Smart expansion

The costs associated with launching a satellite office can vary wildly and depend on a wide range of factors including a firm’s size, location and compliance needs.

Philippe Bucher, chief financial officer at Adveq, has overseen office openings at the Swiss fund of funds since he joined in 2005 and said in the upper price range set-up costs could reach $1 million, including real estate expenses and legal fees. Simon Cooke, a Hong Kong-based partner at law firm Clifford Chance, said licensing and business incorporation costs could exceed $100,000 in some cases.

But before the fees begin to rack up the first step is to determine the purpose of the new office, which will dictate the level of compliance, including whether the new branch needs to secure a new license to trade from a regulator.

Piers Warburton, a partner at law firm Ashurst, said: “What exactly is the new office going to do? Will it be providing local support for portfolio companies? Will it be sourcing new investments? Will it provide investment advice to a fund? And if so, will it do so directly to that fund or indirectly as a sub-advisor? And will it be raising its own fund independently?” 

Most satellite offices carry out a mixture of deal sourcing and advice on local investments, according to Warbuton, and are structured as sub-advisors to the main fund, which means they do not earn fees separately from the main vehicle.

Sub-advisors do not always need their own licenses but it is important to check if they are operating in a jurisdiction which requires them to have one if they wish to fundraise. Cooke said for instance: “A sponsor can have an advisor operation and not be licensed but then its activities in Hong Kong are restricted to giving advice only to its [fully controlled] group companies, or GP. It can be difficult to say you are not investment managing or raising funds when you have portfolio companies and relationships with LPs.”

Lucy Frew, a senior financial services lawyer at Gide Loyrette Nouel, said licenses from UK regulator the Financial Services Authority could cost up to £25,000 (€31,000; $40,000) but it was common for a private equity firm to cut these costs by using another financial firm’s FSA authorisation. In return, the authorised firm assumes liability for the firm using its license, known as an appointed representative.

Setting up an office in the same region as a firm’s headquarters often makes compliance simpler. Pam Hendrickson, chief operating officer at US firm The Riverside Company, said much of the paperwork associated with opening another US office was limited to notifying the US Securities and Exchange Commission and other regulatory bodies of the new operation whereas setting up a team abroad was always more complicated.

Frew highlighted that European firms setting up another office in the region could simply passport a branch, meaning it would not require separate authorisation from a regulator. However, she warned that firms often significantly underestimated the amount of time and resources regulatory compliance consumed.

STAFF UP! 

Hiring the team is the most important step of an office launch, according to Bucher. He said: “[This means] finding great people, flying in someone you already have or… someone who is local enough to venture this initiative but also fits the company and culture.”

The new team will lead to questions surrounding the most appropriate way to incentivise them. Jonathan Exten-Wright, a partner at law firm DLA Piper, said: “There are a number of well-established routes in private equity for rewarding people – carried interest – but because you are working in a different jurisdiction you will need to check that continuing to use your existing structures for rewards is legally effective and tax efficient.”

He added it was important to set out the terms of an executive’s eventual return to a firm’s headquarters before they depart for a new office. He said: “Most people are not posted to wherever forever. You should not lose sight of their rights – can they come back to their old job? They have been away for three years. Somebody else would have filled their shoes. It does beg the question what do you agree will happen on the end of the posting?”

FINDING LAND

An office’s location not only sends a message to the market about a firm’s image but it can also play an important part in attracting the right staff, according to Jane Crawford, managing partner at secondaries firm Camonix Private Equity, based in London’s neighbourhood of St Paul’s. She said: “We wanted to be located in a private equity cluster; we wanted to be perceived as serious players and certainly not flash. We wanted to be positioned well for public transport both for travel meetings and to be better able to recruit staff.”

David Beisel, a partner at Boston-based early stage firm NextView Ventures, said: “We wanted to have a look and feel of the office in the space itself that spoke to companies we were looking to invest in. Not a bland corporate office but not something that was extremely high-end. We wanted something that looked and felt like a tech start-up space.”

WORDS OF WARNING 

Securing and moving into an office can take as little as weeks, according to Beisel, to as long as nine months. Three months alone can be spent refurbishing and fitting out the space, according to Marian Chapman, administration manager at Chamonix.

Chapman highlighted the importance of a “very detailed project plan” and said one of the most time-consuming processes was setting up IT infrastructure. Despite taking just one to two days to install, IT should be given six to eight weeks’ lead time.

The biggest headache of Chamonix’s office opening? Two-thirds of the way through the project the company Chamonix had hired to fit out the office went out of business, meaning the office was left unpainted and unfurnished two weeks before the targeted completion date.

With 19 offices worldwide Hendrickson is well placed to offer tips on some of the most common issues firms might face. First, start early, especially if opening a branch outside of your home country, and allow at least six months to get the office fully operational. Second, make sure employees working out of hours are well taken care of and have reliable facilities such as security for staff working late and good air conditioning. She said: “If you are in a place like Singapore where it is very hot and your people are going to be in the office at the weekend… know how much it is going to cost you to have the building run the air conditioning system especially for you.” Third, find out how full elevators get at peak times. “Elevator usage can be awfully frustrating to private equity types who are waiting on a lunchtime elevator.”

In other words, it’s those small details that can make or break the success of a new office. 

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RENT CONTROL

A quick cost guide to office openings by region:

US: A fully serviced Grade A office in Manhattan carried an average asking rate of about $67 per square foot per year in the second quarter, according to real estate services provider Savills. In Washington DC, the average stood at roughly $56 per square foot per year in the same period, while prices on the West coast were substantially lower – Los Angeles asking rates varied from about $40 in the west of the city to about $34 Downtown. In San Francisco the top offices cost about $43.

UK: According to a third quarter real estate report by BNP Paribas, Central London continued to demand the highest average office rents in its commercial property ranking, at €1,359 per square metre a year. A separate report on the second quarter published by property consultancy Cluttons said relatively thin occupier demand in London meant that prime city rents remained static in that period at about £55 per square foot. Mayfair and St James’s – popular destinations for buyout firms – continued to be significantly more expensive with rents of £95 per square foot.

Rest of Europe: Paris came in second in BNP Paribas’ table of European cities at €830 per square metre a year while Milan was the third most expensive city at €510. The cheapest rent in the ranking could be found in Berlin at €264.

Emerging markets: Setting up shop in Hong Kong is significantly more expensive than Asia’s other main private equity hotspots of Beijing and Shanghai. According to Savills, in the second quarter the average rent for the most desirable offices in Hong Kong was $168 per square foot. This compares with $54.00 in Beijing and $39.70 in Shanghai.