Stonehage Fleming launches unique funds strategy for family offices

Family office manager Stonehage Fleming recently announced plans to bolster its private equity holdings by raising a new fund-of-funds for middle-market strategies each year.

Stonehage Fleming, which advises $40 billion of assets, plans to allocate that vehicle across five to seven funds, Partner Richard Clarke-Jervoise told Buyouts. The investment strategy will concentrate on mid-market funds.

The firm recently announced a final close for the strategy’s first fund, a 2016 vintage, which raised more than $160 million, a news release said. Recent commitments include allocations to funds raised by ABRY Partners and Summit Partners.

While Stonehage Fleming has raised private equity funds-of-funds in the past, it usually did so every three to four years, Clarke-Jervoise said. Raising a new vehicle each year will expand its footprint in the asset class, effectively providing its family office clients more opportunities to invest in private equity.

Stonehage Fleming’s limited-partner network includes a large number of smaller family offices, he said. Many mid-market firms, particularly those based in the U.S., struggle to raise capital from smaller European LPs because of regulatory and logistical hurdles. Stonehage Fleming functions as an intermediary between the two groups, bringing family office capital into institutional-quality funds.

“It’s a source of capital that’s families, but without the hassle of having to talk to each of those families individually,” Clarke-Jervoise said. “And the regulatory pain, believe me, is much tougher when you do that.”

The strategy also offers benefits to smaller, family office or high-net-worth LPs that lack a back office able to regularly — and quickly — service capital calls.

Rather than calling the fund-of-fund’s LP capital over a five-to-six-year window, which is typical for most funds-of-funds, Stonehage Fleming fund-of-fund LPs will provide half their commitments up front. This capital is invested in a semi-liquid evergreen vehicle with investments in a wide array of private assets.

Stonehage will call the remaining 50 percent from its LPs as it begins allocating capital to managers of new funds. Once those are called, the firm draws down the evergreen vehicle to allocate their LPs’ remaining capital.

The structure also offers a number of benefits to smaller LPs, according to Clarke-Jervoise. Fund-of-fund investments have longer J-curves, which means they take longer to generate meaningful returns. LPs have to wait for their fund-of-funds manager to make commitments to general partners, then for the GPs to invest in new portfolio companies.

Allocating half the LPs’ commitment in a semi-liquid evergreen fund up front produces an immediate return on their investment, thereby reducing the fund’s J-curve, Clarke-Jervoise told Buyouts.

“It’s difficult to keep people’s attention for that long,” he said. “One of the things we most wanted to do was to accelerate the client experience with PE, trying to avoid a J-curve as well as ensuring the money came back relatively quickly.”

Furthermore, because many small family office clients lack the ability to immediately respond to capital calls, providing some committed capital up front alleviates that burden. It also safeguards against events like divorce, illness or death, which could hurt the family’s overall wealth, Clarke-Jervoise said.

“The administrative burden for families that don’t have teams are relatively high,” he said. “In the U.S. the families tend to be bigger and have foundations. So when they’re talking about families, they’re really talking about foundations. … In Europe, it’s much more fragmented.”

Stonehage Fleming administers and advises on investments for more than 250 high-net-worth families. The firm has 11 offices throughout Europe, the Middle East, Africa and North America.

Action Item: For more information about Stonehage Fleming, visit www.stonehagefleming.com

A reveler’s hand rests on a stone during the summer solstice at the ancient Stonehenge monument on Salisbury plain in southern England. Photo courtesy Reuters/Kieran Doherty