Panel Discussion: Tech, Due Diligence, and Investment Strategies at The Family Office Club Event

In this episode, industry experts discuss the evolving landscape of technology and its impact on investment strategies. Key topics include the role of AI in driving innovation, the potential for consolidation in med tech and healthcare, and the increasing importance of operational due diligence in private equity. Panelists share their experiences and insights on how technology has streamlined due diligence processes, enhanced transparency, and shaped decision-making in their investments. They also offer valuable advice on how family offices and private investors can approach M&A, divesting strategies, and niche investing, while emphasizing the importance of focusing on a clear strategy and avoiding distractions from emerging trends.

Transcript

Greg or the rest of the panels are any new kind of technology that you're using
that you think has been really impactful recently? I think a lot of conversations
are around foundational software. So when you talk about AI, right, it's not about
whether you have AI on your platform. It's about who's using AI, right? So in, in,
it's more about Facebook is not going to create a platform for their AI. They're
going to embed it based on a platform that already exists. The question is who are
those companies going to be, and that's where you want to be investing your money.
The other pieces are around, again, foundational software and the educational
technology sector. That's going to be a great spot to be as well. When you start
thinking about healthcare or med tech, the question there right now, it's very
saturated. There's going to be some consolidation there. And then what is on the
software side? I'm sorry, software, sorry, I did get too far, but on the software
side, yes, it's going to be the medtech area is a little I do think medtech in
health care right there poise right now for a little consolidation. There's a lot.
Yeah, there's a lot That's awesome. Yeah
No, I love it. I think that's great insight. That's what I want to hear and I
would say technology is rippling through both The companies that we hold through our
partnerships and our own companies. So, on the heritage side, you know, technology
has made it more efficient and helpful. I would say one way it's impacted us is
it's made our due diligence easier or more thorough, right? So, I can give you an
example of, you know, we do background checks, personal background checks on all the
people we invest with. Prior to working at Heritage, I did a lot of personal
investing and I didn't do that step, right? But we're doing that for our clients
and we've had deals that we love the investment narrative, But that background check
came back and uncovered some things that we dug into and we passed because we
didn't feel comfortable with that operator at that point in time. So yeah, technology
is helping everything. It's made our due diligence process. I'd say, you know, easy
for us to get that transparency we want with those partnerships that we're making.
Do you have a due diligence team or how do you do that? We do. More than
anything, you know, if you look at how many investments we're doing a year, we're
not doing 50, right? We're making five to seven to 10 allocations. So, we don't
need a massive team to execute on that. What we have is a defined process.
And this addresses one of the other questions you asked to be prepared for. I would
say, you know, one of the things that's been pressed upon me over the last three
years is the importance of separating investment diligence from operational due
diligence. So prior to joining Heritage, all I ever cared about was what's the good
narrative? That's a killer story, to your point. Tech for tech's sake. "Hey, that's
a really cool piece of technology." But once you get past the investment narrative,
which many of us in this room might be good at, operational due diligence, how
granular do you go in the fund ox? How do you get into the backgrounds of the
GPs? How do you get into the weeds of what they're doing? We've had multiple deals
where we loved the investment narrative and the due diligence. And we thought they'll
probably make money. But operationally, we discovered, hey, you know what? They did
something really funky here. Instead of being an LP, they were the LLC, which means
they can give disparate economics to their investors, we're a pass on that. Red
flags will pop up and so process has been more important than depth of team. We've
got 156 question checklists we go through. And what's cool about PE is you have
time for that, right? So when I was in real estate, which was my background before
joining Heritage, you have 30 days to do diligence, right? - Yeah, right, sure. - And
we spend seven months on one operator, right? Just to get to the end and then
we're like, okay, now it's ready. So I do like that element of PE. How can a
family, I mean, obviously a family office through, you know, going to you can get
that level. If I'm not, how am I doing it? Wow.
Yeah, yeah, that's a great question.
