Private Equity and the Family Office

For many family offices, investing in private equity is nothing new. However, over the last decade, there has been a significant increase in interest. More family offices have included private equity in their portfolios and those already doing so have been increasing their allocations. According to a survey by UBS in 2020, 77% of family offices have some form of private equity investments, allocating around 16% of their portfolios on average (split 9% direct investment and 7% funds).  With an estimated 7,300 single family offices worldwide responsible for around US$ 5.9 trillion¹, their growing influence in the sector should not be underestimated.

What is the attraction?

Family offices are created by and for ultra-wealthy families and they come in all shapes and sizes as a result. Managing the wealth of a family, their strategy is typically driven by a range of both financial and non-financial objectives. This includes their rationale for investing in PE.

On the financial side, with historically low interest rates family offices have had to revise their investment strategy and have been attracted by the potential returns they can generate from private equity. Those engaging directly rather than through funds have also appreciated the ability to avoid the management charges and performance fees (although the costs of properly researching, transacting and managing these investments in-house should not be underestimated).

This is really only part of the story however. A lot of the interest in PE is motivated by other factors. One popular reason for a family to establish their own family office is to increase control over their financial affairs and this can also translate into control over specific investments. For families with an entrepreneurial mind-set, it also enables them to continue their involvement in growing companies even after they have stepped back from their own family business or it has been sold. It is no wonder that those family offices being set up more recently, where the founder and wealth creator is still involved, gravitate to this sector even more than those family offices established by earlier generations. In these instances, by investing directly rather than through a fund, the family has an opportunity to contribute not only financial resources but also experience and access to their own personal network.

Family offices are also adapting their investment approach to better reflect and align with the family’s values. The historical bar bell approach, which allowed wealth creation to focus on maximising returns and channelled social conscience into philanthropy, is changing. The rising generation of wealth holders in these families are seeking more alignment across the board. This will lead more and more to prioritise environmental, social and governance factors and seek out those businesses creating a positive social impact. If the family office is looking to create positive social and environmental impact through their investments, this is generally easier to achieve by investing directly into private businesses rather than public markets.

A good example that brings all this together is the recent investment by RG Advisors (the family office for Ruth Parasol) in City of London Group to finance the launch of a new start-up bank which will serve and support the UK’s SME sector. Alongside the investment itself, Ms Parasol was also appointed as a non-executive Director of the City of London Group.

So what are they investing in?

When you speak to family offices about their sector focus, it can sometimes be easier to start with what they don’t invest in. With captive money from one or a small number of families and without the constraints institutional investors often have, family offices can be much more opportunistic and this often leads to a wider range of investments.

Their investment approach also varies depending on their underlying strategy. Those with an objective to protect and preserve the family’s wealth might use private equity as a way of diversifying their risk and balancing out concentrated positions in the family’s original business. For others more focused on wealth creation, they tend to stay closer to home, leveraging their knowledge and networks by investing either up or down the food chain or in adjacent sectors eg real estate into prop tech.

A recent study by Fintrx found that 61.4% of global family offices that invest directly, invest in tech companies. Other popular sectors include healthcare, consumer and real estate, aligning with the backgrounds of the families behind the family offices.

What next?

Our first observation is that we expect to see the interest in socially responsible investing highlighted above continue to increase. It has been talked about a lot in Family Office circles over recent years but it is now gaining much more traction. Results from a survey we recently conducted into the attitudes of HNWI and their advisers found that 56% felt the rhetoric was now being matched by some concrete action. As well as shaping new investment decisions, this will also translate into reviews of existing business portfolios to determine whether they continue to be appropriate for the family to hold.  

Secondly, we expect to see more of the informal co-investment clubs that exist between family offices formalising their arrangements. Large-scale investors like RG Advisers have their own in-house teams of professionals. However, for many family offices it is not always possible or cost effective to establish their own in-house teams, particularly if they want to be active at different stages and in diverse sectors. They have therefore been collaborating with each other for a number of years already to increase their ability to source and execute transactions in a competitive market. On the downside, these arrangements can make execution more of a challenge and the administration of resulting investments continues to grow increasingly complex. We therefore expect to see more of these investment clubs establishing their own private fund structures and becoming regulated. In doing so they can open up opportunities to more investors and share costs while also enhancing their credibility. From a practical perspective they also improve their ability to transact quickly as well as making it easier to manage their administration and satisfy counterparties with the necessary KYC.

Finally, we anticipate more family enterprises entering the private equity marketplace for the first time.  The pandemic has caused many business-owning families to reflect on their current arrangements and come to the conclusion they are no longer comfortable with the risk presented by a continued focus on one industry alone. While not an entirely new conversation for many, COVID-19 has acted as a catalyst, spurring them into action. They are now looking at ways in which they can raise liquidity, including potential sales of assets or even whole businesses, and diversify with investments that they can still relate to in other sectors or locations.

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