3 questions to smart minds
Photo: Hendrik Brandis

What role do family offices play in growth financing?

For this 3 questions to Hendrik Brandis

EARLYBIRD in Munich and Berlin
Photo: Hendrik Brandis
25. Septem­ber 2019

Family offices are play­ing an incre­asingly rele­vant role in the growth finan­cing of promi­sing growth compa­nies. The main reasons for this are the conti­nuing finan­cing vacuum in venture capi­tal, the incre­asingly diffi­cult invest­ment envi­ron­ment in almost all other asset clas­ses, and the resul­tant strong impro­ve­ment in the rela­tive and also abso­lute perfor­mance of venture capi­tal and growth finan­cing. While the median IRR of the global VC indus­try was a meager 3% in 2007, this has risen to an impres­sive 16% in 2017. In addi­tion, family offices (Fos) are stra­te­gi­cally well posi­tio­ned for growth finan­cing with their often “deep pockets” while main­tai­ning a long invest­ment hori­zon. If these are growth compa­nies that are rela­ted to the family office’s former or current core acti­vi­ties, family offices are also a very attrac­tive part­ner for growth companies.

For this 3 ques­ti­ons to Hendrik Bran­dis, foun­ding part­ner of EARLYBIRD in Munich and Berlin

1. At what stage of funding are FOs present?

Family offices are parti­cu­larly rele­vant for the later finan­cing phases of growth compa­nies. For once, other insti­tu­tio­nal inves­tors are parti­cu­larly under­re­pre­sen­ted in Europe at this stage of deve­lo­p­ment. In the U.S., for every dollar inves­ted in the early stages, over $3 is inves­ted in later stages. In Europe, this ratio is only 1 to 1. Accor­din­gly, the oppor­tu­ni­ties in later phases are greater.

On the other hand, the barriers to entry in the form of good access to the rele­vant deal flow are dispro­por­tio­na­tely smal­ler in the late phase. The number of promi­sing targets is only 5–10% of the rele­vant early-stage volume. The poten­tial target compa­nies are alre­ady active and visi­ble on the market. An active approach is possi­ble in prin­ci­ple, while early-stage inves­tors depend to a good extent on being approa­ched in good time by the rele­vant entre­pre­neurs. For this, a certain aware­ness of the inves­tor brand and a good repu­ta­tion are important. Howe­ver, this contra­dicts the wide­spread philo­so­phy of family offices to rather act from the background.

2. What FOS are you obser­ving in the early funding phase? How active are they? What assets do they bring to the table?

Some family offices have chosen to be active in the early stage as well. In this case, I observe an exten­sive alignment of struc­tures with those of inde­pen­dent early-stage venture capi­tal funds. The family office beco­mes the sole “LP” (funder) of an early-stage fund mana­ged by a profes­sio­nal team of early-stage inves­tors. This team is gene­rally incen­ti­vi­zed in line with the market and can act rela­tively freely. Typi­cally, there are only a few speci­fi­ca­ti­ons regar­ding the invest­ment stra­tegy, which aim to ensure the compa­ti­bi­lity of the early-stage invest­ments with the other acti­vi­ties of the family office or family. For this purpose, the family office often reser­ves the final invest­ment decis­ion by leading the invest­ment commit­tee. Compared to inde­pen­dent venture capi­tal funds, these family office funds have the advan­tage of hardly having to spend any time on fund­rai­sing and can ther­e­fore concen­trate fully on port­fo­lio work. In addi­tion, it is often possi­ble to access know-how from other acti­vi­ties of the family office or the family, which can create synergies.

3. In which direc­tion do you think FOs will deve­lop in the future?

I believe that the presence of family offices in the area of growth finan­cing will conti­nue to increase. — Firstly, because the pros­pects for returns conti­nue to increase as a result of acce­le­ra­ting tech­no­lo­gi­cal inno­va­tion, while they remain under pres­sure in other areas. Secondly, because family offices are funda­men­tally well suited for invest­ments in growth compa­nies, which are gene­rally desi­gned for the long term, for the reasons mentio­ned above.

About Hendrik Brandis

Studied aero­space engi­nee­ring at the Tech­ni­cal Univer­sity of Munich. After gradua­ting, he spent three years as an engi­neer at Airbus prede­ces­sor EADS. In 1991, he joined McKin­sey, where he met Chris­tian Nagel. In 1997 they foun­ded Early­bird toge­ther with Roland Manger and Rolf Mathies. The company has just under 50 employees (divi­ded between offices in Berlin, Munich and Istan­bul) and mana­ges assets worth over one billion euros. Early­bird has inves­ted in around 170 compa­nies to date, with seven IPOs and 22 other exits (“trade sales”) reali­zed by the end of 2018.

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