So one comment on that is that when I was in my last private equity role, and I
joined the org of Alpine, we didn't have an operational check as of the companies
we were purchasing. Like they were looking at all the financials and when you
acquire it all of a sudden, everything that you thought they'd start performing on
starts to fall apart. So we build that operational checklist and actually in this
venture fund, we're looking to do this very intrusive due diligence, like technical,
commercial, financial, 'cause we'd only wanna partner with people that are willing to
open kimono so to speak because that's what's going to allow an operating partnership
um and and yet your point there's no there's you know there's ddq docs out there
but like you have to figure out depending on what your strategy is and where you're
investing how much of that you want to build yeah michael how did you how did you
do that with your family office starting out i mean like how how do you obviously
now you've built a team and maybe you guys already had always had the team but can
you describe >> Yeah, so I think to kind of piggyback of what they're saying, I
think having industry experience and what you're investing in is critical. So I mean,
we're oil and gas folks before we were a family office. That's how we all were
trained up. We were on the drilling rigs. We were working on the business
development side. And so I think it's being able to ask those operational questions
and understanding, you know, what's the infrastructure on the ground of this, you
know, yeah, we think there's a lot of potential oil here, but we may not be able
to actually go access it because of marketing issues on the midstream side, or our
first purchaser is actually charging us $4 extra per barrel to do something that you
may not know if you don't actually dive into the operational side. I think that's
critical when you're doing this type of granular due diligence, is understanding the
full swath of what you're actually investing in. And again, lucky for us, we all
come from an oil and gas background. So it really helps when we go through that
process because we're not trying to learn a new market. - Yeah, that's great. What
does, what's kind of your average, your investor in your,
if we could go down the list, like who are your investors? Who's the largest?
- Before we go into that, I just want to say, just put on the meandering consulting
lens for a minute. Don't be afraid to ask for help. If you are a family office
and you don't know something about a certain industry, there are plenty of people
that do. I think that's one of those things that, I think there's a lot of pride
sometimes, people feel like they have to do it themselves. There's a lot of experts
out there. Even once in a while, I'll say, you know what, I know so and so did
this for 25 years. Why don't I ask them about this, right? And so I think there's
something about that, being humble enough to ask. >> Well, that's great. What would
be your investor avatar and who's what is kind of the largest investor that you
have You don't have to name names, but just yeah I would say our largest investor
are the small family offices You know one of the benefits is as you guys I'm sure
heard today about investing in oil and gas is the tax benefits Not just on the
passive income side, but on the active income side Especially if you for the first
12 months while capital is being deployed coming on the GP side So generally it's
Generally, it's smaller family offices who are looking to take a bigger chunk out of
a project. We don't tend to get too big with our fund sizes. But also, kind of on
the more the individual size, it's someone who's generally a high net worth W2
individual who's looking to offset those high net-- those high W2 earning incomes.
Usually it's someone living in California or New York who's got a tax bill that is,
why cut a check to the federal government when you can cut a check into a business
that's going to give you a little bit of passive in or going to give you some
passive income Give you those tax deductions They'll also give you an equity stake
in a project that will last you know 10 15 years. That's great And just remember
we focus primarily on M &A So with that said we work with companies and with
funding family offices And so we work with companies as large as worth a billion
dollars or more. So and families nine figures, right? So for For us,
there is some consistency around that, but the other pieces, too, around expertise,
whether or not they want to have a big portfolio, things that they're looking for.
