As ever, the usual disclaimers apply to views of external contributors. The editors welcome such debate and insight; please email tom.burroughes@wealthbriefing.com if you wish to do so.

A recent survey by BNY’s wealth management business said 62 per cent of US family offices made at least six direct investments in a private company or private lending last year, with 71 per cent planning to make the same number or more in 2024. Family offices still hold one of the largest segments of the market’s capital, and their numbers have tripled since 2019 resulting in total assets reaching an estimated $6 trillion.

When paired with a recent report from Sacra showing that secondary markets are set to hit a record $64 billion this year – a whopping 40 per cent increase in volume from 2023 – it is clear that family offices will play a key role in reshaping private markets and the private equity and venture capital industry as a whole. 

Whether through direct investments or a secondary-dedicated fund, family offices have more avenues for diversifying portfolios and enhancing liquidity via private market transactions than ever before. 

Understanding the private market boom
Prior to 2020, the market’s reliability to return on private growth companies going public kept funds and the family offices that contributed to them coming back year after year. However, since then we’ve seen inflation rates skyrocket and initial public offerings deferred past traditional timelines. And now they’re often projected to take anywhere between 10 to 12 years or longer. The public market’s short-term shifts toward dividend yielding versus growth stocks can increase the drag and negatively impact the potential for liquidity and ability to recycle capital. 

But, of course, IPOs ultimately re-emerge consistently. We were all on the edge of our seats to see how Reddit’s public offering would hold up and they came out the other side sparking renewed confidence in the time-honored strategy. But venture capital funds have had to re-strategize these past few years, which were spent under a lot of pressure to pay out investors. On the other side of the dwindling capital flow, companies needed to find a new approach to compensating employees and shareholders with stakes to gain in their growth and success. 

Thus, sites were set on secondary markets where extended and recurring funding rounds would yield the capital recycling needed. Companies that were staying private longer began selling individual shares at discounted rates to increase liquidity on a faster timeline; and the private investment industry in alignment began carving out secondary growth funds with exits ranging between three to five years on average and building dedicated data platforms at exponential rates for enhanced decision-making. 

In the past, high ticket prices associated with venture-backed investments were not financially feasible for the individual entities that operate within the massive family office sector; especially since those investments were historically hard to access longer-term investments. Yet now, with the emergence of private markets as a new “semi-liquid” class of private assets, family offices can take advantage of newfound flexibility. Discounted share prices, co-investment and syndication opportunities allowing for lowered minimum capital requirements, and the liquidity and duration of these investments are much more appealing. 

Portfolio diversification through direct secondary-dedicated funds
Direct secondary venture growth funds are smaller by nature and require less money to invest in individual companies. The funds that write $1 to $10 million tickets are far nimbler and more profitable than their overtly bloated peers. They tend to be managed directly by seasoned fund managers who professionally invest their own money alongside mutually aligned investors, rather than manage junior people beneath them so they can gather more AuM from outsiders for management fees and status. 

The apt quantum of capital of well-structured funds enables them to be simultaneously niche and generalist allocators that capture most market opportunities. They too have well-honed alignment of interests with investors. This is a vital element that’s especially advantageous to multi-family offices that are juggling the varying priorities of entities involved. They provide instructional grade services that are catered individually to help meet their partners’ divergent needs. 
 
These actively managed secondary funds are allowing family offices to further fine-tune their investment approaches, while maintaining flexibility when structuring deals, allowing for negotiations when it comes to aligning co-investment terms with specific objectives, and providing customization options that are much less attainable with larger growth vehicles. For example, funds may target specific sectors, like generative AI in healthcare business development, or geographies, like fintech in emerging markets, and deploy capital to them for specific purposes and timeframes. And then reallocate profits and ultimately return them to their investors more quickly than others.

The emergence of data-driven secondary analytics platforms
Secondary-dedicated data platforms like Launchbay Capital, Forge, Hiive and Rainmaker are making it easier than ever for institutional investors of all types to explore opportunities and compare prices in private markets; something that until recently was near impossible and reserved for PE professionals exclusively. This newfound understanding and ability to make informed decisions has played a substantial role in the uptake of secondary investment opportunities by the various segments of investing vehicles. 

These data-driven platforms are highly impactful tools for family offices, whether leveraging to inform their direct investment decisions or to gain insights on the capital moves their fund managers are recommending. Trackable analytics can be pulled on specific companies or broader sectors to review recent share prices, volume of trades, growth timelines and past, present and future funding rounds, to gauge true areas for opportunity more effectively. As investments are made, users can return to the platform to monitor the progress of their investments while staying closely informed in order to strategize future decisions. 

Another added benefit is that these platforms make the process of doing business much more seamless. Once you’ve landed on a share to purchase, the platform will provide the information for the broker to contact with your inquiry. 

Some may argue that the growing amount of secondary data that’s become available through these platforms is blurring the lines between public and private markets. Rather than sourcing major investment houses’ underwritten share prices, analysts are now frequenting estimates pulled from private market data to predict how much major companies will be valued at when they go public. We’ve seen this with Reddit, Stripe and even Pitchbook’s IPO pipeline reports. The increasingly frequent use of secondary data in major market news goes to show just how much credibility this sector has gained, and in such a short timeline. 

Markets trending through end-of-year
When considering where to start your family office’s venture into private markets, it’s good to note that a majority of the movement we’re seeing is within tech-related sectors. Currently, and as no surprise, generative AI is dominating attention, but not in the same way it was just a year ago. Ticket prices to invest in top, privately held companies like OpenAI and Anthropic are at an all-time high with little potential or reason for discounts any time soon. Additionally, the AI framework has been ultimately set in place by these major entities. 

Rather, investor interests have shifted to companies that are specializing in the business implementation of AI, like Cohere, which recently locked in a $450 million investment from big-name corporate investors to fund its platform that specializes in developing large language models for enterprise chatbots, search engines and copywriting. 

Another leading sector is fintech, where companies like Stripe and Klarna continue to serve as secondary poster children as they head into their I and H funding rounds. Deployment and implementation of AI within the fintech space has further hastened this market’s capabilities and investor interest. 

Secondaries are here to stay
The expansion of secondary markets can be likened to opening Pandora’s box. There’s a clear appetite for getting in on private growth funding rounds – and not only by institutional investors. As we’ve seen in recent news, Silicon Valley startups have been pushing for greater access that would allow retail investors into the space. 

The US Securities and Exchange Commission even tried its hand at setting new regulations that would enforce greater transparency by private companies and investors to no avail. Retail investors now have access to AI that’s leveraging both public and private market data to provide investment paths that are nearly on par with those mapped by institutional traders. 

The private market is headed in an array of directions, but backwards certainly isn’t one of them. The capital power of the market-reigning family offices ensures that they’re primed to lead the pack. Whether your family office is seeking portfolio diversification, liquidity, risk mitigation or access to established companies, the growing opportunities to achieve these goals through secondary investments are undeniable.