United States: Cross-Border Direct Investing

As the mid-market private company transaction market heats up, family office investors will find themselves competing for deals with strategic acquirers and private equity funds—not to mention independent sponsors and other family office investors who have entered the market in recent years. This may compel some of the most sophisticated investors to look abroad for investment opportunities.

Investing abroad is not, however, for the weak of heart. While unusual opportunities may indeed be available, at attractive valuations, conducting the due diligence and implementing and operating those opportunities present unique and, for some, insurmountable challenges.

There are those investors who say that cultural considerations are overrated and that in the increasingly flat, inter-connected world we live in, analyzing a cross-border transaction is no different than a domestic transaction. This may be the case as far as financial models are concerned, but an Excel spreadsheet cannot tell you how your actions will be perceived in a different culture.

Be Present

Family office investors may have an advantage over strategic acquirers and investment funds in cross-border mid-market deals. Many target companies will themselves be family-controlled businesses, and may take comfort from a transaction with another family-controlled entity, as opposed to an institutional acquirer; private equity funds, in particular, have a bit of a bad name in Europe these days.

To capitalize on this advantage, a family office investor must clarify that it is different from an institutional investor, in particular by connecting not just with the seller, but with senior management, employees and other constituencies, such as local government officials. A willingness to meet in the target's home jurisdiction and to spend time there (rather than just flying in and out), helps establish credibility. After the transaction is closed, some senior managers may secretly want the new owners to stay far away from the company, but seasoned investors know that a portfolio company investment cannot be managed entirely from afar.

In many countries, a business enterprise is expected to reflect the owner's values, and ultimately this cannot be accomplished if the owner is hidden from view or poorly represented by a local partner or senior management. This may require some family investors, who cherish their privacy and prefer to remain in the background, to leave their comfort zone, because what would be considered a mid-market deal in the United States is often a very big deal in a non-U.S. jurisdiction. You can expect local newspaper articles, television and radio coverage, and other unwanted attention. Also, in some cultures, a foreign investor can be seen as foreign interloper, or worse—particularly if the investment is in a strategic or culturally significant industry. This provides all the more reason to establish personal credibility and maintain a strong local presence.

Choose a Local Partner You Can Trust

Whether it is someone who is familiar with the company, a local attorney, accountant, business advisor or co-investor, having a local presence that is both respected by the portfolio company and trusted by you is a major asset for a successful investment.

Know Your Management

Even with a local presence, nothing will cause a cross-border investment to succeed or fail so much as the quality of the management team. You must be confident that the management team shares your family office's values, philosophy and vision, because it will be the management who will be entrusted with implementing your strategy and presenting your public face. Without a trusting relationship, complemented with regular visits and communication, the foreign investor may be seen as a distant, somewhat-malign force. This perception can quickly spread through the company and poison the relationship between you and your management.

Cross-border direct investing can be an exhilarating and profitable experience, but it must be entered into knowledgably, with experienced advisors and partners. As direct investing becomes an increasingly common part of many family office portfolios, cross-border direct investing will no doubt become an active, and competitive, investment area in the years to come.

Cross-Border Direct Investing

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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