Back to School: Family offices eye direct deals, driven by younger generation

  • Amid strong public markets, family offices move away from hedge funds
  • Appetite growing for PE, especially direct investment
  • Shift from wealth preservation to wealth accumulation altering strategies

PE funds are the most popular alternative investment among family offices, but direct investing is increasingly giving them a run for their money, a report by iCapital Network shows.

The fintech company surveyed 157 single-family offices and found that 41 percent have exposure to PE funds, compared with 39 percent invested in hedge funds. But around 90 percent either maintained or increased their allocation to PE in the past year (including third-party funds and direct investments), while 56 percent cut their hedge-fund commitments.

The future also looks brighter for buyouts: 47 percent of offices intend to increase their PE-fund investments, compared with 37 percent who plan to boost their hedge-fund exposure.

But besting both on that score was direct investments: Two-thirds of single-family offices said they’ll do more of these deals going forward.

ICapital CEO Lawrence Calcano said the diverging fortunes of alternative-asset classes are attributable to performance. “In a market environment where stocks are on fire, it’s tough. The risk is to stop hedging [and] get a lot more correlation. It’s not unreasonable to expect that during really high-flying markets, hedge funds might underperform,” he explained.

They’re also under greater competitive pressure: “There are more challenges that hedge funds face from more liquid products … whereas I think in the private equity arena it’s been very difficult to replicate the returns.”

In addition to pointing away from hedge funds, the quest for returns with lower fees is leading family offices to invest directly in private companies. One-quarter of those surveyed currently do so, including through co-investment alongside GPs as well as club deals.

Direct deals are more popular among offices overseen by second-generation family members, 46 percent of which invest directly, versus 15 percent of their first-generation counterparts. Since last year, 71 percent of Gen2 offices increased their direct-investment allocation, compared with less than half of Gen1 offices, and 82 percent intend to keep going higher.

Overall, Gen2 family offices are more enthusiastic about alternative assets. About 40 percent have 15 percent or more of their total portfolio in alternatives, twice the share of Gen1 offices that invest at similar levels. The report attributes this to the sophistication of the younger generation, and a growing sense among heirs that a family office should generate wealth as the original business did, rather than simply preserve it.

That’s good news “for GPs that both perform well and provide these kinds of attractive co-invests,” Calcano said.

Action Item: Read iCapital’s full report “Single-Family Offices and Alternative Investments” here.