Alt Investments
GUEST ARTICLE: Family Offices And The Direct Investing Approach
Family offices and certain other types of investors are, so it is said, taking more direct stakes in businesses, cutting past certain more familiar, pooled ways of putting money to work. This article examines some of the drivers.
As readers will know, there has been something of a trend of high net worth investors and family offices engaging in direct investing: bypassing listed or pooled private capital entities. The assumption is that such an approach can yield superior returns particularly for an investor with specialist knowledge and the ability to do the due diligence as required. But clearly direct investing comes with risks and costs.
This article is written by Brett de Bank, co-founder and managing director of Capitama, a UK-based organisation. The subject of this article is international in its relevance, so the editors are publishing it for readers in different regions of the world. Those who wish to respond with comments can email tom.burroughes@wealthbriefing.com Comments of guest contributors are not necessarily endorsed in full by the editorial team.
With global high net worth wealth on track to exceed $100 trillion globally by 2025 (1), it’s no surprise we’ve seen a surge in the number of family offices set up. Definitions vary, but EY estimates there are at least 10,000 single family offices globally – at least half of them set up in the last 15 years (2).
Perhaps once regarded as little more than hobbyists or amateur investors, Family Offices have become increasingly sophisticated. In the search for both returns and diversification, growing numbers of family offices are looking beyond traditional assets such as stocks and bonds and are willing to get their hands dirty as active and value add investors. Few trends illustrate that more clearly than the growth of direct investing.
Rather than relying on limited partnerships or deals arranged by investments banks, family offices are increasingly going it alone. The Global Investment Survey (2017) by membership group the Family Office Exchange found that 81 per cent of family offices have at least one person working on direct investments. It also found that 57 per cent intended on increasing their allocations (3). According to UBS, the average family office portfolio has 9.3 per cent in direct venture capital and private equity; that compares to just 7.1 per cent in private equity funds. (4)
Looking for control
Partly, this may be down to less than satisfactory returns in
other asset classes, perhaps disappointment with traditional
products and their legacy treatment post crisis or the simple
desire to “enjoy” their investment in a more tangible way.
The same survey found family office allocations to hedge funds
are now just 6.2 per cent, with money going to other assets, such
as direct investments.
Family offices have also found they can achieve better results from their direct investments, with average returns in 2016 at 8 per cent, compared to just 6 per cent for the private-equity industry (5). At the very least, direct investing enables family offices to avoid the private equity industry’s “2 and 20” fees.
Crucially, however, it also gives them more flexibility. Family offices as direct investors can, for instance, hold stakes longer than many private-equity funds permit and at different thresholds which provides greater optionality in the future for them and is considered attractive by the companies seeking investment that want more aligned, long term investors. And this is probably the key: Ultra high net worth investors want more control of their investments whether this is exercised through passive or active engagement.
The last decade has seen an unprecedented democratisation of information, with increasingly detailed investment data and insights easily accessible online. This enables anyone prepared to do the homework to develop opinions and make informed investment decisions themselves. At the same time – and not unrelated to this – there’s been a growing sense of distrust of much of the established financial services industry.
The result is that the days of investors passively listening to a strategy being outlined by a wealth manager – perhaps the same as advised their parents – are gone. Today’s ultra-high net worth individuals are informed, engaged and active and generally better advised than before.
We can see this not just in the rise of direct investing, but also growing interest in impact investing, which has seen a surge of interest among family offices. The younger generation in particular want to see their money make not just a return but also a difference, as well as avoiding any environmental or social harm. The UBS report found that more than 28 per cent of family offices are active in impact investing and nearly 95 per cent plan to keep, or boost their philanthropic investments next year (6).
A wider universe
This is just another example of how democratisation of
information and the drive to a personalised approach to
investments has widened the range of asset classes being
considered. The long-established passions of the ultra-wealthy
for art, wine and property, have been joined by investments in
start-ups, high growth businesses, infrastructure and commercial
real estate. Many have significantly outperformed the traditional
assets such as stocks and bonds.
Of course, private banks and wealth managers do still have a role to play, but when it comes to direct investing the genie is very much out of the bottle. It’s potentially exciting, rewarding, and very engaging for a group with the time and resources available to devote to defining their investment strategy. Furthermore for family offices established by entrepreneurs and long term business owners, it enables them to choose to invest in businesses they have experience in and have the potential to add value to, for the benefit of all shareholders.
It is, of course, not for everyone. Designing and executing a successful direct investment strategy takes time and effort. It requires wealthy investors to clearly identify their goals and the areas they want to invest in: Are they seeking income as well as capital gain? What investment periods do they want and require? Where do they have at least some experience or knowledge to help them make more informed decisions?
Investors will need to identify both the sectors (fintech, consumer, retail and so on) and types of investments that are most suitable (early stage, growth or real estate). As with any investment, due diligence and post investment risk management is everything.
Family offices willing to put in the hard work are likely to reap the benefits, however. The evidence suggests they can not only match but outperform investments through external managers and funds. Perhaps more importantly direct investment gives wealthy individuals an opportunity to see the difference their investment makes in the companies and causes they support first-hand. In that way, it offers a return no other investment can really match.
About the author
Brett de Bank is co-founder and managing director of Capitama.
The organisation is a private investment platform and market
network connecting sophisticated investors, such as family
offices and venture capital firms with professional sponsors
seeking co-investors and funding. De Bank focuses on raising
capital and building niche start-up businesses. He has worked as
an analyst for Goldman Sachs and Merrill Lynch.
He is an entrepreneur focusing on capital raising and building and developing niche start ups. Brett has many years of broad commercial finance experience, having previously worked as an Analyst at Goldman Sachs and Financial Advisor with Merrill Lynch.
Footnotes:
2, https://familybusiness.ey-vx.com/pdfs/1003023-family-office-guide-v3-lr.pdf
4, http://www.globalfamilyofficereport.com/investments/
5, https://www.barrons.com/articles/family-offices-bypass-private-equity-funds-1497041682
6, https://www.barrons.com/articles/family-offices-reap-better-returns-in-2016-1505314919
