Looking to raise money from wealthy families? Start by cutting fees.
That was the message from a packed panel regarding issues facing the family office investor, sponsored by The Alliance of Alternative Asset Professionals and held last night at Bloomberg’s midtown Manhattan headquarters.
Given the uncertainty in finding consistent returns year after year from a single fund, families are increasingly pushing for “alpha through negotiation” by pressing for fee discounts that were once reserved only for the largest institutional allocators, said Stephen McCarthy, senior vice president of KCG Capital Advisors. “That’s the most sustainable alpha there is.”
Families are also linking up, both formally and informally, to drive a harder bargain. “They don’t have to pay the big fees for the big funds,” he added.
Performance fees, which had an average sticker price of 19.86% for new funds last year, have been whittled down as low as 7.5% for some recent investments, said Jamie McLaughlin, chief executive of consultancy J.H. McLaughlin & Co.
“Costs matter more than they ever have,” agreed Bob Borden, managing partner of Delegate Advisors, a North Carolina family office.
As the crowd sipped on Heineken Light and chardonnay, the panel advised them not assume that wealthy families do not necessarily share institutional investors’ goals of achieving steady returns and easy liquidity. A family office may instead be concerned about passing wealth to the next generation, or setting up a structure with more control for a particular family member.
“They do not have normal economics,” McLaughlin said. “Their economics are perverse. They exist to serve the family.”
See also: Family offices question hedge fund relationship • Family offices eye hedge fund talent • Family offices team up to tackle hedge funds