Validating the Family Office Life Science Investment Strategy

22 Jan

By Max Klietmann, VP of Research, LSN

Anyone following my articles on investor trends in the life sciences arena knows that I am particularly interested in the emerging trend of family offices investing direct in life sciences companies. My interest in this space is that while family offices have a reputation of being very private and opaque, they compose an extremely important investor category. Aside from the findings aggregated by my research time via intensive web research and phone interviews, I try as often as possible to sit with wealth advisors and consultants to family offices to discuss trends we see and compare notes.

I recently had the opportunity to spend some time speaking with a managing director at a multi-billion dollar global wealth management firm focused exclusively on advisory services for family offices and ultra-high net worth private clients. We had a lengthy and involved conversation about the fundamental dynamics that are driving family offices to invest directly in companies, and in particular, life sciences. I wanted to validate two important trends that we have been following at LSN: That family offices are recruiting top wall-street talent and internalizing the due diligence process with institutional operations quality, and that family offices are moving heavily towards making direct placements into private companies, especially in life sciences. We reached a few conclusions based on trends we’ve seen in the market that shed some light on how this category of investors is behaving in the space today.

The trend of family offices broadly beginning to make direct investments began to really accelerate in the wake of the recession; investors became disillusioned with highly non-transparent alternatives funds losing substantial amounts of capital, while still taking a hefty management fee. My conversation partner mentioned that he began to see a heavy trend in recent years of family offices withdrawing their allocations to these asset classes. However, this is not happening because family offices don’t believe in private investment; rather, they want the ability to transparently control allocations. In order to do this in a sophisticated way, they need the operational diligence that was traditionally only reserved for large funds and banks. In recent years, however, it has certainly become a trend that a larger family office will bring this expertise in-house by recruiting top talent (at a premium in terms of wall-street compensation, but for a bargain relative to the fees charged by fund managers).

According to my conversation partner, he has seen a trend of family offices recruiting top-notch institutional operations talent and due diligence capabilities from Wall Street. This allows them to make placements directly in companies in order to have consistent insight and a more compelling return profile. It is primarily the large family offices with total assets above $100 million that are able to justify this sort of institutional approach to allocating their own capital on a consistent basis. This is a key demarcation line, as it is really only above this threshold that a family office can afford to consistently allocate capital on a regular basis towards investments in a substantial way (above angel-sized contributions).

This type of activity has recently seen a substantial increase in several industries, but especially in the life sciences sector. What makes this investor class so appealing to CEOs in the space is that the way in which family offices operate is very much unlike other private investment categories; typically, family offices seek to fulfill a philanthropic mission alongside their efforts towards capital-preservation. This makes direct investment in life sciences a particularly compelling opportunity, because it offers family offices the ability to make a targeted allocation with substantial financial and philanthropic upside.

More importantly, for CEO’s looking to raise capital, family office allocations in life sciences are often heavily motivated by a connection to a particular indication, meaning that they are strategic investors with an emotional motivation to help a therapeutic succeed in coming to market. This attitude was confirmed by our discussion, and it is likely that in a macro-sense this will be an increasingly important piece of family offices’ investment focus, as chronic diseases linked to old age become more prevalent in the coming years. These are not exit-oriented investments by any means, and it is typically the success of the therapeutic that constitutes the most important aspect of the investment.

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