Family offices increase PE allocations; co-investments a big attraction, study says

Private equity is a preferred strategy among family offices, and North American FOs led the way with high PE allocations in their portfolios.

Additionally, family offices increased their private equity allocation by almost four percentage points in 2017 from 2016. Eighty percent thought the asset class performed in-line or exceeded their expectations.

That was the upshot of the Global Family Office Report 2018 released by UBS in partnership with Campden Wealth Research. The report surveyed 311 family offices worldwide with an average of $808 million in assets under management.

Globally, family offices invested almost half their portfolios in alternatives like PE, real assets and hedge funds, favoring illiquid investments in the pursuit of alpha in 2017.

Family offices’ total portfolio returns doubled to 15.5 percent in 2017 from 7 percent in 2016. That boost came in part from the performance of the respondents’ PE portfolios, the study said.

The average PE returns increased to 18 percent in 2017 from 13 percent in 2016, the report said.

Additionally, FOs increased their PE allocations to 22 percent in 2017, almost four percentage points up from 18.2 percent in 2016.

Half the respondents said they would make more direct PE investments in the next 12 months. Nearly a third also intended to increase investments in PE funds, the report said.

Almost 84 percent of the respondents invested in private equity funds, 26 percent in funds of funds and 61 percent in direct investments.

“This [private equity] asset class continues to capture the attention of investors as they eye up mid-sized, high-potential companies across the region,” the report said.

Regional PE allocation differences

North American respondents had the highest allocation to PE, with 14 percent to direct investments and 9.9 percent to private equity funds.

In comparison, European family offices allocated 14 percent to direct investments and 7 percent to PE funds. Asia-Pacific families allocated 15 percent to direct investments and 4.9 percent to PE funds. Families in emerging markets allocated 12 percent to direct PE investments, the least among all regions, and 6.3 percent to PE funds.

Among North American family offices, growth equity (77 percent), real assets (63 percent), private debt (58 percent), buyouts (56 percent), venture (53 percent) and special situations (51 percent) were preferred PE strategies.

Among European family offices, growth (65 percent), venture (58 percent) and buyouts (55 percent) were preferred PE strategies.

Asia-Pacific family offices chose growth (72 percent) and venture (72 percent) as preferred strategies.

Co-investments

Family offices took a majority or minority stake in 64 percent of direct PE investments; co-investments accounted for 23 percent and club deals accounted for 13 percent of direct PE investments.

Still, “co-investing seems to be one of the big fashions of the family office world at the moment,” an FO investment officer noted in the study.

Most family offices made one to five direct or co-investment deals, and 60 percent of these were in real estate, 46 percent in technology, 34 percent in healthcare/ social assistance and 34 percent in finance and insurance.

The most popular pathway to finding new direct investment opportunities was through the personal network of contacts (39 percent), followed by financial advisers (18 percent) and fund managers and dedicated deal clubs (12 percent).

Family offices considered several factors for direct investment decisions. Sixty four percent considered level of control and 56 percent considered costs important. Forty-seven percent considered the opportunity to partner with other families, and 46 percent considered level of diversification important factors for these decisions, the report said.

Yet co-investments had multiple challenges, the report said.

Sixty-nine percent of the respondents said due diligence was the toughest challenge and 64 percent said sourcing attractive deals was a concern. Another 42 percent said that deal flow was a challenge.

Other hurdles included lack of relevant resources and minimum investment sizes (31 percent) and willingness of companies to provide governance rights.

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