THE COMPLETE DIRECT INVESTING HANDBOOK

A Guide for Family Offices, Qualified Purchasers, and Accredited Investors

 

 

Kirby Rosplock, PhD

 

 

 

 

 

 

Dr. Kirby Rosplock has created an indispensable resource for family offices seeking to invest in private equity. She explains how to analyze winners and avoid the pitfalls, and discusses the extensive due diligence required even after initial investment. This is the conclusive guide to direct investing, which provides investors with the information necessary to ascertain how to proceed. Rosplock has written the essential manual for what will be a major investment trend for family offices in the years to come.

Howard Cooper, CEO, Cooper Family Office

Once again Dr. Rosplock gets it right! In my experience, few have the insider's knowledge that comes shining through in this book. Not only was it helpful, it was a pleasure to read.

Wendy L Craft, COO, Favara, LLC (SFO), New York, NYC

Kirby Rosplock's The Complete Direct Investing Handbook is a must read for anyone interested in direct investing. With key insights reinforced by practical case studies from noted experts in the field, this is an essential guide for current and potential direct investors.

Joanne Pace, Former Managing Director and Chief Operating Officer, Morgan Stanley Investment Management

The world's best and brightest family offices are devoting ever more capital to direct investing. Now is the critical time for advisors, CIOs, and family members to share a common understanding on how to source, screen, diligence, structure, monitor, and harvest direct investments. Dr. Rosplock's handbook provides the roadmap.

Brian Smiga, Partner & Co-founder, Alpha Venture Partners

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This book is dedicated to the memory of my father, Thomas L. Harbeck, who inspired me to dream big and to lean into new endeavors with a passion to first ask, learn, and seek knowledge before jumping off the deep end. His keen business sensibilities and wise counsel will always be treasured and appear throughout this book.

Family offices are in the business of exploring the investment landscape for new and creative ways to enhance returns and diversify from traditional models of investing. I have spent the better portion of my career looking at investments through both an institutional as well as a private investor's lens. The array of investment possibilities within the privately held marketplace is vast and growing, affording the burgeoning family office arena significant possibilities for investment. I see this as the new frontier of investing, and where some of the most exciting opportunities will be unearthed.

Dr. Rosplock's book, The Complete Direct Investing Handbook, provides a valuable and practical framework for approaching the direct investing landscape that appeal to both the neophyte and the most seasoned investor. It imparts not only her wealth of knowledge, but the insights and experiences of some of the private investment industry's most successful and respected leaders. The book includes valuable case studies, research, and practical tools and metrics to apply to this facet of investing. To date, there have been limited resources beyond the MBA textbooks to delve into this nuanced topic, but finally we have a playbook.

Interest in direct investing over the last decade has caught the attention of accredited investors, angels, and family offices. Yet Dr. Rosplock puts great emphasis on the fact that this specialized type of investing may not be suitable for every family office or accredited investor. She provides sage advice throughout the handbook on the importance of proper sourcing, vetting, due diligence, analysis, and structuring before deploying capital. Investing in private companies carries with it the seeds for outsized returns, but also the corollary risks. It should not be undertaken without a full understanding of the implications of those factors for the total portfolio.

Current research indicates that, despite the enhanced return potential in the private investment arena, the failure rate will still exceed the success rate for all but the most skillful investor. There has no doubt been a sea change in the investment world over the last 40 years, and the pace seems to be accelerating. As an active investor in both the private and public markets, I have found particular appeal in the nonpublic sector because of the ability to participate in a variety of investment vehicles. The bespoke nature of private investing requires creativity and investment savvy on the part of either the lead investor or the banking firm, and when done well it has the ability to enhance returns while reducing risk in the admittedly risky world of private investing. Investments can be tailored, with carrots and sticks, to provide incentives for management to reach particular milestones. I have found such instruments to have a beneficial impact on both the investor and the company.

Many family offices are uniquely positioned to take advantage of the opportunity of direct investing because they often have the luxury to be patient investors, something that seems to have fallen by the wayside in the larger world of investing, which has adopted a trader's mentality. Focusing on quarterly investment returns defies the concept of true investing, which is long term in nature. Yet it has become the yardstick imposed on the investing public, particularly since the onslaught of hedge funds. The value of making private investments is embedded in the belief that a good investment idea has merit over a period of years, not months. Many family offices are in a position to take advantage of this sound investment concept because, unlike numerous endowments, foundations, pension plans, and private equity firms, they are generally not hostage to the cash flow and exit requirements of these institutions.

The Complete Direct Investing Handbook is the go-to resource for private equity investors and family offices. It compiles insights from leading minds and provides specific examples and recommendations on best practices. Each of its contributors provides a window into an important element of investing in the nonpublic arena. I would recommend that this book be kept nearby for investment decision-makers in the family office world.

