager instead, Hill said.

The tech selloff and difficulties in the equities market have underscored the relative attractions of non-public investments, Hill said. The private markets are not immune to wider economic trends and the venture capital space, for example, has become more cautious. “There probably is lower appetite for venture risk,” he said. 

Joining the briefing was Dave Sherwood, CEO and founder of Bibliu, a London-based digital learning platform serving higher education institutions and publishers; it works with universities in the UK, Europe and the US. Stonehage Fleming clients put money into the business about two years ago.

The multi-family office agreed to invest in Bibliu in 2019, and a few months later, the pandemic started. Stonehage Fleming decided to press ahead despite the lockdowns and disruptions. “We felt this was a business that would benefit from a move to the digital world…we put $2.5 million into the funding round,” Hill said. (The total round was $10 million.) Stonehage Fleming secured a board seat and active involvement in the business – an example of the sort of investment clout that some of its clients want to have. The MFO went on to invest $6 million in the Series B funding round. One of the benefits of family offices is the ability to provide follow-on capital.

“The decision-making process [of Stonehage Fleming] is very quick and streamlined…that can be different with many VCs,” Sherwood said. Unlike an MFO such as Stonehage Fleming, venture capital limited partners tend to be quite remote from the firms they invest in.

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