How Can a Family Assess Whether an Investment Sponsor Has Enough Experience?

Assess a sponsor's experience by matching its actual work to the investment you are considering. A polished biography or a long firm history cannot answer whether the current team can source and evaluate this kind of investment, manage it through its life cycle, or plan an exit. Ask who handled each part and whether those people will work with your capital.

Separate Personal and Firm Experience

Request a clear account of the sponsor's relevant deals, including each person's role, decision authority, and time on the investment. Distinguish results achieved at a prior firm from results achieved by the present organization. If the team has changed, ask what resources and responsibilities changed too, along with any shifts in incentives. Past performance can inform your view, but it does not by itself establish that the same outcome can be repeated.

Look for experience across the work that matters to the strategy. That can include finding opportunities, arranging financing, conducting due diligence, working with management, monitoring results, and planning an exit. In my experience, families can underestimate the work involved in investing independently. A co-investment, for example, may provide access to a fund team that finds opportunities, evaluates investments, and tracks results. This can let the family avoid taking on every part of that work alone.

Test the Process With Specific Examples

Ask the sponsor to walk through a completed investment and explain what it expected, what happened, and how it responded when conditions changed. Ask for examples of decisions that did not work as planned, along with what the team learned. You want to hear a consistent account from the people who made the decisions, supported by records that can be checked.

For a fund manager, review the strategy, team history, process, disclosures, terms, and performance information together. Ask whether the track record belongs to the current team and vehicle, and whether it includes different market environments. Compare the work with the opportunity in front of you. Experience in a related field may be useful, but it does not equal managing a similar asset or strategy through its full life cycle.

Check Fit and Incentives

Experience also needs to fit your family's needs. Ask how often the sponsor communicates, who answers questions, and what information investors receive. Discuss how the sponsor is paid, what costs investors bear, and how the sponsor's interests change after capital is committed. Ask for references and confirm material claims independently. If the sponsor will not explain its role or provide support for its record, treat that as information about the relationship.

Use a written review process so the family can compare the sponsor's claims with its evidence and agreed investment limits. Your committee can identify unanswered questions, set conditions for further review, and document why the experience appears adequate or insufficient. If the opportunity involves complex legal or tax terms, talk with your attorney or CPA. The goal is to understand what this team has done and what it is prepared to do for you.

Read next: What evidence helps verify an investment manager's track record? and How can investors tell whether a manager's strategy is repeatable? and What due diligence questions should a family office ask a manager?

If the single family office were to try to invest independently without the private equity fund, it would have to find the right company to invest in, come up with sufficient capital or financing to execute the deal, persuade ownership to accept the investment, perform due diligence on the firm, manage the investment, and ultimately exit with a profit that justified the exceptional sweat equity and resources put into the deal.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.