Family Offices Seen Increasing Allocations to Private Equity

Over Half of Single-Family Offices Invest in PE
  • Most invest at least 10% in asset class, iCapital survey shows
  • 40% take stakes directly in companies, bypassing pooled funds

More than half of single-family offices invest in private equity and the majority of those expect to increase their allocations over the next two years, according to a survey.

The secretive firms, which handle the daily and financial affairs of the world’s richest families, typically had at least 10 percent of their portfolios in the asset class, iCapital Network said in a report to be released today. A fifth of the families surveyed globally had 20 percent or more, the online marketplace for private equity funds found.

Families are being driven to the asset class by low-interest rates and because of the expectation of higher returns in exchange for locking up their money for several years. The investments span equity stakes in startups to financing for closely held businesses.

"Some family offices have a clear mandate of wealth preservation but they can’t do that with just investments in Treasuries," said Michael Sonnenfeldt, chairman of the New York-based investing network Tiger 21. "Any type of prudent wealth preservation requires taking risks. They have to reach somewhere for yield and return."

Family offices are becoming an increasingly important investor base for big money managers such as Blackstone Group LP and KKR & Co. Family offices account for 9 percent of capital invested in private equity funds, compared with 4 percent in 2010, according to London-based researcher Preqin.

“Returns are critical,” said Lawrence Calcano, a managing partner at iCapital and former partner at Goldman Sachs Group Inc. “In today’s economic climate it’s really hard to find growth in the public markets.”

Private equity funds returned almost 13 percent annually in the 10 years ended June 30, compared with 7.9 percent for the Standard & Poor’s 500 Index and 4.4 percent for the Barclays government and credit bond index, according to Boston-based advisory firm Cambridge Associates. Over the trailing three years, private equity narrowly trailed stocks.

Direct Stakes

Forty percent of the families that invested took stakes directly in companies, according to iCapital, which collected data from 162 family offices in 2013 and 2014. They invested on their own, with peers or through co-investments, in which families invest alongside a private equity firm in a deal.

Direct private-equity deals by family offices are increasing as they seek ways to gain more transparency on what they own and circumvent fees of traditional private equity funds. An added bonus is that family members can take a role in managing or supervising a company in which they have a stake, the report showed. The families surveyed had an average net worth of $918.5 million.

‘Best Managers’

Many families are comfortable with private equity because they made their wealth by building a company and understand how to vet or fix a business in a certain industry, Sonnenfeldt said. Tiger 21 members, some of whom have their own family offices, increased their private equity allocations to about 20 percent in 2015 from 12 percent a decade ago. The group’s members have an average of $100 million in investable assets.

Among the family offices that aren’t currently investing in private equity, 72 percent said they don’t have plans to start this year or next, according to iCapital’s survey. Some aren’t comfortable with the longer holding periods and lesser liquidity typical of the asset class, Calcano said.

“One of the impediments to family offices investing directly in private equity is having the team to be able to source a lot of opportunities,” he said. Developing that expertise, or forming partnerships for it, will be crucial to success.

“The majority of industry returns are concentrated in the best managers,” he said.