00:06:15 · James Bohannon, Mikk
[00:06:15] S1: Yeah, I mean, flexibility is sort of the hallmark of family capital. I mean, why do people like family office partners? Because it's flexible, meaning it just belongs to someone. It's not spoken for. It's not coming from another sort of fund where it has to be kind of deployed or called or at certain pace and then redeemed at a certain pace based on some fund structure. And so family capital is ultimately flexible, which means every family office is gonna invest differently. They're gonna invest based on their own parameters and desires. They're gonna be based on how their team is compensated and the alignment and the incentives of the team, is something we should really talk about, just very important in family offices, which people sort of overlook. It's gonna be invested based on the proclivities and desires of the principal, right? Some billionaires love venture, some hate venture, right? Some want to do sports teams, some people want to do huge direct investments, some people want to do funds. The rhyme or the reason of that is really preference and, circle of competence and where that family office is in their journey. If you look at the industry of family offices, you're in Europe, are you not? [00:07:37] S0: Europe. Yep. So Correct.
00:07:38 · James Bohannon
[00:07:38] S1: In Europe, the family office has been, you know, it's a family enterprise. It goes way, way back to the original sort of merchant banks of the early years. Some family offices in Europe can be 500, you know, a thousand years old, etcetera. In The US, they're all pretty new. So it's a new thing. So if you talk to some of the European counterparts, they're gonna be like, we made all the mistakes until we figured out sort of what worked for us. And it seems to me they all kind of after like fifty, one hundred years kind of go back to just the very large endowment style investing where they're using sort of a massive consultant. But in the early years, a lot of families sort of make their own, they have to make their own mistakes or figure out what works for them or figure out what they kind of want to do. And so that's kind of the flexibility. Some come out of the gate and they invest in 25 different funds. And then they're like, all my liquidity is locked up and now I have 25 line items and I can't invest this new sort of great thing that comes out. Some people will do direct investments right off the gate and they'll risk it's a lot harder and they're not equipped to do it. Some people will do a bunch of venture deals and get their faces ripped off. You have to figure out what works for you and what works for us. Like our preference is sort of cash flowing, easy to understand businesses in The US old economy. That's obviously a very popular place, but that's consumer services, business services, shipping logistics, little bit of healthcare, things like that, multi site consumer. We like franchising businesses. We like businesses that are easy to understand. We like really strong alignment with sponsor management team and investors, etcetera. And there's a bunch of attributes in our deal box that we specifically look for things like skin in the game and experience and all that. But in terms of the flexibility, it's sort of all over the place. The fun part too, is if something super interesting comes along, and we're like, look, we want to make a small investment in this, it's not necessarily part of our core mandate. We can do it if we have our own process on how to do that. As every sort of family officer, multifamily office does, we have a discussion, we have sort of an IC process, we put together a document, we do references, etcetera.
00:09:53 · James Bohannon, Mikk
And if we like something, we can do it. So flexibility is the cornerstone, the hallmark, the greatest weapon of family offices. And it's probably the main reason why everyone wants a family office partner. Because let's say you have an amazing asset and your big investors have fun, they're like, look, we got to sell because the team needs their carry, they promise their investors to get back or if that asset is like the last deal in the vintage that is six years in, they need to sell it like the flexibility of just saying, hey, this is a great business, we want to hold on to it. Or sure, we can put in more capital because it's crushing in to do more add ons and we can really be aligned with the management team. That is a sort of key cornerstone. So that's how we think about flexibility. [00:10:39] S0: Now when it comes to the process on a management team level, how much extra work is required to do it successfully, let's say, up a directs program verse... And doing that in house versus outsourcing to a third party manager?