But yes, M &A is definitely a very different transaction. Yeah, we predominantly work
with families who have less than $250 million in assets. We manage $70 million for
one family. In this fund, specifically, that targets lower middle market private
equity. We have a five million dollar investor in there the minimum There's a
million but it's really people who are saying I want access to that space in a
diverse in a diversified way And I don't want to put 50 million of my own money
just to hit fund minimums. Yeah to get there
Yeah, similarly mainly family offices, you know, this is this model is new It's it's
unique It's kind of bridge it bridging a little bit of the the side that venture
isn't quite delivered on the funds they've created and then taking a P approach into
this area where we do want to support innovations. So the type of LP profile or
family office profile has to sort of, you know, there has to be strong alignment in
like what we're trying to achieve. And the, our investors so far, family offices,
roughly 250 to 500 million in, you know, AUM. >> What advice do you have for the
private investors here today who might be interested in your space or maybe it's a
family that has a deal, they're thinking about divesting or maybe they're,
you know, how do they bring it internally to take on new opportunities?
So if for the people who are here today, like what would you say, this is how I
can help you directly?
Well, I guess I'll >> I would say ask a lot of questions about what assumptions
they're making and their models. Oil and gas is a subject that the average retail
or small family officer doesn't really know much about and there can be, you know,
my dad used to always say if you can't baffle them with brilliance, bury them and
you know what. And so sometimes you can get a lot of bury them in BS when you
start throwing, you know, really fancy models out at you. I mean, I come from the
-- I was an engineer and I'm on the finance side and trust me, you can build the
most complex Excel model that you want, but four to five key assumptions made to
the upside can completely change the way the model acts and I can get a model to
tell you whatever you want. So we can work backwards from the outcome if we really
want, but the key is what are you underwriting and what are those assumptions you're
actually making and really ask those questions because if you're not asking that of
your sponsor, they may or may not tell you. >> For me, I would say it's plug.
Tomorrow at 10 .40 a .m., we'll be talking about that, acquiring and divesting
companies. But the other side of that, too, when you think about from a divesting
standpoint, a lot of family offices tend to hold onto companies forever, right? They
just buy and hold. One of the things you want to start with is thinking about the
strategy off the bat and thinking about, okay, what do we want to be in the next
few years? And at what point is enough enough. What kind of performance metrics are
we looking at? What does an exit strategy look like for each of these holdings?
And that's something you want to be thinking about when you think about M &A in
particular. When you think about acquiring, again, it also has to align with your
thesis on who you want to be and your vision going forward. >> With uncertainty in
the market, does it make it better to be ‑‑ I mean, like, is it better to sell
now, or is it like with the uncertainty in the market, is it better to like, let's
ride the wave and see where the optimal is? >> I love this question. You know
what, there's winners in every single marketplace. And I always say, no matter what
the economy is doing, if it's good or bad, there's always somebody winning, right?
In every industry. So if you believe in what you're doing and you have a great
product or you have a great company that's winning, then Yes, it's probably a great
time to sell or either hold on to write it and then sell later. But you know,
that's a good time to, you know, get your cash if you're looking at if you're
looking to exit. But yeah, I love that question.
Yeah, I would say, you know, for people here in the room who are deciding whether
or not to start their own family office or if they have their own family office,
you know, if you have $250 million or less, it's an interesting question to ask is,
should I do this, should I start my own family office, should I go hire six to
eight people who are professionals with diverse backgrounds and really run a brand
new company or not? You know, while no one can answer that for you, I can tell
you there's power in partnering with groups like ours who don't only get a single
look and have a single perspective that you may have, but we have multiple families
with multiple experiences and expertises and networks. And leveraging that can be
wise, I would say in addition to some of the niche investing, which we do, the tax
planning and tax strategies, which plug 11 .30 tomorrow, I'm gonna talk a little bit
more about, can be massive. And there are actually tax tools out there that you
cannot legally do by yourself that require a third party like us. And they add up
to tens of millions of hard dollar savings in your pocket. So yeah, I think that's
interesting decision everyone's got to make for themselves and if it's a conversation
you want to have we'd love to have it.
