Family Affairs: family offices’ rising private equity appetite

Over the last decade, family offices have become an increasingly influential and important stakeholder group for investment houses, with the number of family vehicles, and the capital available to them, on the rise.

According to Credit Suisse, the number of millionaires globally almost tripled between 2010 and 2019, from 13.8 million to 46.8 million, and there are now an estimated 56,000 people worth US$100 million or more. The 2019 Global Family Office Report, produced by UBS and Campden Research, meanwhile, shows that the number of family offices has expanded since the turn of the century, with 35% of all family offices launched in the decade since 2010, and 33% opened during the first ten years of the new millennium.

As family office numbers and wealth have grown, so has the approach to managing family portfolios. Family offices have evolved from opportunistic investors, who leverage their industrial networks and sector expertise to deliver opportunities, into disciplined investment programmes making growing allocations to sophisticated alternative assets.

According to UBS and Campden, equities still account for the single largest source of family office allocations, representing just under a third of portfolios. But alternatives now make up 40% of portfolios on average, with 19% of that alternatives allocation going into private equity. More than four fifths (81%) of family offices now make some kind of investment in a private equity vehicle.

“Family offices have become bigger players in private equity, and there has been a notable increase in appetite for private equity assets,” says Jan Philipp Schmitz, Ardian’s Head of Germany and Asia, as well as the firm’s mandates business. “Longer hold periods, relative illiquidity and excess cash-on-cash returns generally align well with family office objectives.”

Schmitz also notes that there is a growing trend among large alternative assets GPs to open up their funds to families. Many institutional LPs have already made large allocations to private equity, so there is less scope for them to grow alternatives portfolios from current levels.

Private equity performs

Family offices that have invested in private equity assets have seen good value from these portfolios. According to UBS and Campden, private equity was the best performing asset class for family offices in 2019, delivering average returns of 16% for direct deals and 11% for funds-based investments. This compared to overall portfolio performance of 5.4%, with equities in developed markets only showing upside of 2.1%.

The combination of returns dispersion between alternatives and mainstream assets classes has already driven a wider shift from public markets to private markets more generally, and family offices are on the same pathway.

“There is a broader pivot out of public markets into private markets. World Bank data, for example, shows that the number of listed business in the US has almost halved from just over 8,000 to just over 4,300 in 2018,” Schmitz says. “Family offices have tracked this trend. Private market investments offer more control over their holdings and allow them to ride out volatility and short-term market fluctuations.”

Broad church

But although the overall long-term direction of travel for the family office community as a whole is towards increasing allocations to private markets, family offices are a diverse group with a wide set of differing investor objectives.

“The number of family offices is vast. They vary in size and risk appetite, and all have distinct investment objectives and time horizons. It gets granular very quickly,” Schmitz says.

Schmitz says family offices can be grouped into three broad buckets. There are the large single family offices who will be well-networked with capacity to build diversified alternatives portfolios and write larger cheques. Then there are multi-family offices who will co-ordinate activities and share resources and people; and finally you will have smaller family offices who will be bundled together by private banks to pool their capital.

Meeting the broad requirements of a sizeable and growing investor base poses challenges for private equity managers who are used to dealing with large institutions.

Managers, however, are adapting their models to accommodate family office capital. The Ardian mandates business that Schmitz heads, for example, offers tailor-made investment solutions through a single account. The product deepens access to a wider range of market niches and geographies within private markets, providing exposure to funds run by Ardian and other managers.

More experienced family offices who have built and sold companies can therefore allocate to co-investment strategies in targeted sectors, for example, while newer entrants can invest in fund or fund-of-fund strategies with portfolio steering support if required.

Such has been the popularity of the offer, that Ardian saw inflows of more than US$3 billion into its mandates platform in 2018 and deployed US$5 billion of capital from its mandated accounts during the same year.
Other managers that have built up similar special account platforms have observed similar growth in uptake. According to fund adviser Triago, more than US$150 billion was committed to co-investments, separately managed accounts and direct deals during the first nine months of 2019.