Follow the Money – Direct Investment Increases
Monarch Bay professionals are capitalizing on the trend that, increasingly, investors are investing directly in companies vs investing in funds which then invest in companies.This trend is visible among pension funds and family offices and appears to exist at both the early stage and more mature stages of investment.Fund return performance and the perception of high fees appears to be the driver.Even fund managers recognize this trend though there seems no coherent solution.Boustead is responding to this trend by going directly to investors as well as working with funds.For background articles on this trend, we recommend:1. Katten Law summarized its 2015 experience with fundless transactions in the lower middle market.ExcerptMore institutional investors are comfortable with the independent sponsor model. Although the M&A environment in 2015 remained extremely competitive and sky-high valuations priced many institutional investors out of bids for higher middle-market companies, independent sponsors continued to find value in the lower middle market and source transactions at lower multiples than those in the higher middle market. As a result, we saw a wider cross-section of institutional investors team up with independent sponsors in 2015.Beyond traditional private equity firms, mezzanine funds have shown an increasing appetite to finance acquisitions sourced by independent sponsors. In addition, as family offices have begun to implement direct investment strategies, they have increasingly relied on independent sponsors to source transactions, identify management teams and carry out post-closing strategies. Opportunities to find transaction partners seem as ripe as ever for operations-focused independent sponsors with successful track records.2. This trend toward direct investment appears visible even in the earlier stage investment market according to an article by 1,000 Angels, which provides earlier stage funding,ExcerptHowever Mark Suster of Upfront Ventures has noticed a startling trend. LPs are now seeking direct investments; bypassing venture capital funds and investing directly in startups.“Nearly 40% of all LPs surveyed said that direct investments were becoming an important part of their program (17% said they’re very important), and a further 44% of LPs are opportunistically doing direct investments”3. Family offices are sharing their experiences with direct investing as Bloomberg reports .ExcerptWealthy families are embracing their inner Warren Buffett, albeit on a smaller scale. They used to hand most of their assets to managers to invest. Now, following the likes of Buffett, Michael Dell and Bill Gates, many are acting like private equity firms, buying large stakes in companies or acquiring them outright. Families can exert tighter control over their money, give the kids something to do and cut their deal fees.But the trend has meant that private equity shops have been forced to scramble to make sure they don’t lose a critical source of money for their buyout funds. Blackstone Group LP assigned an executive to court wealthy families, and Carlyle Group LP and other private equity firms are allowing many to invest alongside them in deals.4. At the recent hedge fund conference in Las Vegas, some of the most notable hedge fund managers addressed this issue which is on the minds of many attendees.ExcerptSome of the most famous minds in investing convened here this week for an annual celebration of the hedge-fund industry. But, feeling the weight of years of underperformance and an uptick in client defections, the mood was anything but festive.