Large family offices are veering towards private equity investment during the economic turmoil caused by the coronavirus pandemic, a new study and interviews with family office CIOs reflects.
The trend, according to the 2020 Global Family Office Report published by global financial services firm UBS, is as much about blood and passion as it is about returns.
The highlights from the UBS report are also reflected in Investment Magazine’s Market Narratives series recent interview with Kathryn Young, head of investments for Cambooya, one of the country’s oldest and most mature family offices, and Scott Fletcher, chief investment office at Woodbury’s family office, who will discuss asset allocation and diversification on the series in coming weeks.
More than two thirds of family offices globally view private equity as a key driver of returns according to the report, which surveyed principals and executives in 121 single family offices with average total family wealth of USD $1.6 billion around the world.
The family office appetite for private equity has burgeoned as recent market volatility has spurred family offices to gravitate towards investments that give them a better sense of control and oversight, the report explains.
“In the turbulent environment after the onset of Covid-19, 35 per cent of family offices regarded the greater control offered by private equity as a plus, against just over a quarter (27 per cent) beforehand,” it states.
The migration to private equity is about more than control, however, with UBS analysts saying the sector is intrinsic within family office groups and “in the DNA of many entrepreneurial families who have a zeal for building businesses”.
“For many business families private equity is in the blood,” the report describes. “A third (34 per cent) of family offices describe private equity as a passion for the owner.”
In a figure which the report believes demonstrates “the extent to which private equity is an extension of entrepreneurs’ careers”, more than than two thirds of family offices report that the business owners favour investing in sectors that they’re familiar with.
“In more than a third (38 per cent) of cases, the family itself is the source of new deals,” the report adds.
The expectations for PE, however, are high. 73 per cent of family offices investing in private investments expect them to deliver higher returns than public investments, with UBS reporting that family office investment officers see more value in the sector than public alternatives.
“I think it’s just a game you have to play now because companies are coming to public markets so much later than they have in the past. In fact, you could easily live your life as a private company and never touch public markets,” one European family office CIO is quoted as saying. “So it’s a game we have to play because there is so much value there.”
That perception of value has seen tremendous investment in the teams tasked with hunting out the right deals, with 70 per cent of family offices having their own research teams to assess opportunities. “They’re active deal makers,” the report adds.
Diversification is naturally also a factor in the trend, with more than half (52 per cent) indicating they are veering towards PE to diversify and to avoid being buffeted by the volatility of listed markets.
As to the vehicles for these PE deals, the UBS Evidence Lab says 31 per cent favour funds, 19 per cent prefer direct investment and 26 per cent use both. The prevalence of office managers using funds, the report suggests, is connected to the access they have to opportunities.
“I believe that secondary private equity managers are in a unique position,” one CIO said. “For example, if an investor is having some issues in their portfolio more broadly and therefore maybe wants to sell private equity holdings inexpensively, the secondary manager can come in and buy them at an attractive price.”