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Family office tentacles dig into private market investments

15 November 2021

April French Furnell

Family offices, with an estimated $5.9trillion of assets under management, are deploying a growing portion of their assets to the private markets. Citywealth’s April French Furnell spoke to family office advisors to find out the reasons why.

Access to the private market has become increasingly attractive to family offices and Julius Baer recently reported in their 2nd Annual Family Barometer Report that of the investment related topics UHNW clients inquired about the most in the last 12 months, direct private investments took the top spot. “There are a number of factors that have propelled private market investments to the fore in recent years. They offer exclusivity, and second, many people believe they can outperform classical investments”, said Guy Simonius, Head of Family Office Services at Julius Baer.

Family business synergy

Annamaria Koerling, managing partner at Delfin Private Office, has also observed this trend among her client base. She explained their rationale for turning to the private markets. “Public market returns are likely to be in single digits at best, if you are looking for double digit returns then that naturally leads to private markets. So it’s partly about return on capital, but for those individuals who built their wealth founding and operating businesses, it’s also a natural investment choice”, she added.

Venture Capital expertise grows

Within the private markets, venture capital is a segment of particular interest. According to research from SVB Capital and Campden Wealth, family offices made up 4.2 per cent of the 23,000 venture capital deals worldwide in 2021 through to August 31, more than double their share a decade ago. To facilitate these investments, they are building their in-house expertise. In their 2020 study, the average family office staff included one venture capital specialist, while the 2021 report found this had grown to two. 

Investing in start ups

High profile examples include Mousse Partners, the family office for the owners of Chanel: Alain and Gerard Wertheimer, which has invested directly in several startups in recent years including MessageBird, Butler Hospitality and Tonal. There is also 1984 Ventures, the venture capital arm of Man Capital, the investment firm for Egypt’s Mansour family, which has more than 20 startups in its portfolio.

Tech into tech

The trend towards VC investment, has been of special interest among tech millionaires and billionaires. In the last few months alone, it has been reported that Revolut’s Nik Storonsky, Checkout.com’s Guillaume Pousaz, and Wise’s Taavet Hinrikus have set up family offices to focus on their VC investments into start-ups.

Is their approach to VC investment different to other family offices? As Simonius explained, it’s about their risk profile. “The distinguishing factor with these entrepreneurs is the speed at which they grew their wealth from nothing. They took some bets and generated their wealth extremely fast. That gives them a different approach to investing large sums in other start-ups, to a family whose business was grown from one generation to another over hundreds of years”.

Tech family offices might also take on a more active position, said Ahmet Feridun, investment director at Cazenove Capital. “For example, they can be more focused on particular themes such as AI or cyber security within their venture capital investments, and may be more willing to take more active positions in single investments as GPs based on their expertise.”

Private equity pain

On the private equity front, despite interest from family offices, access to opportunities is still a barrier. “The most challenging aspect of accessing PE is that interested families need to be able to put money in for a second, third or fourth round or financing, and they need the capital to keep investing in the business. It’s a long-term vision and they need the underlying means to finance this as a family”, said Simonius.

As a result, families are finding new ways to work together. “We’ve seen a trend of families clubbing together to get the right access. By combining their assets and expertise, they are accessing opportunities otherwise not available to them without utilising expensive bank products. This way, the families can share the cost of due diligence and spread the risk, while also leveraging off each other’s skills”, said Koerling. It’s another way in which family offices are challenging traditional investment and asset allocation models, she said.

ESG and impact

A further reason private markets have become a popular choice among family offices is to access impact investments.

“We are seeing those with strong sustainability preferences viewing private assets as a significant part of their strategy to maximise positive impact and engagement with, these investments”, said Feridun. “Many of the most innovative companies finding solutions to the world’s problems also reside in private markets, furthering their appeal.”

The changing priorities of families and their wealth is also a factor. “If we rewind 20-30 years, the majority of wealthy private investors would not have the same drivers for their investments that we see more of today. Many would have been focused on return and less so on where the ultimate investment lay. But today’s wealthy are re-investing their wealth and are more cognizant of the positive impact of their money can have not just the return”, said Rebecca Burford, a partner at Charles Russell Speechlys.

Next gen engagement with climate

It's also an area which performs as a perfect first step into investment for the next generation. “Investing in a climate fund for example, can get youngsters talking about purpose, long-term values, risk and profit. It creates the right conversations to educate the next generation on investment principles but it’s a lot easier to get the conversation flowing in the first instance”, said Simonius.

There are some great examples of family offices setting up impact investment funds, one of which is Max Gottschalk, founder and chief executive of his own family office, Vedra Partners. Now a multi-family office, Vedra Partners created Ocean 14 Capital in partnership with Blue Marine Foundation. Ocean 14 is an impact investment vehicle which raises private capital and uses it to invest in growth-stage companies that bring a positive impact on the oceans. It aims to breakdown the return of an investment into two components, the financial return and the impact return in dollar terms. As governments declare that greater private investment is essential to tackle the climate crisis and reach net zero carbon emissions at COP26, the role of family offices in impact investing is likely to continue to grow and trailblaze a path for others to follow.

It's evident, family offices’ interest in the private markets is not a fad because of the synergy with family businesses and the ability to engage new generations. This means we are likely to see this  investment appetite develop throughout this decade.

 

View Citywealth’s Top 20 Family Office Advisors