The Complete Direct Investing Handbook

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


The practical guide to direct investing strategies and best practices

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.

Contributing Authors

CHAPTER 1: Introduction to Direct Investing

This chapter orients the reader to direct investing, with specific attention to family offices. The definition and background of direct investing are provided, including a review of how the economic upheaval of 2008 affected the direct investing marketplace. The role of the family office and private investors in direct investing is outlined, followed by a discussion of best practices and key considerations for these types of opportunities.

CHAPTER 2: The Emerging Presence of Private Capital in Direct Investing

This chapter outlines the specific market of family offices and their unique preferences and vantage point on direct investing. Specifically, Family Office Exchange (FOX), a globally recognized private membership organization for family offices provides proprietary research and demographic data on family offices as investors of private capital. The chapter further describes the unique benefits of private capital versus institutional capital to the direct investing marketplace. Finally, the chapter concludes some of the opportunities that family offices observe in the growing direct investment space.

CHAPTER 3: Co-Investment Strategies in Direct Investing

This chapter delves into the situation where two or more separate investors join in together on a direct investing transaction. First, the definition and context for co-investing is provided, along with a discussion of why and how this approach to investing has gained popularity. The roles of the co-investor are then outlined, specifically as it concerns deal originators, network facilitators, sponsors, and minority investors. Drawbacks of co-investing also are discussed and guidelines are provided for vetting co-investors. Finally, club deals, a particular type of co-investing are presented.

CHAPTER 4: Private Equity Strategies: Characteristics and Implications

The aim is to help family offices and the advisors who serve them better understand the nuances of the various sub-categories of private equity.  Ultimately by understanding the characteristics and implications of each asset class, the reader should be equipped to make an educated choice regarding the most relevant and appropriate strategy for their unique profile. Specifically, this chapter covers early stage investing such as venture capital and seed investing as well as growth capital, buyouts, mezzanine financing, distressed investing and real estate. Each section looks at the different characteristics of the type of investment from cash flow characteristics to risk return profile, use of leverage, and skillsets for investors implementing these strategies, as well as the size, duration and nature of the investment.

CHAPTER 5: Family Office Considerations to the Direct Investment Process

This chapter outlines the nuances and mechanisms of direct investing from the viewpoint of family offices. First, the impact a family’s source of wealth has on its direct investing preferences are considered and the Strengths, Opportunities, Threats and Weaknesses (SWOT) analysis tool is presented as a means for evaluating how a direct investing strategy may be deployed for your family office. A three-phase process of direct investing is then outlined for discovering and vetting, deploying, and ultimately exiting opportunities.

CHAPTER 6: Designing a Direct Investment Thesis

This chapter overviews the process of creating and definition of a direct investment thesis. The direct investment thesis guides investors investment thesis of what to purchase, what to sell, what other actions to take, as well as when, why and how they need to initiate these activities. The chapter highlights several considerations to observe when designing the thesis, including the family’s intended asset mix, the family’s pathway to direct investing, the family’s entrepreneurial orientation, and the family’s desired style. The chapter also discusses a Barbell Approach to direct investing and implications of having one or more core closely held businesses. Finally, the chapter concludes with an anonymized case study of a multi-generational family with an investment thesis for directs.

CHAPTER 7: Sourcing, Deal Flow, Screening, and Deploying Direct Investments

The material provides a framework and action steps to sourcing investments, making investment decisions, and ultimately deploying capital into direct investments. This stage of the process is where investors are accessing hopefully the best in breed direct investment opportunities, discerning to screen those that meet their unique investment criteria, and then efficiently and effectively deploying capital into these direct investments. This is followed by insights into developing a network of referral sources and partners for direct investments. Finally, a framework for screening investments and the process for making investment decisions, including due diligence, writing an investment memo, and the investment committee decision-making process, is provided.

CHAPTER 8: Direct Investments: Deal Structures, Terms and Portfolio Construction

This chapter provides a framework for assembling a portfolio of direct investments and outlines the most common types of equity and debt instruments utilized in direct deals.  The chapter also covers hybrid structures such as mezzanine financing and highlights the range of possible investment returns across these financial instruments.  Also included are helpful strategies for investors to protect themselves when structuring a term sheet or participating in a direct deal as part of an investor group.  The chapter details a case study of an actual mezzanine investment in a privately held company that generated a venture capital return with a debt instrument.  It concludes with a Series A Preferred stock sample term sheet containing commonly used terms associated with many typical direct investments.  Throughout the chapter are helpful guidelines for families who are new to investing in direct deals and for those who are more experienced in this asset class.

