Family Offices Have Spoken.
Still Investing. And what’s next?
“Money itself isn’t lost or made, it’s simply transferred from one perception to another.” — Gordon Gekko, ‘Wall Street’ (1987)
A myriad of research reports are starting to emerge, discussing current general investing trends of ‘good deals are still good’, ‘hunker down on expenses’, ‘cash is king’, ‘focus on the current portfolio’.
Here at Ligo Partners, we wanted to go beyond those generic answers.
So, we ventured out (figuratively, of course, and no pun intended) and discussed two very direct questions at lengths with 320+ family offices and qualified investors on our platform: Ligo’s invite-only consortium based in South Florida is interested in non-traditional and market-uncorrelated investment opportunities they can not easily find elsewhere.
- Tell us about deals that are getting done. What has changed?
- What are you investing in next?
With 200+ family offices, and investment funds thoughtfully responding, we were able to deduct a few interesting patterns that were interesting, if not surprising:
Pattern #1: Seed investments are hot, while Series A/B investments are actually deemed riskier in the long run
Those with a long-term investment perspective are betting on seed investments as an undervalued asset class. While normally a much, much riskier bet than a Series A or B-backed company, the sentiment is that seed will grow much faster during the rebound.
“Seed investments are best-positioned,” said Andrew Cleland, Managing Partner at Comcast Ventures. “No one really expects them to make a ton of revenue in the first six months in any case, so they will start to focus on go-to-market in an environment which is likely post-health crises.”
It is also interesting to wargame the seed vs A/B human+financial capital scenarios.
Think of the plight of institutional knowledge and customer retention that A/B will lose as they cut costs and fire large portions of their workforce…while burning through capital. Seed does not have this issue — and will move a lot faster when the rebound happens — easily surpassing larger players.
A and B teams will have fired huge chunks of their workforce (losing a lot of institutional knowledge as a result), and they’ll burn through tons of capital keeping what they can intact. Earlier teams won’t have that problem. As such, they will generally be moving much faster when the brakes come off. From our experience, many of those teams will slingshot past bigger players in the six to nine months that follow this.
“Despite the obvious economic challenges, 2020 is a great year to be making new seed investments,” said Jim Andelman, Partner at Bonfire Ventures
Pattern #2: Liquidity is now more important than IRR
The biggest weakness of private markets is their illiquidity. But public markets are continuing to exhibit extreme volatility. What’s one to do?
The sentiment across the board is that “Deals are still getting done,” said Howard Morgan, Chairman B Capital and co-founder at First Round Capital.
While that statement is absolutely true, IRR is no longer king — liqudity is. Strategies have shifted: away from public markets and into direct deals/SPV structures that offer:
- maximize uncorrelated-to-market investments
- better optimized velocity on liquidity
- no fees
- more frequent return patterns (e.g. monthly clip/revenue-based financing)
- flexibility to cherry pick deals
- shorter return horizons
But even with shifting strategies, there is a lot of capital that will need to be deployed for fund managers to start showing velocity: Q1 2020 has seen a record number of fundraises.
“I am closing deals, all day — every day. Every situation comes with its own opportunities,” said Evan Luthra, Luthra Family Office
“There is plenty of capital sitting on the sidelines, waiting to jump in when the volatility subsides,” said Scott Wolstein, CEO Wolstein Group and former CEO, Starwood Retail Properties.
Pattern #3: Think post-WWII
It is interesting to think about this period more as an aftermath of World War II rather than a comparison to 2001 or 2008 that many have made.
“Consumers will spend. Unemployment will be up massively, yet those with with discretionary spending coming into the crisis will remain mostly intact,”, said Glenn Argenbright, Partner at Quake Capital. “We’re also going to see a resurgence in manufacturing and infrastructure — probably unlike anything in the last 30+ years.”
We expect to see more spending in many traditional areas that family offices typically follow — and their tech-enabled startup equivalents as well as category killers that disrupt those traditional businesses!
This thesis is supported by numerous family offices, most of whom agree that companies that are true medicines that solve real pain points are much more interesting investment opportunities that vitamins that are nice to have.
“Many items will be moved to the critically important list and manufacturing will be moved, in particular, back to the US,” said Jim Rappaport, Rappaport Family Office and Board of Directors, New Boston Real Estate Investment Funds.