Yeah it's like this question as well that you know one of the single biggest
comments I've gotten from both family offices and institution LPs or actually a
comment rather is that they haven't been very happy with the lack of transparency
from their fund managers especially the last tranche of emerging fund managers and so
that's actually actually one of the things we provide because of our intimate working
relationships with our start -ups. So the idea here is that there has to be
alignment, again, you know, that word's been used a few times, but the idea is an
alignment in the strategy, alignment in what you're looking for in terms of a fund
return, in terms of the value creation, and we thereby create this, you know,
not only intimate relationship with start -ups, but we want our cohort of helpies to
really understand what's going on, be aware of things that are coming up, and you
know, are able to get ahead of things, you know, and more collaborative than
anything. >> Are there -- well, I'm going to ask one more question,
but I thought I'd first ask the audience. Does anyone have a question that they'd
like answered, and perhaps Charlie and Alexander can run run around.
Go ahead and raise your hand if so. And while that's happening, you know, if you've
been to our events before, you've heard this question, like, what's the one piece
of, like, million -dollar advice that you can tell the people in here that you can
look at was a single mistake you made that you could -- here's the lesson from
that. So, when you look at your history, like, what was one thing that that this
is how I would do it differently today.
- Oh, man. I mean, if you've been investing as long time as we have,
you're always gonna have some swings and misses. I would think stick to your
strategy. And for us, we have a specific even niche strategy within oil and gas.
We tend to avoid some of the more complex horizontal drilling. You know, our focus
is really on unconventional unconventional vertical drilling. I think the times we've
gotten in trouble is when we've varied away from that. I think the times when we've
moved into more of an exploratory mode, I think has proved somewhat fruitful.
But I think, you know, specifically over the long term with our strategy is not --
and try not to get caught up in the new hot thing. I think we've done a good job
of that over the years. But I think every time we've kind of gotten bit a little
bit is because we've maybe straight from what that strategy was that has made it
successful for so long. >> I mean, for me, I think I double down on culture
matters. And I think the idea of when you think about a company, when you think
about do you get along with the owner, does the owner have a good strategy if
you're looking to buy their company? If you are the owner, the question is, you
know, are your people going to actually keep things moving in the right way? Do you
have a second line of defense that's going to be really good at taking over the
company. These are things that really do matter because it is about, in the short
run, sometimes it's about the dollars, but that's not really what a transaction is
about, right? It's about legacy and it's about long -term viability. >> Yeah,
something we see a lot is, I think one of the learning is intellect does not
necessarily qualify someone to be good at managing money. Everyone in this room is
smart. Not everyone in this room is really good at managing their own money. They're
all good at something, right? We're all experts at something. And we run into this
a lot. You know, people who are former masters of the universe, they're the world's
best shoe salesman. That doesn't necessarily make you good at investing $50 million
that you got from your liquidity event. So understand the distinction between being
really smart and really good at something and then having a team.
Yeah, I think that You know having having the ability to focus on on your strategy
and whatever you've picked in terms of what you're planning to do Like setting those
parameters ahead of time and not really string from it You know and then focus the
power focus is not really about saying noted things about saying noted things That
could be really really good, but it's not aligned with the vision you've laid out.
You know, that's really hard to do. >> That's a real discipline. We do have one
question that I saw. Go ahead, Charlie.
>> Paul Graham here. Curious to think as we think of niche investment strategies,
what have you maybe not shared that you think would be beneficial for us to take
away and now? >> Oh, gosh. Two words, carbon credits, but that's what I'll say.
>> I think IT I think IT services companies, that's a strong area for growth right
now. So this whole boomer retiree wave and ways to ride that, if you've heard the
term "search fund," that's a very interesting space for us, of which we're active
investors. We can talk more about that offline at a table if you want.
Yeah, I think in general, I always like services, businesses. I think you can
probably cash cash flow, liquidity, and we push our start -ups to think about getting
that exit pathway as well, not only just building huge valuations, but getting to
consistent liquidity, I think, in these markets is more important than ever.
Yeah, that's great. Listen, can everyone give a big round of applause to this panel?
What a great panel. Thank you so much.