5 Steps to Close: How Family Offices Review Potential Investments

This post is excerpted from The Single Family Office: Creating, Operating & Managing Investments of a Single Family Office.

Family offices receive an overwhelming number of requests from fund managers to review their fund and consider making an investment. While evaluation processes vary, here are five key steps many use to conduct an initial review. This is not the complete process (there are usually many sub-steps along the way), but this should give you an idea of the typical procedure.

Step 1: Review the One-Pager

The initial step in the fund manager selection process is to review a one-pager (also known as a tear sheet or teaser), which provides an overview of the investment fund. This one-pager is usually distributed as a PDF and will include information such as the fund’s investment performance and audited track record, team bios and history, investment process and philosophy, disclosures, investment structure, and contact details.

The teaser provides the family office with a 10,000 foot view of the fund, and is usually sufficient for investors to decide whether or not to pursue more information about the investment or pass on the opportunity. Most investors can complete a review of a teaser in 5-10 minutes and know whether or not to move on with the next step of evaluation.

Step 2: Review the Pitch Book

If the investor is interested after reviewing the teaser, the family often will request (or more likely be sent without prompting) the pitch book — usually sent in the form of a PowerPoint deck. The presentation is called a pitch book for a reason: it’s purpose is to pitch the family office on the benefits of investing in the fund. The deck typically ranges from 10 to 100 slides, and reviews the management team, unique edge in the marketplace, investment process, risk management procedures, operations, service providers, investment examples, and future plans.

This document is generally sufficient for investors to know whether there is a strong chance they will invest in the fund.

By proceeding onto the third step, you are signaling that you have been satisfied with the information so far and would like to learn more with a phone call or meeting.

Step 3: Conduct Phone Screening

If the family office is interested in investing after reviewing the pitch book, they will request more information. Given that family offices invest with a number of fund managers that are often based many miles from the family, a phone call is usually the most practical third step in the evaluation process.

This phone call is an opportunity for the family office to ask any questions about the materials or the investment and to get a feel for the fund’s professionals. These calls are usually at least half an hour in length and I have participated on many calls that last hours — although active single family offices usually try to limit the length as much as possible. During this call, the fund manager or investor relations professional will walk the family office through the presentation, answer any questions, and elaborate on any points that are particularly interesting to the single family office. Most pitch books and teasers are carefully prepared to present the fund in the best possible light; the phone call is an opportunity for savvy family office CIOs and analysts to poke holes in the strategy and performance. Family offices will be able to form a better opinion of the investment after engaging in these calls and get a sense for how the fund manager operates.

If the phone call and evaluation goes well, almost all of the single family offices that I know will have a face-to-face meeting before making a commitment.

Step 4: Due Diligence

At this stage, the family office is seriously considering an investment in the fund. The primary document that is used by investors during this process is the due diligence questionnaire, also known as the DDQ. This is an exhaustive list of 50-200 questions which covers many different areas.

The momentum toward a deal can sometimes slow at this point, since this questionnaire requires both sides to work through the granularities of structure, past performance, audits, references, and other time-consuming tasks. Most large investment funds have a dedicated investor relations or compliance professional who routinely prepares these documents for investors; as a result, the turnaround for these funds is usually much quicker than smaller shops. Likewise, many investors employ a consultant or staff member who is experienced in reviewing DDQs and digging into the details of the responses.

Once the DDQ has been reviewed by the investor, the final step in the due diligence process is to conduct an on-site visit to see how the fund operates, ensure that nothing has been misrepresented or exaggerated in the materials, and get a better feel for the potential investment partner.

Step 5: Formulate a Final Opinion

The final step is to circle back with the family office investment team and formulate a final opinion on the investment. Getting through to this point in the process does not necessarily mean that the opinion will be positive. Many of the best-performing family offices that I have met credit their willingness to walk away from a deal, even at this late stage, as a big reason that they have been successful.

The family office will usually conduct a meeting between the investment committee and the decision-maker in the family so that the committee and CIO can present their case and outline the structure of the deal. The team may find that they still have some questions, in which case they will expand on the due diligence and evaluation. If they are satisfied with their evaluation and receive the green light to move forward, then the family office will contact the investment fund and proceed with executing the contract.

For more information, check out The Single Family Office: Creating, Operating & Managing Investments of a Single Family Office.