CHAPTER 9: Investment Monitoring, Exit Strategies, and Harvesting Returns

The content within discusses the approach to investment monitoring, exit strategy, and evaluating different opportunities to harvest returns when it comes to direct investing. There is a review of many of the significant upfront considerations that direct investors need to weigh in order to maximize their likelihood of achieving a desired exit. It emphasizes the importance of having alignment of interests between management, majority stakeholders, and the minority investors with respect to the adoption of an exit strategy and the harvesting of the investment. Further, negotiating for information rights and transaction rights is essential and is best accomplished as part of the initial investment, not after it. It also notes that the “amount of return” only tells a portion of the story, and that looking at the timing of the return sheds greater light on the true success of the investment. Certain metrics such as return on investment (ROI) and internal rate of return (IRR) provide two measurements as to the success of the harvesting of return. It continues by demonstrating that harvesting returns is closely related to the lifecycle of the underlying company and that depending at which point in the company lifecycle the investment is made, the investor should expect differing levels of risk, return, and time to harvest. Further, the discussion focuses on the importance of understanding the risk/return profile and the associated exit strategy in identifying the harvesting opportunity. Differing exit valuations and multiples result as a function of the lifecycle of the investment, segment, and leadership capabilities. Investors should consider various exit value drivers such as EBITDA, book value of assets, strength of the management team, defensibility of the intellectual property, the firm’s market position, and the tax ramifications in the exit phase. Additionally, several common exit strategies for direct investments, including taking a company public, are discussed as well as certain considerations of a sale of a company to a strategic versus a financial buyer specifically with regard to creating synergistic value. Finally, there is a brief discussion of the complexities of the company sale process and the role and importance of advisors such as investment bankers to the exit strategy

CHAPTER 10 – The CIO Perspective

The chief investment officer (CIO) perspective of a “direct investing” style family office is a very special breed of investment leader, one who typically has deep operating expertise and or C-level experience in one or more companies. This chapter delves into their unique perspective, their qualifications, education and experience and the importance of compensation and interest alignment. It further demonstrates the importance of how to consider “success” standards for the CIO differently perhaps than a traditional CIO. Further the chapter outlines the different qualities between direct investments from a SFO (single family office) and institutional investor. The chapter details anonymous real-life case studies and debriefs on the key lessons learned. It concludes with the key criteria when searching and selecting a direct investment CIO and pitfalls to avoid.

CHAPTER 11 – The Millennials and Direct Investing: A Look at Impact Investing

This chapter covers the direct investment interests and objectives of the next generation or millennial family members (“Millennials”), who were born between 1981 and 1997, as well as addresses how a family can engage them in the direct investment process. The chapter will also focus on Millennials’ specific interest in social and environmental challenges with market-based solutions, also known as impact investing.  Interest in impact investing is not the sole providence of Millennials and often spans multiple generations in a family. Engaging a broad base of family members in an impact investment development process may generate valuable intangible benefits, labeled here as experiential returns, for the family, including strength of family unity, growth of human assets, and expansion of the family’s “circle of competence.”

Millennials have been extensively studied over recent years researching who they are, what they want, how they are engaged, as well as how they are similar and different from previous generations. Engaging Millennials in the development of an impact investment strategy may help families reach the proverbial “brass ring” of training the next generation of family members to be valuable contributors in the family’s investment decision process.

The chapter will also address the challenges and barriers impact investing may cause for a family’s existing asset allocation model and investment process. It concludes with an introduction to Harvard Business School professor Hirotaka Takeuchi’s work on “knowledge creation” within an organization and MIT Sloan School of Management professor Peter Senge’s work on creating a “learning organization” and how this work can be applied to family offices.

CHAPTER 12 – SCIE: Sustainable Cycle of Investing Engagement

A new framework, SCIE (Sustainable Cycle of Investing Engagement), is proposed that is an iterative and collaborative model designed to help experienced family office investors and those with little-to-no investment experience come together in the development of a new investing strategy. The framework guides a family through five steps: Establishing Family Values, Framing Strategy, Developing Strategy, Implementing Strategy, and Communication and Learning. During each step the family office members and executives develop a set of questions that result in clear objectives the family expects to achieve. The goal of the SCIE framework is to develop buy-in from family office stakeholders as the family considers an investment strategy in a sector in which the family has little domain experience or expertise.

CHAPTER 13 – International Direct Investing

In this chapter, we discuss why investors are increasingly seeking investments outside of their home market. We review some of the key differences between investing abroad versus investing in the United States and how to identify the most attractive markets and opportunities. Then we analyze the key components of successful international direct investing and the most common mistakes made. Finally, we discuss ways to mitigate risk. The chapter features several interviews and case studies of leading international investors and their top considerations.

Most wealth books are written for managers and contain lots of details but no sense of the daily life and concerns of the people who are to be served. This Handbook is one of a kind—written for real concerned and want-to-know people. The book starts not with concepts but with concerns and offers clear ideas about what to do, laced with details about real families managing the dilemmas of great wealth and an expanding family. There are few such families, but this handbook is for every family member of such families.