Patricia W. Chadwick
President, Ravengate Partners LLC

This book took a village to write, and there are many to thank for their involvement. First to the direct investors and advisors who shared their stories—this book is only possible because of your trust. Thank you to my family and especially my husband, John, who provided constant support and encouragement. Thank you to all the contributing authors who shared their experience, wisdom, and technical expertise in their respective chapters.

The contributing authors and I would like to share our appreciation to (in alphabetical order) Abdulwahab Ahmad Al-Nakib, Adam Goodfriend, Align Private Capital, Alex Lamb, Alex Scott, Alexander Monnier, Amy Fulford, Amy Hart Clyne, Andrew Pitcairn, Angelo Robles, Ann Kinkade, Anna Nekoranec, Anna Nichols, Anne Hargrave, Annette Franqui, Barbara Hauser, Barry and Nate Wish, Bengt Niebuhr, Benjamin Kinnard, Benji Griswold, Bill McCalpin, Bill Woodson, Blakely Page, Bob Casey, Bob Gould, Bob Rice, Bobby Stover, Brian Smiga, Bryce Stirton, Carolann Grieve, Caroline Davis, Carolyn Friend and Jamie Weiner, Charlotte Beyer, Chris Battifarano, Chris Cecil, Chris Chandler, Chris Cincera, Christin Cardone McClave, Claude Kurzo, Cynthia Lee, Daniel Goldstein, Darcy Garner, David Barks, David Guin, David Herritt, David McCombie, David Nage, David Shrier, David Wood, Dennis Jaffe, Diane Nakashian, Dianne H. B. Welsh, Dirk Junge, Don Carlson, Donald Sull, Doug Borths, Drew Mendoza, Elizabeth Fennell, Elizabeth Keller, Ellen Perry, Ellen Singer, Eric Knauss, Erwin Latner, Euclid Walker, Falko Paetzold, Family Office Association, Family Office Exchange, Family Wealth Alliance, Fran Lotery, Francois de Visscher, Fredda Herz Brown, George Blurton, Ginny Neal, Grant Kettering, Greg Curtis, Gregory T. Rogers, Gunther Weil, Hirotaka Takeuchi, Howard Cooper, Iñigo Susaeta Córdoba, Ira Perlmuter, Iris Wagner, Ivan Sacks, Jack Reynolds, James Gifford, Jane Flanagan, Jason Brown, Jay Hughes, Jean Brunel, Jeffrey Yin, Jennifer Eaton, Jennifer Kenning, Jesus Casado, Joanne Pace, Joe Calabrese, Joe Lonsdale, John Benevides, John Davis, John Rogers, Jolyne Caruso, Jon Carroll, Jon Van Manaan, Jonathan Lidster, Josh Lerner, Joshua Nacht, Juan Luis Segurado, Juan Meyer, Juan Roure, Judy Green, Julie Alberti, Julie Kerr, Julio Gonzalez, Justice Rines, Justin Zamparelli, Karen Koepp, Karen Neal, Karen Rush, Kathryn McCarthy, Laurent Roux and Lori Zalbowitz, Lee Hausner, Liezel Pritzker, Ligian Ma, Linda Mack, Luke Gilgan, M.J. Rankin, Marcia Nelson, Margret Trilli, Maria Elena Lagomasino, Mark Haynes Daniell, Maya Imberg, Meredith Brown, Michael Balt, Michael Murray, Michael Sallas, Michelle Osry, Mindy Rosenthal, Natasha Pearl, Nate Hamilton, Nava Michael Tsabaris, Nikki Gokey, Noelle Laing, Omar Simmons, Pam Friedlander, Patricia Angus, Patricia Chadwick, Paul Karofsky, Paul McKibben, Peter Brock, Peter Senge, Phil DiComo, Phil Strassler, Phillip Edwards, Preston Root, Preston Tsao, Proteus, Ralph Wyman, Rebecca Gerchenson, Rebecca Henderson, Rebecca Oertell, Regine Clement, Renee Kaswan, Rhona Vogel, Richard Millroy, Rick Cott, Rick Stone, Rino Schena, Robert Blabey, Robert Kaufold, Robert Krugel and Konstantin Braun, Roger King, Ronald Mayers, Sam Altman, Sam Bonsey, Sam Weatherman, Sami Karam, Santiago Ulloa, Sara Hamilton, Sean Davatgar, Sean O'Shea, Smart Energy Capital, Stacy Allred, Steve Campbell, Steven Casey, Steven Hirth, Steven Weinstein, Summerly Horning, Susan Babcock, Susan Remmer Ryzewic, TAG Energy Partners, Ted Staryk, Temple Fennell, The Alberleen Group, Tom Handler, Tom Livergood, Tom Mahoney, Tready Smith, Tula Weis, Victoria Vysotina, Ward McNally, Warner Babcock, Wealth-X, Wendy Craft, Will McEnroe, Will Trout, William Kambas, and Yirhan and Irena Sim.

