I am often surprised that even the largest family offices and investors have only a small network of fellow investors and peers. Not only is this an unsatisfying way to invest, it can also be detrimental to your business and investment portfolio to be too isolated. When an investment team is far removed from others in their industry or investor group, it can have a number of negative effects.
Here are a few of the drawbacks to going it alone as an investor:
No Exposure to New Strategies and Creative Approaches to Investing
Many family offices that are exceptionally isolated are following the same strategy that they have been executing for years, without consideration of cost-saving measures, innovative strategies, and various changes that could positively impact the portfolio. These methods could include types of club deals, leveraging tax efficient structures, or structuring royalties into minority co-investments for example.
Susceptible to Self-Serving Bias
When you and your team are removed from other investors, it can be easy to justify mediocre or poor performance without acknowledging that others performed better in similar conditions. By exposing your team to your peers, you can develop a better understanding of how similar investors have performed and how you might emulate their successes.
Becoming Blind to New Risks
In the last couple of decades, the economy has become much more global and, consequently, more complicated for investors. Investors need to stay informed and in-the-loop on their investments and the myriad of risks that could hurt the portfolio. Now companies can see their share price slide 5 points on a political shift in a key foreign market, a comment from the head of a central bank, or a Chinese manufacturing survey. For investors, it is important to build your network of contacts that can help keep you apprised of all relevant information that could impact your investments and make you aware of various risks, from growth in sub-prime borrowing to changes in federal law.
Lack of Counsel and Support
Many of the family office executives that I work with are seeking to expand their peer network and meet other family offices. Not only are there great business reasons for doing this, but on a more human level it can be satisfying to build relationships with like-minded individuals who have similar aspirations and challenges. These business relationships can help advise you on a problem that they may have experienced before or give you assistance through referrals, resources, and other helpful actions.
Identify Ways to Benefit the Business.
By developing a strong community of peers and business partners, family offices will have a great network to source deals, form new business partnerships and joint ventures, and grow your holdings. For investors with substantial business interests, you may identify a new bolt-on acquisition or land a powerful business for one of your portfolio companies. I constantly find opportunities to introduce parties with similar interests and, in turn, many executives in my network make a point to make valuable introductions for me, such as a family office or business that is looking to sell. You may not even have a clear way to benefit from your network, but it is worth developing the community now with the understanding that you will derive value in ways that you can’t foresee.