DENNIS T. JAFFE, PhD
Professor of Organizational Systems and Psychology,
Saybrook University

Dr. Kirby Rosplock has created an indispensable resource for family offices seeking to invest in private equity. She explains how to analyze winners and avoid the pitfalls, and discusses the extensive due diligence required even after initial investment. This is the conclusive guide to direct investing, which provides investors with the information necessary to ascertain how to proceed. Rosplock has written the essential manual for what will be a major investment trend for family offices in the years to come. 

Howard Cooper
Private Investor,

The Complete Family Office Handbook is an important resource on the opaque world of the single family office. Comprehensive and easy to read, the book incorporates the views of many thought leaders on diverse topics from the importance of a family office vision to the current legal and compliance standards for the single family office. Those who are new to family offices and those of us who have worked in the field for decades will use it as a valuable reference for issues and ideas.

KATHRYN M. McCARTHY
Director,
The Rockefeller Trust Company, N.A. and an independent advisor to families and family offices

Kirby Rosplock has written an extraordinarily comprehensive 'owner's manual' for family offices already, or seriously contemplating, investing directly in illiquid private markets. The book cogently sets forth not only the 'why' behind these families' desire to get closer to the source of private market returns, but importantly the 'how' to go about identifying, diligencing and structuring direct investments. Given the fast growing proportion of family office capital in direct private deals, this book's insights are exceptionally timely.

Tom Mahoney
Senior Managing Director,
Tangent Capital Partners

The family office space has long needed a comprehensive introduction to direct investing for non-specialists—which it now has thanks to Rosplock and her co-authors. A great place to start.

Grant Kettering
5th Generation Member of Kettering Family,

Kirby Rosplock expertly captures the complexities of the practical and emotional choices that affluent families and their advisors face.

SUSAN REMMER RYZEWIC
President and CEO,
EHR Investments, Inc.

Kirby Rosplock dedicated a year of her life to writing this book and it shows. This is the must-have book for anyone dealing with high levels of wealth—it will support wealth holders as well as wealth advisors and service providers in creating the most efficient structure possible for handling and preserving a high net worth person or family’s financial and human assets. Rosplock and her collaborators clearly demonstrate their command of the subject and why they are globally known to be at the top of this industry.

STEFFI CLAIDEN
Founder/CEO,
Family Office Review/Family Office Capital Network

The Complete Family Office Handbook captures the essence of today’s family office and paves the way to best practice for every family and advisor entrusted with sustaining generational wealth. Kirby has written what is sure to be an industry classic.

SARA HAMILTON
Founder and CEO,
Family Office Exchange

Once again Dr. Rosplock gets it right! In my experience, few have the insiders knowledge that comes shining through in this book. Not only was it helpful, it was a pleasure to read.

Wendy L Craft
COO,
Favara, LLC (SFO)
New York, NYC

The world’s best and brightest family offices are devoting ever more capital to direct investing. Now is the critical time for advisors, CIOs, and family members to share a common understanding on how to source, screen, diligence, structure, monitor, and harvest direct investments. Dr. Rosplock’s handbook provides the roadmap.

Brian Smiga
Partner & Co-founder,
Alpha Venture Partners

In The Complete Direct Investing Handbook Dr. Rosplock and her contributing authors impart a wealth of global family office and investment expertise designed to educate affluent families and their professional advisors regarding the nuances of direct investing. This well researched new resource will prove to be an invaluable tool in navigating the rapidly growing field of direct investments.

Thomas J. Handler, Esq.
Chairman, Advanced Planning & Family Office Practice,
Handler Thayer, LLP

There are many good books and articles about private investing in general but few that tackle the topic from the unique lens of the family office. Family offices have advantages and constraints relative to other institutional investors. They need to be understood. Kirby Rosplock’s book should be read by both family members and professional managers to better understand how to craft and advance a direct investment program.

Sam Altman
President,
Joddes Limited
Montreal, Canada

Kirby blends leading industry research, real world case examples and best practices to architect the first book to comprehensively outline the infrastructure, costs and considerations for building and sustaining a world class family office. My hat is off to her.

JOHN BENEVIDES
President,
CTC Consulting | Harris myCFO

Kirby Rosplock's "The Complete Direct Investing Handbook" is a must read for anyone interested in direct investing. With key insights reinforced by practical case studies from noted experts in the field, this is an essential guide for current and potential direct investors.

Joanne Pace
Former Managing Director and Chief Operating Officer,
Morgan Stanley Investment Management

The Complete Directing Investing Handbook is a wonderful and really the education needed in the family office world. I think we seek out direct investing to diversify risk while enhancing overall returns. However, with direct investing comes the challenges with sourcing the deals, screening the deals and doing proper due diligence, structuring the deals and then monitoring these investments. Your book touched upon all these areas will great educational direction for families to easily understand and use in their offices. The book also touched upon other areas such as millennial perspective and international regard which I felt was extremely helpful. I found the book very comprehensive, informative and a very useful source for our family office.

JULIO GONZALEZ
CEO,
Julio Gonzalez – Single Family Office