Introduction
Family offices use co-investment and club deals to enhance returns. In this post, we will delve into the topic of co-investments and club deals, exploring their appeal, their risks, and potential for outsized returns. Let’s dive in and find out why these investment strategies have become the go-to option for savvy family offices.
What are Family Office Co investments and Club Deals?
Co-investments and club deals are a type of alternative investment strategy. These strategies are where multiple investors pool their resources to jointly invest in a deal or opportunity. In the context of family offices, co-investments involve investing alongside the lead investor in a round of financing. It could be another family office, but its more typically a private equity fund or venture capital (“VC”) fund manager.
The equity co-investment is generally a minority investment. It comes about because a VC manager may have a successful company in its portfolio that it wants to invest further into; known as a ‘follow-on’ investment. The VC manager may have hit the upper limit of what they’re allowed to invest with their fund’s assets. They approach their investors with a proposal; to create a dedicated investment vehicle (essentially a simple company, or “SPV”). This SPV’s only purpose is to invest in that one round, alongside the main fund’s follow-on investment.
The investors benefit with an opportunity to invest directly in a winning company in the fund’s portfolio. The VC manager receives their standard fees on the co-investment structure; usually a management fee and a carry. Co-investments are often seen as a bonus. Preference is first given to the VC’s existing investor base in their fund. Often the manager will give a 1:1 or 2:1 co-investment right i.e. the right to invest one or two dollars for every one dollar invested in the fund.
Club deals are a similar concept. They are where a group of family offices collaborate to make a joint investment in a particular asset or venture. Unlike a co-investment there tends to be no fund manager involved. Club deals are more common in real estate deals. The families will create an SPV to pool their assets together and purchase a property for income or redevelopment.
The Allure of Co-Investments and Club Deals
Family offices find co-investments and club deals attractive for several reasons:
Enhanced returns: By investing directly in an opportunity, family offices can potentially capture higher returns compared to investing via a fund. This is due to the reduced fee structure and the ability to negotiate better deal terms.
Diversification: Club deals with other family offices or institutional investors allows family offices to diversify their portfolios, spreading risk across multiple investments and sectors. Co-investments allow family offices to make multiple minority stakes in companies they wouldn’t otherwise invest substantially in.
Control and influence: Participating in co-investments and club deals offers family offices the opportunity to have a more significant influence on the management and strategic direction of the invested company. This is not something not typically possible in traditional fund investments. Furthermore, co-investments allows the family office to actively choose the investment, unlike a fund.
Access to unique opportunities: Through their networks, family offices can uncover exclusive, off-market deals that are not available to the broader investing community. This can be off-market real estate opportunities, or follow-on investments in highly desirable companies.
Key Players in a Co Investment or Club Deal Transaction
In a typical co-investment or club deal transaction, there are several key players:
The family offices: These are the primary investors in the deal. They pool their resources, networks, and expertise to identify, evaluate, and execute the investment.
The target company: The company or asset in which the family offices are investing.
The lead investor: A family office, private equity firm, or institutional investor that takes the lead in coordinating the deal and managing the investment process.
The advisors: Legal, financial, and industry experts who provide guidance and support to the family offices throughout the transaction.
Examples of Co Investment and Club Deals
One famous example of a club deal is the acquisition of the iconic Claridge’s, Connaught, and Berkeley hotels in London. Itw by a consortium of Qatari investors, including Qatar Investment Authority and Constellation Hotels, in 2015. This investment highlights the collaborative nature of club deals and the access to unique investment opportunities.
Potential Returns and Risks
Co-investments and club deals can offer higher returns than traditional investments. However, they also come with unique risks:
Concentration risk: By investing a significant amount in a single deal, family offices may expose themselves to concentration risk if the investment fails.
Lack of liquidity: Co-investments and club deals often involve long-term commitments, making it difficult for family offices to exit the investment quickly if needed.
Execution risk: Family offices may lack the expertise and resources to manage the investment effectively, potentially affecting the investment’s performance.
In Conclusion
Family office co-investments and club deals are gaining popularity among UHNW families looking to enhance returns, diversify portfolios, and have a more significant
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