An investment specialist who recently attended a conference in New York put together by the publisher of this news service focuses on the issues of due diligence and the capabilities around it that are often big challenges for family offices.

The author recently attended the New York Family Wealth Report Asset Allocation Summit 2016, held at the University Club in the city. Poonam Mathis founded StealthForce.com, a curated online platform for project-based, real estate investment talent on-demand. She is a published author and is a graduate of Harvard and has an MBA from Wharton.

The recent conference, organized by the publisher of this news service, addressed a number of issues, including the prize of obtaining returns in a low-rate environment, the benefits - and hazards - of illiquid assets, and the experiences family offices have had in direct investing. We are grateful to the author for her views; as always, we invite feedback from readers and they can do so by emailing the editor at tom.burroughes@wealthbriefing.com

It’s hardly news that a low interest rate environment poses challenges to the family office; shrinking returns amidst fixed cash demands leave managers to weigh the lifestyles of the current generation against the interests of those still to come. But as smart managers scour the globe seeking premiums to bridge the gap, they’re discovering that it’s not as simple as adding illiquid assets to bolster returns. Real estate is a perfect example of why the active investor is the one who is poised to win.

Real estate is where the premiums lie. Both Rebecca Patterson of Bessemer Trust and Avi Sharon of Blackstone commented during last month’s NYC Family Wealth Report Asset Allocation Summit on the "illiquidity premiums" available to patient capital in areas like real estate. As one indicator, according to Lazard Global Real Estate Securities’ August 2016 US Real Estate Indicators Report, even with an August when REITs underperformed the S&P 500 Index and every equity REIT sector declined “the asset class is still up 14.2 per cent year to date.”

But most families are grossly understaffed for due diligence, relying instead on funds. The family office structure prioritizes generalists, rather than subject matter experts in areas like real estate, taking on fund investments, and diligencing the GP rather than the underlying assets…leaving the rest of the analysis to the funds. The problem with that strategy in a low cashflow environment is that fund fees and expenses are the enemy. A Prequin Survey of Family Offices found that as much as 59 per cent of respondents cited management fees as a point of contention. That, combined with the lack of visibility and control have led many offices towards direct investing, but going direct requires a steep learning curve which you can’t navigate without the right help.

Direct investing enables you to become more active…and on-demand talent enables you to avoid the overhead. Getting into direct real estate deals starts with generating a pipeline, and might move forward through collaboration with other families, but ultimately it falls on the individual office to earn back the fund fees. And the platforms which can get the best talent to run their deal analysis are ultimately best-positioned to steer through these waters. That’s why the smart family office is opting in to talent on demand.

Whether for advanced pharmaceutical efficacy analysis before investing in a drug company, or for an on-demand project-based deal team comprised of former REIT professionals to vet the latest real estate deal coming into your funnel…the right team and the right time is now at your fingertips, if you’re willing to use it.

Imagine that a personal introduction to an experienced developer with immediate plans to build the only luxury hotel within 50 miles of a high-income suburb. You take the meeting but choose to pass, he raises financing from a fund, and shortly thereafter you’re offered the chance to invest as an LP. Fast forward three years, and the cashflow he’s producing dilutes from a 20 per cent return, after GP expenses to an 18 per cent, after fund fees to a 16 per cent, and after the promote down to 14 per cent. And that’s before taxes.

Now imagine instead that you had hired a consultant to join that introductory meeting. One with 20 years of hospitality development experience at a REIT. One with multiple mutual connections with whom to background check the developer. One who could translate very quickly to you the intrinsic value of the building approval already obtained, the competitive advantage to the location given county development plans, and the conservative nature of the financial projections given rising local incomes.

Imagine that after running through the due diligence, he recommended you make the investment. And three years later the family held ownership interests on top of the 20 per cent return, raised further by the depreciation tax benefits of  ownership. Imagine that as a result of doing your own diligence, you prevented the developer from layering in the fund and the GP at all…leaving all that cashflow on the table for the family. Just imagine.