Family offices have become the go-to wealth management vehicle for wealthy individuals. Private equity is a natural fit for their investment strategies, say our experts Paul Eva, head of private wealth, Jersey, and Chris Patton, head of private equity fund services, Jersey
Family offices are allocating increasing amounts of capital to private equity.
Eight out of 10 family offices now invest in this asset class, across both direct investments and funds, according to the latest annual Global Family Office report from investment bank UBS.
Private equity continued its steady rise from a 16% portfolio allocation in 2019 – including funds and direct investments – to 21% in 2021.
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, however, is that this diverse group of data-hungry investors are piling pressure on investment firms’ in-house resources.
Family offices are growing their private equity exposure but may demand bespoke reporting and services in return.
The number of high-net-worth individuals (HNWI) globally expanded by 7.8% in 2021, according to Capgemini’s World Wealth Report. At the same time, their wealth grew by USD6.4tn.
This expanding class wants certainty and stability – but trust in banks has never recovered from its 2009 slump. Family offices have stepped in to fill the gap. In recent years, they’ve become the go-to asset management vehicle for wealthy families. Four out of 10 family offices were created in the past decade.
According to UBS, alternative assets make up 40% of family office portfolios on average.
What drives this appetite for private equity? Partly, it’s cultural.
With family office wealth often being created through entrepreneurial success, many family offices are keen to invest in private equity funds with strong entrepreneurial track records.
But it’s also down to long-term goals. The decade-long lifespans of private equity funds don’t deter family offices looking to preserve and grow wealth across generations.
So family offices are natural private equity 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 HNWIs use private equity investing to drive sustainable change.
Private equity is also popular as a hedge against short-term economic volatility.
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.
More often than not, funds must deal with diverse, sophisticated investors who ask questions, scrutinise data and monitor performance closely.
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 geared up to provide bespoke data on demand, whether it concerns performance, sustainability or risk.
They must also be transparent about fee structures, expense allocations and risk exposure.
Investors of all stripes are demanding more detailed and frequent reporting, along with greater transparency – but firms used to the standardised approach of large institutions may find family offices require a more tailored and resource-intensive service.
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 and report 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.