Thoughts on joining new family office?

Has anyone here joined a newer family office? I have the opportunity to be employee #3 for one. Family has a very successful legacy business and recently spun out the new family office, where they look to allocate ~$250M in the next few years.

 

Not sure if it’s just me but a couple hundred BP’s of carry for a family office seems very low. This isn’t a PE fund which is going to be levered up 5 times. You won’t get those returns, and you’re only working on $250m. Maybe we need more details about the scope of the family office but carry seems negligible.

 
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This really boils down to the people involved. 

I wrote a long comment to someone asking about joining a smaller family office in a smaller city. I'll quote the relevant section here; I believe the framework is appropriate.

Really diligence how they make decisions, whether you'll be involved in those decisions, if your involvement is observatory versus participatory (big difference, although mere visibility at a minimum is helpful), their plans for team expansion, your involvement in the design and execution of headcount growth, and lastly, whether the economics are differentiated enough that you should view this as a lifer post rather than a mercenary stint.

APAE

Long answer: You need to design a rubric you can use to grade this opportunity. An easy one would be:

  • the CIO's background
  • the investment committee structure
  • whether family members are involved in the office
  • how confident you are in your own abilities
  • ---- plus how relevant those abilities are to your new role

One:

You want to make sure the CIO is a high-performing investor, manager, and adult.

If s/he's a bad investor, you're going to see crap dealflow that's annoying to have to spend your time on or (worse) actually do bad deals. This will also affect your future prospects. Reputation matters, and if you interview with someone who knows or knows of your CIO as a sucky investor, their impression of your caliber as a professional may unfortunately be harmed.

If s/he's a bad manager, your life is going to suck way worse than it would at a fund where you'd get multiple staffings with multiple different seniors. Small teams give no one any space to hide. You can't get away from a bad manager like you can in a banking group. If they don't like the way you deliver the work, you can either adapt or leave. For instance, if they're crap at communication, you're either going to have to just take it (and perhaps develop a reputation as the person who can't manage deadlines well, even though they're never communicated to you) or leave at some point.

If s/he's not a mature adult, you're going to suffocate quickly because there aren't any real checks on a single aspect of their personality. A family office CIO usually has complete freedom to shape the office in every way from top to bottom. This means you'll face their personality in every single element of your job: how collegial it is, how flat it is, how formal it is, how bureaucratic it is, and so on. Family offices are incredibly culture-driven. Senior staff tend to get picked based on how much the family leader trusts them, which means it's usually a "my way or the highway" approach.

I say none of this to scare you, simply to point out what it looks like in a less-than-healthy situation.

Two:

Try and find out how investment decisions are made or how the mandate was designed. Is there a three-person I.C. that includes the CIO, the patriarch, and his oldest son? Is it simply the CIO running a one-man show? Is there a fifteen-person committee that includes the (non-family) CIO, CEO, and COO plus seven family members from various branches plus five local business leaders or GPs from friendly funds?

Separate from soundness of structure, is there soundness of strategy? If the family wealth originated in oil and gas, was the office set up to diversify away into counter-cyclical assets (e.g. long-dated, buy-and-hold investments in consumer staples)? If the principal is a hedge fund billionaire, do you think it makes sense to join a team acting basically as a fund-of-funds to seed new public-markets GPs?

You want to assess the level of stability in the organizational design. An I.C. process that's as robust as wet toilet paper should give you real pause and prompt some diligence. Something on the other end of the extreme should too: an overly bureaucratic model inevitably stifles efficiency and innovation. (This tends to happen most frequently in the multi-family office category or in deep-generation single-family offices, e.g. the fifth generation.)

You also want to assess how wise the strategy is, both on an absolute basis and on a relative basis. Does it hold water to begin with, and does it hold water based on who's operating it? Buying consumer staples businesses isn't ever a bad idea on its own right. A buy-and-hold strategy in under-performing middle market consumer staples businesses when the CIO has a background only in REITs and REPE probably is.

Three:

One of the worst elements of a family office is how political the environment can get.

It's tough to navigate workplace politics, period. Doing it when your direct manager is the son, cousin, nephew, or brother-in-law of the guy whose money you're managing magnifies that exponentially. Worse still is when that person isn't even your direct boss but sticks their nose into your work. It's tough to figure out if or how to mention it.

Look to see whether family members are involved. If they aren't, look and see how old the children are. If it's a first-generation family office and the kids are in high school now, you're safe for the better part of a decade. If they're in college, the absence of family members may quickly change. If it's anything other than a first-generation office and family members aren't present, you're probably safe. If they are present, ask serious questions to find out exactly how they're involved. The best way to do this is to talk to other junior employees in the office.

