Family offices have become a go-to wealth management vehicle for wealthy individuals. Private equity is a natural fit for their investment strategies, says our expert Chris Patton, head of private equity fund services, Jersey.
Family offices are allocating increasing amounts of capital to private equity. According to the latest annual Global Family Office report from investment bank UBS, 66% of family offices believe illiquidity boosts returns. It’s no surprise then that 41% plan to increase their private equity (PE) allocations and an additional 42% plan to maintain their PE allocations over the next five years. Family offices also plan to add private debt investments to their portfolios.
That’s good news for private equity general partners (GPs). Family offices are major players in the space, happy to trade liquidity for yield. The challenge is that this diverse group of data-hungry investors are piling pressure on investment firms’ in-house resources. Family offices are growing their private capital exposure but may demand bespoke reporting and services in return.
What drives family offices’ appetite for alternative assets
According to UBS, alternative assets make up 40% of family office portfolios on average. What drives this appetite? Partly, it’s cultural. With family office wealth often created through entrepreneurial success, many family offices are keen to invest in private funds with strong entrepreneurial track records.
But it’s also related to long-term goals. The decade-long lifespans of private capital funds attract family offices looking to preserve and grow wealth across generations. Family offices are natural private capital investors, wanting long-term investments that have historically outperformed listed investments.
Other factors at play include the rise of impact investing. Environmentally and socially aware high net worth individuals (HNWIs) use private capital investing to drive sustainable change. Alternative asset funds are also popular as a potential hedge against short-term economic volatility.
A wide array of family offices
Family offices vary hugely in size and risk appetite, as well as in their preferred outcomes and time horizons. Some are headed by experienced investors with the connections and know-how to source opportunities and invest directly in target companies. Others prefer to diversify their portfolios and spread risk by investing in funds. And many pursue a strategy that mixes the two.
Fundamentally, GPs should remember that family offices aren’t a straightforward investor base. Frequently, funds must deal with diverse, sophisticated investors who ask questions, scrutinize data, and monitor performance closely.
Family offices’ demands on GPs
One upshot of all this is that family offices can stretch GP resources. Family offices expect investment firms to provide both market insight and operational excellence. GPs need to be ready to provide bespoke data on demand, whether it concerns performance, sustainability, or risk. They should also be prepared to be transparent about fee structures, expense allocations, and risk exposure.
Investors of all kinds are demanding more detailed and frequent reporting, along with greater transparency. Firms used to the standardized approach of large institutions may find family offices require a more tailored and resource-intensive service.
How can GPs meet family offices’ demands?
Family offices are too important to ignore, so GPs need the people and processes in place to meet their demands. Digital solutions will be key, especially those that provide portals offering anytime access to financial information. Being able to collect Environmental, Social, and Governance (ESG) data from scattered sources and report it relevantly is also growing in importance.
Investments in technology will have to be matched by expanded human expertise. However, a talent shortage in the sector means experienced analysts are in short supply. Outsourcing is one answer, giving GPs the extra human and digital resources needed to meet family office demands, without increasing internal management headaches.
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