They have many names: 'Family Enterprises', 'Family-backed Investors', 'Family Offices' and 'Family funds under management'. The credit crunch has resulted in major changes to the way large families who run their own investment vehicles think and how they invest their money, writes Mike Reid, managing partner of Frog Capital.

The funds controlled by wealthy families are significant, and not only in quantity.  According to the 14th annual World Wealth Report 2010 of Capgemini and Merrill Lynch Wealth Management, the financial wealth and therefore investable assets owned by HNWI amount to US$ 39 trillion.

However, more important is these families’ ability and experience in breaking investment moulds and exploring new markets. This means they are more likely to break ranks and cut loose from under-performing funds; it also means that they are potentially important to new private equity fund management teams with differentiated strategies.
This shift has occurred as many traditional investors in private equity, such as insurance companies and banks, are constrained by new regulation from allocating funds to alternative assets such as private equity.
Many wealthy families and individuals have expressed cynicism about private equity. This is the result of high management fees, long lock-up periods, minimal transparency of the asset base and absence of personal engagement with the fund managers – or certainly larger ones.  
This cynicism is being replaced by three different approaches.  First, the approach of the liquidity scaremongers.  The more conservative family investors recognise that Black Swan events can kill off family wealth in a single generation and, in the wake of the recent turmoil, have concluded that private equity offers an unattractive blend of long, locked-up risk, which will not be offset by the net (and I stress net) returns from main stream private equity funds over the new cycle.
Second, the approach of the navel gazers.  For this group, the credit crunch has forced a process of asking uncomfortable questions such as what the family’s wealth is for, who it's for and what bonds the family together. For many in this group, this process is re-energising individual family members, leading to families focusing on core passions, such as environmental issues. The effect is a steady reallocation of funds from private equity to direct company investments or co-investments with other sector specialists, where families feel they can re-kindle their entrepreneurial roots and thus provide some form of raison d'être.
The final approach is that of the pragmatists. While acutely aware of the lifetime costs of investing in private equity, the pragmatists are passionate believers in the potential super-alpha rewards that can be generated by this form of illiquid investment.  “Direct investing is the only way to beat the market in the long term”, a passionate family patriarch tells me every time we meet – the philosophy being: it is nearly impossible to outperform in the liquid markets (equities, bonds etc) in the long term, so the focus there should be on index tracking and cost reduction. It is then the illiquid areas where the long term alpha performance is to be found.
But the pragmatists are also looking for change. They want simplicity, transparency and a way of avoiding 'just paying a fee' to a distant manager. Simplicity is a reaction to the recent era of excessive use of leverage. As many of their great grandfathers did, they want to back growth businesses. Transparency has become an issue as a reaction to losses they've had in funds where they didn't realise what a manager had invested in until it was too late. And with regards to fees, they know fund managers take relatively little personal financial risk, with good upside, and they feel they should participate in this.

It may be a big ask, but they are smart, and these families know they can attract the talent to work with them directly rather than handing their cash over to several different fund managers. I wager that many of the new funds in the market, if they can demonstrate interesting strategies and track records, will be backed by either a single family LP or cornerstoned by a wealthy family.  2009-2010 saw this pattern at Synova, Spring, Notion and Frog Capital. I am convinced it will continue.
GPs backed by family money need to understand which category their family LPs belong to and the implications this has for them.
If your current LP group contains families directly, or indirectly through fund of funds, then start from the perspective that all of them will have shifted their investment views dramatically since they invested in your last fund. Meet with them, and try and decide which category they are in.
If they are amongst the liquidity scaremongers, they may have already decided not to invest further. Don't ask them if they will do so. Ask them instead how their core overall goals have changed following the crisis, and then how you might fit into this fresh approach. If they say it hasn't changed, then assume it has and that they aren't telling you.
The navel gazers still have potential, but you need to understand if, and how, you can help them with the new fields they are looking to develop.
The pragmatists are trickier, as they want to be part of the business with you. This could be good if you're a newer fund looking for early investors. For mature funds, it's more complex as you don't wish to share the economics. Direct co-investments, helping train family members, and sector knowledge-sharing may all stimulate ways of keeping them interested.