Investing together for the greater good
By Danielle Cottignies and Tony Hind
As featured in the STEP Journal
What is the issue? The rise of purpose-driven investment, and ESG in particular, is coinciding with a rise in co-investment amongst family offices.
What does it mean for STEP Members? There are numerous benefits when it comes to co-investment, but family offices and their advisers need to be fully aware of what co-investment entails before making that leap.
What can STEP Members take away? There are structuring and organisational implications when it comes to co-investment that advisers should be able to communicate effectively to family office clients.
With Cop26 at the end of 2021 having further intensified the focus on climate change, the need for transformative investment has never been more apparent.
For ultra-high net worth families and family offices, environmental, social and/or governance (ESG) investment is not a new concept – but the urgency around Cop26 and the stark findings of reports from the Intergovernmental Panel on Climate Change (IPCC) last year, combined with an elevated focus on purpose-driven investment amongst millennials and Gen Z, have certainly heightened the desire to focus on investments capable of making a meaningful difference to the current pace of environmental damage.
One of the interesting specific outcomes of COP26 for family offices has been the emphasis placed on collaboration when it comes to impact investment. The key message to emerge from all the commentary from Glasgow was that no one country, government, group or organisation can bring about change in isolation.
A co-investment trend
Around six months on and with an eye now on COP27 in Egypt later this year, more than ever there is an awareness that a joined-up approach and collaborative efforts are essential in order to drive positive change.
For families, this is manifesting itself through a rise in co-investment and establishing shared values and identifying areas of mutual interest to scale up impact investment opportunities. Families are increasingly joining forces to invest directly into opportunities capable of enacting such a change.
Again, this is not a new trend, but it certainly aligns itself comfortably with the rise in ESG investment we have seen over the past year or so.
Direct investing by family offices is something the industry has witnessed a rise in over recent years. Interestingly, current data from FINTRX found that 42.5% of family offices globally who do make the step to invest directly do so alongside other family offices, private equity, venture capital and real estate investors.
Further, while this trend is currently most prevalent in North America and within single family offices, there is evidence of a movement in this area globally and right across the family office spectrum.
There is good reason for this trend. Co-investment can have multiple benefits; pooling resources can be instrumental in accessing higher-value deals, entering restricted markets, or achieving broader diversification that might otherwise have been out of their reach. Bringing different but complementary expertise, experience and knowledge together can also be highly advantageous for family offices in navigating new or emerging areas together.
Although commercial and residential real estate investments have proved particularly attractive historically where co-investment and capital pooling are concerned, impact and ESG opportunities are now taking on a greater focus.
Structuring for success
To realise the benefits of co-investment, however, families must put the right frameworks and structures in place if their aspirations are to be achieved, starting with creating defined and clear strategic objectives, made possible by a commitment to robust and honest communication within the family office itself.
When it comes to structuring, choosing a jurisdiction with a clear and robust legal framework that works with the co-investment framework is paramount.
Advisers also need to consider the need for a scalable solution capable of delivering an efficient, seamless process that maximises economies of scale opportunities over time.
In addition, tax considerations are likely to be of critical importance and, depending on the evaluated risk, a structure that ring fences any liabilities or losses may need to be put in place.
Family offices are uniquely placed to drive innovation in the ESG space. By being able to make significant investments over multi-generational time horizons and without experiencing the same pressures when it comes to returns as other investor types, they can truly propel the change needed to be transformational.
By pooling resources this potential increases demonstrably. So, while we have already seen a considerable rise in family offices seeking co-investment opportunities, the expectation is that we will see further growth in this space as wealthy families look to make meaningful investments with a view to driving positive change in the future.