Other areas that were identified were logistics, transportation, agriculture, as well as healthcare and data center solutions.
“…business is booming but I believe mainly because of our national healthcare and remote monitoring solutions”, said Owen Shuler, Shuler Investment Partners LP. “We continue to amalgamate critical assets including data centers and secure telco for maintaining provider and patient privacy.”
Pattern #4: Getting an “A” Just Got Harder
There is absolutely a sense that valuations are finally at a level where companies are compensated based on the value they bring to the table, not a FOMO (fear of missing out) effect.
And yes, it’s much more difficult to get an A in this fundraising class — the curve that companies are graded on is more difficult.
Wan Li Zhu, founder of MIT Alumni Angels and an experienced technology investor agrees that not only are ‘valuation multiples more reflecting of the underlying business models’ but also that ‘valuations are driven by metrics that are more in line with public comps ranges adjusted appropriately for growth rates.’
And for extra class credit, “[Family offices are] even more focused on financials and due diligence,” said Travis Leach, Partner & Leader of Family Office Practice, DLA Piper.
Pattern #5: Vitality Curve Is Back
Ligo Partners predicts that there is a huge opportunity in looking at the current market from a lens of Jack Welch’s vitality curve of running GE workforce:
- Top 20% are most productive
- Middle 70% are adequate
- Bottom 10% are non-producers and should be fired
We will adjust the curve as follows for the current funding situation:
- Top 20% that have recently raised will stay & acquire
- Middle 40% are productive / most will weather the storm
- Bottom 40% will either run out of money or come under extraordinary pressure from their investors to cut costs
The latter cohort of companies — which before was in the middle 40% — can be acquired or invested-in at very favorable rates to investors.
“This is one of those extremely rare periods of time in which [many companies’] stock value has been greatly reduced for no reason other than an emotional response to the environment in the marketplace,” said Acen Hansen, Legacy Wealth Management LLC.
But ultimately, “When you have a sound business model, you will still get funded”, said Sheetal Jaitly, Partner at Jaitly Holdings Inc. and CEO, TribalScale.
“[We] are very constructive about identifying misplaced long-term viable companies with strong operating teams in this environment,” agrees David Logan, Managing Director at Umergence.
Pattern #6: ‘Merica
Family offices agree that the world will be polarized from an investment perspective with some very few players — particularly USA and some strong economies of Asia — accounting for the bulk of the investment activity, in spite of the recession that we are most likely to see in the next several quarters.
“Our feeling right now from talking to international families is that [they] will definitely continue to invest heavily in the US economy. Europe and many emerging markets will sadly be on the losing side,” said Miguel Lopez de Silanes, private family office and Market Leader for Europe and Latin America, Family Office Exchange.
Top 5 investment sectors family offices will continue to deploy capital in:
- Cannabis/CBD/hemp
- Healthcare (medical supplies, medical equipment, diagnostics, tele-medicine)
- Supply Chain Services and Logistics
- Streaming, particularly Distance Learning
- Industrial warehousing and data centers
—
We would like to conclude with the most uplifting and very apropos quote by Hamet Watt, Board Partner at Upfront Ventures and Founding Partner at Share Ventures:
“Think of our grandparents and how the Great Depression impacted them. I only hope that we can come out of this with a positive mindset focused on our resilience and not have our minds devolve into fear and scarcity.”
Comments/Questions? aa@ligopartners.com
Big ‘thank you’ to Anthony Chapkey @ Ligo Partners for his contributions in making this publication
About Ligo Partners
Ligo Partners is an invite-only, discrete consortium of family offices, high net worth individuals and small institutional investors. with a primary goal is to build a bridge between other family offices and disruptive tech-focused deal flow.
As of March 2020, Ligo Partners platform is comprised of over 320 family offices and qualified investors — many of whom are located in South Florida — with a combined net worth of $43B+ who are interested in non-traditional and market-uncorrelated investment opportunities they can not easily find elsewhere (think Uber at seed).
Our investment team sources 40+ potential investments each month on average and selectively curates the top 5 deals monthly, showcased via monthly 30mins-long curated deal webinars.