Thank you to the many additional individuals involved who requested to remain anonymous.

If you are reading this book, it is likely that you have a curiosity for, or a preexisting interest in, direct investing, or are already a seasoned direct investor. Whichever camp you fall into, I hope this book will expand your view on direct investing and provide insights from leading experts, advisors, and consultants within the direct investing space. More than half of the book consists of original chapters from contributing authors who are leaders in the field of direct investing and/or the family office realm; thus, the book provides a wide array of thinking from the best and brightest. Additionally, the book features anonymous case studies and innovative research from multiple institutions as well as proprietary data from a direct investing survey from Tamarind Partners in 2016.

So, what inspired me to write this book? One of my first positions out of college was working in a small brokerage firm in Milwaukee, Wisconsin, as an analyst helping administer a series of private equity partnerships. I was green in my career; however, I admired the passion and interest by accredited investors to back and invest into various direct deals. I quickly learned how these investors found an affinity to invest in this manner that was typically noncorrelated to public markets. Additionally, these investments provided portfolio diversification, the opportunity for outsized returns, and the ability to access niche, specialized investments not typically offered to the public. A few became winners, others barely broke even, and the majority failed. As my career evolved and I became more involved in the family office domain, I quickly realized how important private capital continued to be in closely held businesses. Some family offices continue to have a large segment of capital committed to operating businesses, and for many the source of wealth was a function of one or more of these positions.

Later in my life, I personally deployed capital into direct deals. Some investments succeeded and some failed. Like many of you, I learned the hard way the importance of sourcing, vetting, and due diligence after investing in what I was told would be a “sure homerun” that ultimately failed. My other co-investors were also confident in what we thought had been sufficient due diligence in the investment and adequate preferences and provisions for the investors. We were completely off-base, and my original investment has yet to return my initial capital. As Oscar Wilde put it, “Experience is simply the name we give our mistakes.”

I relay this quick reference point to provide context that I, too, am still learning, and that even the best and brightest in the direct investment world likely have a similar war story to tell. I know I am not alone or special. After this experience, I decided to look further into the literature on direct investing, and found that most books are texts or casebooks written for MBA programs or focused mainly on venture capital. There are some excellent reads from top business school professors and academics, but few books focus on the narrow domain of direct investing, and none to my knowledge specically look at the subject matter through the unique lens of the family office.

My first book, The Complete Family Office Handbook (Wiley/Bloomberg, 2014), revealed the complex landscape of the family office realm and captured some of the building blocks to starting, operating, and managing a family office. During the data capture for that book, I learned the variety of family office types and diverse approaches to building a family office. Similarly, I discovered with writing and editing this book that there is a wide diversity of approaches to direct investing. There is not a one-size-fits-all approach to family office or to direct investing. Everything has to be tailored to you, and this book provides a foundation for readers to create their own unique approach.

This book is designed to appeal to the novice as well as the expert direct investor, and consequently covers a broad array of content and fictionalized cases. The book is organized into three sections. Part I provides a high-level overview of direct investing and the family office context. Part II discusses the steps and process of deploying capital into direct investments. Part III provides some additional unique perspectives on direct investing. Specifically, Chapter 1 lays a foundation on direct investing in the context of family offices. Chapter 2 discusses the increased presence of private capital into directs. Chapter 3 shares the interest in co-investing and club deals, and, finally, Chapter 4 outlines the various private equity strategies and where direct investing may fit. Chapter 5 is the beginning of Part II and outlines the various steps to execute on a direct investment. Chapter 6 discusses the steps to create a direct investment thesis. Chapter 7 shares the importance of sourcing, deal flow, and screening and deploying capital into direct investments. Chapter 8 elaborates on the deal structures, terms, and portfolio construction. Chapter 9 shares what happens after the capital has been deployed and the investment monitoring, exit strategies, and harvesting of returns. Chapter 10 is the start of Part III and examines the CIO perspective to direct investing. Chapter 11 looks at direct investing with a lens to Millennials' perspective on impact investing. Chapter 12 shares the Sustainable Cycle of Investing Engagement model (SCIE model) as a possible approach. Chapter 13 closes with describing the international approach to direct investing.

Direct investing is not for the faint of heart nor is it for every investor. A quick disclaimer is required to remind readers of the tremendous risks associated with the potential rewards of direct investing. The contributing authors and I are not endorsing that everyone should be direct investors. On the contrary: The reality is very few may want to embrace this approach to investing even if they are technically qualified. There are more losers than winners when investing in this manner, so operating with your eyes wide open to the downside risks of this type of investing is imperative. We hope this book will be a useful resource and guide to aid direct investors as they consider how/whether to deploy private capital into this niche area of private equity.