Federico Schiffrin is a private equity partner with Unigestion, a Switzerland-based investment manager with $23 billion in AUM, where he runs the firm’s direct investments in the United States. We sat down with him recently to get his thoughts on family offices and independent sponsors.
What is it like working with family offices?
There are two things that I feel with family offices. One is that their hope and their reality is different. They want to, of course, weight towards more control, more access, do as little as they can on a paid basis and do as much as they can on a non-paid basis. And that is really tough for us. We can’t be philanthropists.
The second one is just a statistical problem. You’ve heard about adverse selection, right? You hear about it all the time. The good thing for [larger firms] is they have deal flow just coming because of who they are. But a family office doesn’t have that ability. How will they source beyond the 40 deals that somebody shows them? I don’t know how they do it. On the one hand, they want to go direct but the deal flow that they see generally speaking will almost by definition be of lower quality.
What do you think about the evolution of deal-sourcing technology?
We’ve started to look at it from a digitization perspective—is there going to be a world where a family office gets cheap access to deal flow by clicking a kind of blockchain-powered button? They’ve tried it and I think the reason they have failed is [this]: I think if [an established firm] were to start doing it, it would be very different than if it’s an independent crowd-funding platform, which is what you have today. Because you just don’t know the quality of the deal. But if that deal comes vetted by [an established firm], or Unigestion, I think you will have a higher response rate.
So, I think that’s how technology disrupts access, which is what family offices lack. I know it sounds crazy, but the issue there is first regulatory, but I think the regulator is getting there. The second issue is who is saying this is a deal that you families should be investing in? If it’s [an established firm], I think you will get oversubscribed deals.
When do you think you will start putting this approach into action?
We really have not hit on what is the right formula, so that’s why we’re exploring. We have a whole project going around digitization. One of the limbs of that is crowd funding, crowd sourcing of deals that we will do [if] we have allocation and we don’t have LPs that want it for whatever reason. Why not offer it? Now, are we going to do it in six months? Probably not. But over the next five years I see it as a thing.
What about independent sponsors?
We back quite a few spinoff [firms]. And then there are the ones that have decided that they just want to be independent sponsors forever. I think the reasons for that are not actually illogical. They don’t want to go through the whole pain of raising a fund. The economics are actually potentially even better, because they get deal-level [carried interest] as opposed to fund level, and you’re sometimes forced into waterfalls, which means that you defer your carry for who knows, 10 to 15 years. So we back both.
I actually think there’s a great community, particularly in the U.S., of amazing independent sponsors. We have been very, very successful with them. I like the alignment, that they’re all very hungry. We will continue to do it, more and more, because it’s a great source of deals. We know what industries we like and we have a cadre of sponsors that we follow and/or back.
I would say…in the U.S., probably there are 500 independent sponsors. We would work with 20 percent [of them]. I would say there are about 50 independent sponsors that we follow or have a relationship with that we would work with if they brought the right deal and we can agree on the right economics. I think it’s a very interesting market.
How do the economics on something like that work?
It’s less than a fund. It’s not a 2 and 20 construct, a lot of it is pushed to the company. They are providing a service to the company, thus they get paid as if they were a kind of third-party consultant. The other thing that we try to make sure of is that it’s budget based, so, whatever it is that they get paid is unrelated to the capital that is deployed and is more related to what their budgetary needs are, to not only keep the lights on but keep themselves with a team.
Edited for length and clarity by Justin Mitchell.