A Family Affair

As family offices grow in number and stature, these investors are making their mark on the private equity industry. So, what sets them apart from the rest?

Family offices are becoming an increasingly important type of investor in the world’s economy. Over two-thirds of these investment organizations, set up to manage the assets of either a single family or a group of families (multi-family offices), have been established since 2000, according to the UBS/Campden Wealth Global Family Office Survey 2019[1], with over half serving the first and second generations of wealthy families. In addition, 70% of those surveyed said total family wealth had increased over the past year, attesting to their growing firepower as investors – Campden Research estimates[2] the total assets under management of the 7,300 single family offices worldwide at $5.9tn.

A large proportion of this capital is directed at private equity investment opportunities. Indeed, private equity accounts for over a quarter of allocations among non-US family offices, according to a Family Office Exchange (FOX) survey in 2019[3], and 15% for US family offices. The survey also shows that private equity has generated strong returns for this group of investors. While traditional asset classes, such as bonds and public equities, offered low or negative returns in 2018, private equity significantly outperformed the rest of the portfolio, registering 11.1% for fund investments and 16.8% for investments made directly into companies. FOX goes on to say that “those families that had meaningfully higher allocations to private equity…. saw the highest returns”.

A good match

Private equity is particularly well suited to family offices, given that most of these investors are managing wealth that derives from a successful family business and they usually take a long-term view on their investments. It is therefore perhaps unsurprising that the UBS/Campden survey found that, on a net basis, 39% of family offices were seeking to increase their allocations to direct private equity investments in 2020, while 28% would increase their allocations to private equity funds.

Family offices also often play a unique role in financial markets in that they can target more unusual situations and offer much more than capital, often in ways that institutional investors cannot. When making direct private equity investments or co-investing alongside funds, family offices can bring significant value to portfolio companies, particularly when they target sectors they know and understand. The fact that 70% of respondents to the UBS/Campden research invest in growth-oriented opportunities and 57% in venture capital-style investments attests to an entrepreneurial affinity between family offices and young, growing businesses.

Different approaches

Family offices are far from a homogenous group, although they do often share characteristics according to generation. First generation family offices are usually driven by an individual or individuals with a proven ability to manage and run companies. Second generations remain focused, motivated and disciplined – they have, after all, witnessed their parents’ hard work and determination in creating a successful business – yet they are often more conservative in their approach and can benefit from experienced advice, particularly in private equity.

Successful private equity investment requires in-depth knowledge, high levels of resource and a significant amount of legwork – there is a large disparity in returns between the best and worst performing funds, for example. Investors seeking to identify tomorrow’s stellar performers would do well to work with advisers with strong relationships in their target markets, especially given that many of the industry’s strongest performing funds are in areas that are less obvious and off the beaten track. Negotiating terms and conditions in private equity funds is also a complex and specialist area that is best led by experienced advisers.

Coming together

Often sophisticated and well-connected investors, family offices are increasingly finding ways of working together. Organisations such as the Family Business Network, the Global Partnership Family Offices and Club B provide forums for family offices to collaborate, share best practice and discuss investment themes. We increasingly see groups of family offices pooling capital to make investments, sometimes in competition with private equity firms themselves, but at other times, to target specific areas or sectors – technology is a particular area of focus for many.

We’re also seeing smaller family offices, which may not have full resources or a high degree of private equity experience, join forces with others so they can leverage due diligence work and capacity. The family office investment space is therefore fast developing skills, knowledge and capability in private equity investment as investors work together and source opportunities from like-minded individuals.

Going for impact

One area in particular that is gaining traction with family offices is impact investing, with private equity a popular vehicle for achieving positive social and/or environmental impact and financial returns. A quarter of family offices invest in impact strategies, with average allocations set to rise from under 10% today to 25% in five years’ time, according to the UBS/Campden survey. While this increased interest mirrors a move among many other types of investor towards making more impact investments, family offices, especially when working together, have a particularly strong role to play here. Their roots in business and the transfer of wealth to younger generations which, as recent climate demonstrations demonstrate, care deeply about the world they are inheriting, mean that family offices can be engaged and hands-on investors that can add significant value on both financial and impact fronts.

Family offices are clearly an increasingly important and influential group of investors whose growing experience and financial might, when working with the right advisers, enable them to be valuable partners for management teams in direct deals and for private equity firms, especially those run by newer teams.