Family Office Investments in Private Markets
Family Offices are a large but often less well-understood segment of the institutional investment community, with over $4 trillion in assets under management. Some family offices were established decades ago and manage generational money, while others manage the wealth of recently successful entrepreneurs. Unlike other institutional investors they are not beholden to clients, are not tied by investment mandates and do not have to worry about providing a steady income stream to pensioners. This gives them a different, unconstrained perspective to investing, with the freedom to allocate capital to whatever asset class or geography they feel will deliver the best returns or optimize to their preferred investment strategy.
Family offices allocate across a broad range of asset classes from equity and fixed income to real estate and commodities across both public and private markets. When it comes to private equity, we see that they are increasingly deciding to make direct investments in private companies separately from PE fund investments. Currently over 40% of family offices make direct investments in private equity, and 46% say that they intend to increase these allocations
Here are some of the reasons family offices are increasingly ‘going direct’:
Performance.
According to the UBS / Campden Wealth Global Family Office Survey 2019[1], private equity overall was the best performing asset class, with reported annualized returns of 16%. Undoubtedly, this is a driving factor in the increased enthusiasm for direct investments among family offices.
2. Reduced Fees
Like hedge funds, Venture Capital and Private Equity funds charge management and performance fees - typically 2% and 20% respectively, or ‘two-and-twenty’. There are no performance fees coming off the top when investing directly. This likely makes up a large part of the performance differential between funds and direct investments.
In addition, the modern family office has evolved and built out strong investment capabilities around research and analysis, in-house legal expertise and systems designed to manage the front- and back-office operations. As such, there is less need to outsource these functions to third party fund managers.
3. Alignment
Family offices may have a certain investment thesis or objective that cannot easily be fulfilled through investing. For example, a family office that has a strong opinion around the future of robotics, may prefer to make direct investments rather than go into a broad based technology fund. Impact investing is another area where direct investing allows the family office to target specific causes - indeed, 76% of family offices choose direct investments for impact investing2.
4. Teaching and Learning
Many family offices like to take a more hands on approach in their investment portfolio.
For example, the Family office whose wealth comes from the agriculture industry may wish to focus investments in that sector, where they have strong insight and can add value to the entrepreneurs they invest in.
On the other hand, some family offices prefer direct investing as they are able to learn from the expert entrepreneurs and hone their investing skills. To quote one portfolio manager at a multi-family office “When you are meeting hedge fund or private equity managers, most of the time you are learning nothing. But, when you have a direct deal on your hands, you are meeting the entrepreneur… you are learning about the business”
The Institutional Marketplace for Private Capital
At Texture Capital we want to make it easier for family offices and other institutional investors to make direct investments. Leveraging cutting edge blockchain technology and tokenization, we are creating a marketplace where investors can securely research private companies, invest in primary offerings and participate in secondary market liquidity.
To learn more about our marketplace and discuss how we may be able to help with your direct investing strategy, please get in touch at info@texture.capital.
[1] https://www.ubs.com/global/en/wealth-management/uhnw/global-family-office-report/global-family-office-report-2019.html