00:10:54 · James Bohannon
[00:10:54] S1: Yeah. Mean, there's... You can either like fully outsource everything where you're using an MFO. You can partially outsource it where you're using sort of a consultant or advisor that kinda runs your alts or a fund of funds. Or you can then do funds in house. Or you can do co investments alongside sponsors, or you can do direct investments. I think that's the full menu of options for family capital. I think a lot of people, especially recent, they like to say they go direct, but what they really like is doing co investments alongside either funded sponsors or unfunded sponsors, I. E. Newly branded independent sponsors. Why do they like that? Because it's you really get to dig in at the asset level, the alignment is really strong, the returns are juicier, and your capital is sort of not locked up. And so you can sort of underwrite a deal, industry, and then you can underwrite a jockey and then sort of, you know, make a decision from there. So like the process or the decision of do you go direct, do you outsource it, do you do fund to funds, do you get like a family office sort of consultant or an ICO platform? Or do you do it yourself? Or do we just go fully outright buy a business? That comes down to a few different things. I think primarily it comes down to bandwidth, expertise, and desire. On desire, what kind of business do you want to run? Do you want to run a holdco investment firm where you're hiring like really good investment professionals, like private equity investment professionals who could do a control deal, who are gonna spend 40% of their time like on one single asset, you're basically running a private equity fund, right? Not private equity fund, a private investment firm. You know, it's hard. Winning a deal is hard. Controlling the board, having a majority position in a private business is hard because things can go wrong. And all of a sudden you gotta spend 140% of your time on that deal. And that's a whole different ballgame versus moving a little farther left on the spectrum, co investments alongside independent sponsors or funded sponsors. That's a nice mix, right?
00:13:06 · James Bohannon
Where it's not as much work, you're outsourcing the sourcing, you're outsourcing the day to day sort of management of that asset, but you get to dig into the diligence, you get to have a say, maybe you sort of take a board seat and observer seat or being sort of involved. So it's sort of a nice mix. And a lot of family offices are just hiring ex private equity professionals. So for them, it's like a good mix of like we still get to use those skills. The returns can be juicy and nice, but it's sort of a nice balance. So that's a pretty good sweet spot. And it's also a perfect match. I mean, we're coming from Maguire Woods. And so the independent sponsor conversation is worthy of having. It's a great fit. Like Family Office Capital is a great fit for independent sponsor deals. They're both looking for each other and like that's an ideal sort of fit and it's a harmonious relationship for the most part and it can continue. It can be a long relationship and it can blossom into an LPGP relationship, into a fund and those things. So I guess understanding like where you want to be on the spectrum of how direct, the real question is how direct to the asset do you want to go? Meaning like fund to funds, I say, oh, you're very far from the asset. You're like four different layers. If you own the business outright over here, you're very close to the asset. I. E, you default on a loan, your name is on it type of thing, right? Like you're very like attached to the business. The employees, if they're not getting paid, they're coming to you. So like understanding how close to the asset you want to get depends on those things. Expertise, we talked about, do you have the right people, investment professionals in place? And then the last most important thing is bandwidth. So the mistake that or challenge that a lot of people have is they want to do direct, but their family office is set up where, you know, they're also they're doing privates, doing publics, and they're doing planes, right? They're doing the art, the planes, the houses, the rich people stuff, the services, the capital calls, the day to day management of the family, the inbound investment from the principal who runs into his brother-in-law at a cocktail party and wants to invest in his company, you have to all of a sudden like underwrite that and get back to that distant cousin in a timely manner.
00:15:33 · James Bohannon, Mikk
Like all that takes a long time. So if your bandwidth is spread, it's particularly challenging to do very like close asset deals, like I. E. Direct investments. And that's why some people will sort of look to outsource it. So I think making all those decisions of how you want to invest requires those considerations on bandwidth, expertise and preference. And again, it's a learning process, I think, for the principal. Because as you set these things up, sometimes it's difficult to unwind these decisions because you're... You know, you've hired a team and you've invested deeply in these assets. And now all of a sudden you've got a business to manage, right? And mouths to feed and you've got money in the ground and these are not liquid assets. So those are some of the things to kind of think about. And I can answer any follow-up questions to this if you want. [00:16:27] S0: Yeah, no, when it comes to those managers, sponsors, when does that flexibility create like a real advantage for the business? Yes, we know there is this. It's a great asset. Let's keep compounding. But what about its manager and what needs to be maybe agreed upfront about the distributions follow follow on funding and eventual exits when before starting building all this?