Four:

Figure out whether you're someone who's already learned their relevant need-to-know skills and is looking for a place to really stretch their wings, or someone who is still learning the ropes and needs a forgiving and educational environment.

There's nothing wrong with either. A banking analyst role teaches you a lot. No one goes into it as a complete financial whiz. Sure, the kids who've done real summer analyst roles since freshman summer have a leg up and need fewer months to reach the apex of the learning curve relative to the arts major who somehow got a full-time job without interning anywhere, but everyone learns a lot as an analyst. A private equity associate role also teaches you a lot.

However, if you haven't yet solidified at least the foundational components of your skill-set, a brand-new family office may be a risky move for you to make.

I've written the prior three points agnostically, ignoring what you stated about yourself and the role, offering a framework anyone can use in the future.

Tailoring this to you, I would be concerned taking a role at (i) a brand-new office that (ii) has a "super flexible mandate but mostly focused on PE" given that (iii) you're coming out of a big credit platform.

Yes, a tremendous amount of the company-level analysis you do as a credit investor is portable to private equity. Is it a direct match? Nope, not at all. Look through all the "AMA" threads done by private equity associates and VPs on this forum.

They all include questions and answers on the specifics of their job: the specialized skill-set in deal management (process components, legal docs, and (lastly) the financial modeling everyone outside of the industry thinks is 80% of the work even though it's closer to 20%.

I can't be sure what your work experience has been at a Sankaty or Whitehorse type of place, but if your prospective new job is going to be on a lean team where you're expected to contribute meaningfully from the start (highly likely in a new office like the one you mention), you damn well better be sure you aren't standing on the mound throwing new pitches for the first time ever.

Following the sports analogy, it's okay to only be able to throw a 70mph slider and an 80mph curveball, but you better already know how to throw both of them, plus a fastball, screwball, palmball, and the rest. You can dial up the heat later as you get better, but you can't not know them.

You're in a different situation than that poster. You're a mid-level employee aiming upward, so I would be explicit about compensation and how your incentives are aligned for mutual long-term success. 

The last time I was on this site I wrote a comment answering someone's question on carry at family offices.

APAE

This is a common problem in the family office space. It's not a GP managing external assets, so the typical GP revenue streams (management fees and performance fees) don't exist.

The problem with the first two potential solutions you outlined is the lack of incentive alignment. Your compensation is driven by getting any deal done. There's nothing about getting a good deal done. Either of those two options treats you essentially like a glorified BD person.

I've seen this done two good ways.

One was unique and I thought both generous and wise from the principal. The family created an entity that employed all the staff in the office, then paid in the equivalent of a management fee on all assets (1%). The CIO came from a megafund background, so he had autonomy over hiring and comp for the team. Base and bonus for the ~dozen staff came from that pool, and the guy got to keep any leftovers. Kind of an interesting setup, because you (as the principal) can learn a lot about your CIO by seeing whether he's cheap with staff because he's greedy for himself, or whether he pays well for staff and builds a great team. At this place it was the latter. Everyone had the 2+2 pedigree, strong banking plus strong private equity, and people really seemed to be happy to be there. This obviously wouldn't work as well with a small capital base (this was at least a couple billion in private investments I could identify), but I found it thoughtful.

The second mimicked the vesting schedule you see in some top single managers. Cash bonuses in excess of salary, broken apart on a three-year schedule. I've seen this done as 33-33-33, 25-50-25, 25-35-40, you name it. Your third option matches this most closely.

You can also do some research into phantom equity, it's discussed in several threads on this forum.

There's also share buyback models (a clause that relates to vesting schedules). This could work well because the grant could be drawn up such that the company gets a ROFR on your stock sale ... so you can hold it as long as you like (after it vests), but have a guaranteed liquidity option at fair market value where both you and the company are happy.

Good luck. The family office space is very opaque, but it can be a great place to get awesome and unique exposure to really smart people doing incredibly interesting things off the radar.

When I was looking for it just now, I also found one from 2020 that says much of the same stuff.

All in all, congrats on the opportunity. Ones like this are exciting, but the flip side is the meaningful lift required to diligence it appropriately.

Good luck.

I am permanently behind on PMs, it's not personal.
 

Without going into depth; this is mostly dependent on the decision making process and the willingness for the family to put money to work. I was in a similar situation and it was awful. Family communicated that the investment team would have full discretion. We had discretion right up until the IOI stage and then they were involved every step of the way...except that you move at their pace through diligence now that they are involved...and they aren't working live deal hours nor do they feel like they need to participate in live deal processes. From what I have observed, I think it is very difficult for a family office to have direct investment success when the family wealth was generated through operating business success instead of prior capital markets success (Real estate, former IB head, big-time PE, etc.) Left when I realized that I'd be fortunate to get one deal completed every five years. I should have left earlier than when I did.

 

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