Major institutional investors have existing buckets, and they hire people to manage what's in those existing buckets, for the most part.
Furthermore, any new investment approach that doesn't fit into existing buckets typically starts small. One would be forgiven for expecting that smaller bets would be easier than larger ones for major institutional investors, because after all, there's not much capital at risk. However, it actually doesn't work that way. An investment professional at one of these large investment shops reports either directly or indirectly to a busy investment committee, and they just don't have the bandwidth to consider and subsequently manage a bunch of "small" investments. In my 15 years of investing into clean energy and sustainability, I've repeatedly spoken with smart investment professionals who see intriguing new ideas but can't go to their bosses with any investment opportunity smaller than $50M, $75M, or sometimes even higher.
So the world's biggest investors often find themselves boxed out of new ideas. And yet, the market needs new ideas. And even more so, when it comes to investing in sustainability, the world needs new ideas as well. So if the doors to the biggest pockets of capital are closed to these new ideas, who can help get them started?
Family offices — professional teams investing on behalf of a single family or sometimes a small group of families — are most often much smaller than major pension funds or sovereign wealth funds. Thus, many of them have the flexibility to invest into smaller, early new investment ideas. And yet, they often also still have enough capital to be able to write the $5-20M investment commitments that are necessary to get new investment models up and going.
Since family offices can have the flexibility and the right check size to engage successfully with new investment models, many across the financial world look to them for new ideas. Especially in areas like sustainable investing, where there are clear indications that there are significant long-term investment opportunities waiting to be unlocked. See, for example, the recent partnership between the C$300 billion Caisse de dépôt et placement du Québec (CDPQ) and CREO, a not-for-profit global network of family offices (disclosure: my team has deep ties to CREO and we collaborate often). There are many more less-publicized efforts like this as well; I've personally been in rooms where pension fund managers have gathered with family office investors expressly to try to figure out new approaches and new investment models that are ready to scale up.
So family offices have the potential to punch way above their weight in areas like sustainable investing, as the launch pads for new investment ideas that don't fit well into existing buckets. But it turns out that it's not easy for them as well. A new white paper by Cambridge Associates and CREO might be a valuable resource for any family offices tackling this challenge. (Disclosure: I'm a contributor to this paper)
Why is it difficult for family offices to take advantage of their flexibility and check size in this way? Simply put, it's just really hard to get started.
Family offices vary widely in their scale and structure, but for most, it's a pretty small team. Whether they're family members themselves or staff hired from outside the family, they have to cover a huge range of investment categories with very little bandwidth. Today it's looking at hedge funds, tomorrow it's public equities, Thursday it's buyout firms, and maybe on the fourth Friday of the month they'll get to consider something a bit different than the norm. This makes it hard to build the pattern recognition, knowledge and comfort necessary to try anything new.
So perhaps the most important point in the Cambridge Associates / CREO white paper is this: Family offices who want to start investing in emerging opportunities like sustainability need to be prepared for some early pain. They need to expect they will make some mis-steps. They need to have had the internal conversations around this so it doesn't come as a surprise when it inevitably happens. And they need to actively collaborate with other like-minded groups (family offices, etc) so that they collectively learn from each others' painful experiences, rather than repeat them.
I recently spent time with a large family office that, like so many these days, has made the internal decision to shift significant resources into sustainable investing. But after making that important decision, the next obvious question was "How?" How do we identify which sub-categories within sustainability show the most returns potential? How do we identify the best managers in a sector where there aren't so many well-established managers? In this case, the team and the family are "learning by doing", making a few investments now rather than a whole bunch all at once, and seeing how they go while also bringing in a lot of external expertise and counsel and networks along the way, to accelerate their learning curve. In other words, it's a significant investment of this team's time and effort. And thus, it's not easy.
But as with all things in the investment world, if it was easy, everyone would be doing it — and everyone's returns would be crushed. Family offices who work with other family offices to explore and tackle emerging new opportunities like sustainability need to expect some stumbles. But they also are positioned to take advantage as early-movers into big new ideas. And if they succeed, they may unlock much, much larger checks following in their footsteps.