One little-known fundraising option is private lending through “family offices.”
In 1882, John D. Rockefeller established a family office, an organization of business and financial professionals charged with managing the growing portfolio of Rockefeller family investments.
Today, Rockefeller & Co. is registered with the Securities and Exchange Commission and provides the same services to select high-net-worth investors, which includes individuals as well as foundations, nonprofit organizations and other family offices, outside of the Rockefeller family.
Image via Rockefeller & Co.
As Forbes points out, family offices have grown in popularity in tandem with the boom in private wealth creation. A number of variations of the family office model have emerged to address the complex and specific needs of the ultra-wealthy.
In addition, thanks to a loophole that allows such organizations that do not rely on outside investments to fund their activities to avoid most regulation, family offices are becoming major players in financial markets.
There are now more than 3,000 family offices in the U.S. As they become less about managing existing wealth and more about investing capital, family offices are to 2015 what hedge funds were to previous decades—which explains why so many hedge funds are converting to family offices.
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Using Family Office Financing
One development of particular interest is a growing inclination to lend money to start-ups and small/medium sized businesses. Family offices are going out of their way to identify creative investments in entrepreneurial ventures, especially in businesses that are outside their own area of expertise, Forbes reports. Sometimes family offices seek to invest in local businesses as a way to contribute to the community. In addition, many family offices manage the wealth of entrepreneurs who are themselves eager to promote the next promising generation of start-ups.
A chief advantage for the family office directly investing in a start-up is that it avoids committing capital through intermediary fund managers, as was traditionally the case in public markets. This saves on management fees from 1.5 to 2 percent as well as up to 20 percent of profits that typically go to fund managers.
However, family offices are often overlooked by small business as a funding source, if only because many people aren’t generally aware of them and how they work.
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What’s the Advantage of Family Office Funding?
Family offices provide financing when other funding sources can’t or won’t do so.
For example, in Britain, a family office has established a £5 million fund to direct loans to hard-pressed growth businesses struggling to obtain financing. One recent beneficiary of a £150,000 loan is Metall-FX, which specializes in applying real metal finishes to a variety of surfaces and has worked on a number of Hollywood films, including the Harry Potter franchise.
Additional advantages include:
- Direct connection to a potentially valuable mentor. While venture capitalists also provide mentoring support to start-ups, the very nature of a family office tends to make them a little more patient in getting a return. It’s often the case that the family the office represents has been in your shoes, and is more likely to sympathize with your situation if and when setbacks occur.
- Because family offices have a minimum of $100 million in assets, they are a more reliable funding partner than other options. This particularly helpful when market conditions are fluctuating or are otherwise uncertain, which is when new investing tends to decline.
- As the Small Business Investor Alliance points out, family offices typically have a better understanding of middle market companies, are more flexible and are not constrained by committee “groupthink” common to most public institutions.
- Family offices represent someone who knows something about getting rich.
All that considered, the question may not be so much why you should consider family office funding, but why wouldn’t you?