As asset managers grow more likely to renege on agreements, family offices must map out different options
As measures to contain the spread of the normal coronavirus continue to block off the flow of commerce, businesses around the world are facing a capital crunch. Central banks and governments have attempted to ease the pressure through massive stimulus spending and drastic shifts in monetary policy, but even with that, many companies are staring into the economic abyss.
Suddenly imminent risks of insolvency, bankruptcy, and default are driving all sorts of desperate behaviour among companies. That includes struggling investment managers, whose cash-flow problems may cause problems for a specific segment of their client base.
“Distressed fund and company managers may target family offices first (among all investors) for renegotiation of terms and/or withholding of distributions or information,” said Matthew McGrath, founder and managing director of Emissary Holdings, in a column published on Forbes.
Citing data from Bloomberg and Knight Frank, McGrath noted that as of 2019, the global market for single family offices included roughly 10,000 organizations and more than 2,300 billionaires. As such entities expand their investment footprint, they grow increasingly exposed to disputes including proxy contests against other shareholders with stakes in their portfolio companies, conflicts over breach of contract with buyers of companies, and valuation disputes with fund managers.
“An effect of this chaos [from COVID-19] is that family offices will start to see unusual behavior from certain fund managers and portfolio company managers, who may now struggle with cash issues,” McGrath said. “Family office principals and investment teams must therefore be ready for breaches of agreements and be prepared to manage these cases efficiently.”
To effectively deal with investment-related disputes, he advised family offices to follow five principles:
- Consider playing the long game – since family offices are intergenerational investors, McGrath said they should be able to sacrifice near-term cash for longer-term returns. Maintaining trust and confidence in counterparties, he said, can allow patient investors to use the current economic shock to renegotiate for longer-term economics.
- Map out all resolution options in terms of their expected value – McGrath listed five different resolution paths for any dispute: litigation, arbitration, mediation, negotiated settlement, and sale of exposure. “Which of those you choose to prioritize should be based on your optimal financial and reputational outcomes,” he said.
- Formulate a “war plan” for legal action – family offices should decide on a legal strategy based on its merits, its expected monetary and time cost, and the value they are likely to recover. From there, they should be able to assign a net present value (NPV) to the legal action.
- Design a “peace plan” as the preferred route – such a plan should achieve a higher NPV than a legal action plan, McGrath emphasised, adding that family offices should lay out all the reasons a counterparty should prefer that option over the legal path.
- Recognize the utmost value of time – underscoring time as the greatest determinant in the value of dispute resolution, he urged family offices to avoid long, expensive processes of legal recovery of assets.