The Complete Direct Investing Handbook
A Guide for Family Offices, Qualified Purchasers, and Accredited Investors
Bloomberg Financial Series

The Complete Direct Investing Handbook provides comprehensive guidelines, principles and practical perspectives on this increasingly attractive private equity investment strategy. Interviews with leading family office investors, qualified private equity buyers, and top direct investing advisors provide essential insights, and attention to the nuanced processes of direct investing. The books is a hands-on resource for family offices and those investors interested in generating returns through private company ownership to be more effective in creating returns in a complex market. Direct investing best practices are explored in-depth, with guidance on strategy and the evaluation and assessment of various investment opportunities. The process begins with a codified and specific investment goal, and a robust strategy tailored to the investor's individual needs. Useful insight on 'narrowing the field' helps investors select the appropriate opportunities to meet their investment goals, and practical tools help streamline the process of capital deployment and in turn providing more opportunities to achieve desired returns.

Despite the growing interest in direct investing, there is little public information available to investors and there is a lack of transparency into practical standards. This book bridges the gap between strategy and execution, with comprehensive guidance and real-world insights.

• Define and craft a focused investment thesis and appropriate timeline specific to your needs
• Identify the right type, size, duration, and risk profile aligned to your investment objectives
• Gain perspective on real-world direct investing and a deeper understanding of the risks and rewards
• Better understand best practices and institutional investment rigor to develop bespoke processes and policies that create better outcomes for independent investors

Historically, extraordinary wealth has been created through equity in privately-held enterprise. Today, family offices and direct investors are looking more and more toward large capital deployment in early-stage and growth-oriented private equity investments, but are constrained by a lack of informed, established practices. The Complete Direct Investing Handbook provides the much-needed guidance and tools that can improve direct investment outcomes.

Foreword xvii

Preface xxi

Acknowledgments xxi

Part I: Direct Investing and the Family Office Test

Chapter 1 Introduction to Direct Investing 3

2008: A Wakeup Call for Investors 5

Role of the Family Office and Private Investors 6

The Opportunity 9

Best Practices 10

Key Considerations 12

Conclusion 15

Notes 16

Chapter 2 The Emerging Presence of Private Capital in Direct Investing 18
Contributing Authors: Nathan Hamilton and Sara Hamilton

The Family Office Marketplace 19

The Unique Benefits of Private Capital 21

Increased Interest in Private Equity 24

Conclusion 30

Chapter 3 Co-Investment Strategies in Direct Investing 32

Defining Co-Investing and Providing Context 32

Insights on the Popularity of Co-Investing 33

Interest in Co-Investment Strategies 33

Roles of the Co-Investor 35

Going Solo: Why Co-Investing May Not Be Your Choice 40

The Perils and Pearls of Co-Investing 41

Vetting Co-Investors 44

Club Deals 46

Mini Case Study 51

Conclusion 51

Notes 52

Chapter 4 Private Equity Strategies: Characteristics and Implications 54
Contributing Author: David McCombie

What Is Private Equity? 55

Real Estate 58

Venture Capital 62

Growth Capital 72

Buyouts 75

Mezzanine Financing 78

Distressed Assets 81

Conclusion: Putting It All Together 85

Notes 86

Part II: Direct Investing in Action

Chapter 5 Family Office Considerations to the Direct Investment Process 91

Source of Wealth: Lens of the Family Office 92

SWOT Analysis for Direct Investing 93

Three Phases to the Direct Investing Process 94

A Three-Phase Direct Investing Process 97

Case Study 111

Conclusion 113

Notes 114

Chapter 6 Designing a Direct Investment Thesis 115

Defining the Direct Investment Thesis 115

Asset Mix and the Direct Investment Thesis 117

Family Pathways and the Direct Investment Thesis 119

The Barbell Approach and the Direct Investment Thesis 122

Entrepreneurial Orientation and the Direct Investment Thesis 124

Family Investment Style and the Direct Investment Thesis 128

Case Study 132

Conclusion 137

Notes 138

Chapter 7 Sourcing, Deal Flow, Screening, and Deploying Direct Investments 141
Contributing Author: Euclid Walker

