I recently had the pleasure of chatting with Arthur Andrew Bavelas, the head of the family office BavelasGroup LLC, to delve into family office investing sentiment in the time of COVID-19.
In addition to running his own family office, Bavelas is the founder and CEO of Family Office Insights, a voluntary, “opt-in” collaborative peer-to-peer community of single family offices, qualified investors and institutional investors.
Driven by dissatisfaction with a lack of choices for private capital allocation, Bavelas founded Family Office Insights in 1998 to provide meaningful access and engagement opportunities for active, socially conscious entrepreneurs and wealth managers. The Family Office Insights investor community is touted as a “safe, private, curated environment where investors not only learn from experts, thought leaders and asset managers, but also from their peers.”
Given Bavelas’ intimate knowledge of the investing habits of family offices in particular, we are pleased to share his personal insights at this uncertain time, when fund and company strategic growth plans are being reassessed almost regardless of strategy or sector.
Vailakis: Arthur, thanks for agreeing to share your thoughts with Alternatives Watch readers.
It’s hard to say any one thing about family office investors as they range from very institutional and GP-like in their processes and team structures, to being run by one individual that invests broadly in what they are personally compelled to, and everything in between.
That said, how are the family office investors in your community currently reacting to investment repercussions due to the pandemic and the fierce equity market downturn we’ve just witnessed?
Bavelas: While it is clear that many families seem to be “firmly planted in mid-air” depending on the sector of interest, that is to say they are halting in place a bit with respect to broad allocation plans but have not fully determined their ‘on-the-ground’ approach just yet, there is buying activity and more anticipated interest in mispriced asset acquisitions and/or financings with equity kickers.
Discounted stakes in hedge funds and private equity funds are also of interest.
Vailakis: Given that family offices have invested in more direct deals during the most recent bull market than they did historically, do you think they are more inclined to continue on that path to save on fund fees, or do you think this downturn will reveal some bad investments that incline them to pay for the active management of portfolios in fund format?
Bavelas: It’s too early to say what behaviors will emerge. While the human cost and corresponding emotional stressors are at play, level headed critical thinking around opportunities still tends to prevail.
Vailakis: After the credit crisis of 2008-2009, many alternative asset managers had complex stories about down performance, failed positions and/or gating provisions that led them to appeal less to formal institutional investors like pension funds, as they failed to check all the due diligence ‘boxes’ that emerged in greater measure. Many such funds chased family offices and high net worth individuals almost exclusively at that time.
How have family offices changed since then, when they were overly targeted by funds and firms that were facing fundamental challenges?
Bavelas: Chasing family offices for allocations that are aligned, especially when it comes along with resources such as connectivity to potential customers and other family offices is smart. Thinking that they are less sophisticated, or are easier to deal with than institutional investors regarding mandates, covenants and other terms, is folly, especially when onboarding them to longer lock structures with 10 + 1 + 1 year terms warranting a relationship as long as many marriages.
Vailakis: Currently, what investment sectors and types of direct deals seem most compelling to the community you’ve built?
Bavelas: I am a bit surprised at the steady and increasing interest in deal flow from the active Family Office Insights investor cohort. It has now surpassed pre-Corona levels and while the activity remains focused on specific legacy business domains as usual, there is a ‘wait and see’ view for the obvious vulnerable sectors and less stabilized opportunities post-virus. Supply chain, biotech, cybersecurity, enterprise tech, distressed real estate, and non-retail consumer sector plays are of most interest to the community right now.
Vailakis: What is your sense of how family offices may evolve as a result of the current crisis?
Bavelas: I think we’ll have a much clearer picture of where the economic and health challenges will take us in six months. It’s difficult to draw conclusions just yet while the vast majority of us are still sheltering-in-place and skeptical of as yet undermined Q1 company valuations. I do believe that a few opportunities will emerge post-crisis with the best years ahead of them. There is an insatiable appetite for commerce and in-person connectivity, both largely halted almost everywhere; perhaps this downturn’s eventual unicorns will evolve from there.
There will be a cleansing of a small businesses, some warranted, some circumstantial. Sad, but not too sad.
Given the unknowns, most of the families that make up the Family Office Insights network are taking things one day at a time with respect to the running of businesses, legacy or otherwise, portfolio company direct investments and the management of alternative fund pools.