Industry Professionals and Thought Leaders 142

Investment Bankers/Business Brokers 143

Professional Service Providers 144

Commercial Banks 144

Private Equity Funds/Family Offices 145

Screening Process 146

Due Diligence 151

Investment Memorandum 154

Investment Decision Process 155

Conclusion 156

Notes 156

Chapter 8 Direct Investments: Deal Structures, Terms, and Portfolio Construction 157
Contributing Author: Jolyne Caruso

How to Get Started 158

Portfolio Construction 159

The Capital Stack 160

Equity Transactions 162

Types of Debt Instruments 165

Mezzanine Debt 166

Case Study: Early-Stage Solar Energy Finance Company 168

A Primer on Important Term Sheet Items 170

Conclusion 175

Chapter 9 Investment Monitoring, Exit Strategies, and Harvesting Returns 177
Contributing Author: Adam Goodfriend

Introduction 177

Alignment of Objectives 178

Monitoring Direct Investments as a Minority Stake Owner 178

Why Timing of an Investment Exit and Not Just the Investment Return Is Critical 179

Importance of Company Lifecycles with Respect to Timing and Harvesting Returns 181

Exit Valuations and Multiples 184

Maximizing Liquidity of Illiquid Investments through Pre-Negotiated Rights 186

Exit Value Drivers 188

Common Exit Strategies 189

Mergers and Acquisitions 192

Working with Investment Bankers and Key Advisors to the Exit Strategy 192

Conclusion 194

Notes 195

Part III: Direct Investing Perspectives

Chapter 10 The CIO Perspective 199
Contributing Author: Robert G. Blabey

Sourcing Top CIOs to Oversee Direct Investing in the SFO 200

What’s the Edge? 202

What Defines Success for the CIO? 203

The CIO Fit 207

Risk Management at the Investment Level and Portfolio Level 209

CIO Compensation 211

Conclusion 216

Chapter 11 The Millennials and Direct Investing: A Look at Impact Investing 218
Contributing Author: Temple Fennell

Who Are the Millennials and What Do They Care About? 219

Millennials’ Respect for the Senior Generation 220

Growing Interest in Impact Investing 222

Making the Case for Impact Investing 222

How to Source Impact Investments 227

Experiential Returns: Intangible Benefits of Impact Investing 231

Common Challenges and Barriers to Impact Investing 232

Systems Thinking: Creating and Sustaining Family Knowledge 235

Conclusion 238

Notes 239

Chapter 12 SCIE: Sustainable Cycle of Investing Engagement 242
Contributing Author: Temple Fennell

The Purpose of SCIE 244

The SCIE Framework 246

Family Purpose, Values, and Mission 247

Framing Strategy 249

Developing Strategy 253

Implementing Strategy 259

Capture and Communicate Learning 264

Conclusion 269

Notes 269

Chapter 13 International Direct Investing 271
Contributing Author: Anna Nekoranec

Why Consider International Direct Investing? 272

Key Differences between Investing Abroad versus Investing in the United States 274

How to Determine Where to Invest 276

How Population Change Can Impact Target Market Opportunities 278

Keys to Success in International Direct Investing 282

The Role of a Partner in International Investing 284

Common Mistakes Made by Investors Venturing Abroad 286

Risk Mitigation 288

Foreign Families in the United States 290

Conclusion 291

Notes 292

Appendix a Private Equity Strategies Summary 293

Appendix b Sample Due Diligence Checklist 299

Appendix c

Glossary 306

About the Author 316

About the Chapter Authors 318

KIRBY ROSPLOCK, PhD, is founder and CEO of Tamarind Partners, a consulting firm that advises family offices, ultra-high-net-worth investors, and the wealth management industry. She is a researcher, scholar, educator, and well-respected speaker around the globe on family wealth, family office, and family business. She is also the author of The Complete Family Office Handbook. For more on Dr. Rosplock and Tamarind Partners, visit www.TamarindPartners.com.