Family office private equity: Navigating opportunities and challenges

When it comes to family office private equity, there’s a distinct allure and complexity that sets it apart from other investment avenues. Family offices, entities that manage the wealth of high-net-worth families, are increasingly diving into the private equity pool.

In this article, we explore the nuances of family office private equity, and why this alternative asset class has become so popular among family offices.

What is family office private equity?

Family office private equity refers to investments made by family offices into private equity funds or directly into private companies. These investments typically involve acquiring stakes in companies not listed on public stock exchanges, offering unique opportunities for substantial returns but also presenting significant risks due to their illiquid nature.

Private equity + family offices = A strategic match

Family offices are well-suited for private equity investments due to their long-term investment horizon and significant capital reserves. Unlike institutional investors who may face pressure from stakeholders for short-term gains, family offices can afford to be patient, aligning well with the long gestation periods of private equity investments.

This strategic match allows family offices to leverage private equity for sustained wealth growth and diversification. Utilizing advanced family office software tailored for private equity reporting can further enhance this strategic advantage by streamlining investment management and reporting processes.

Family office vs. private equity firms: Key differences

Family offices and private equity firms may both invest in unlisted private companies, but that doesn’t mean that they’re the same.

Family offices are dedicated to managing the holistic financial and personal affairs of wealthy families. This encompasses not only investment management but also estate planning, tax optimization, philanthropy, family governance, and lifestyle management. In contrast, private equity firms focus solely on generating high returns from investments in private companies.

Private equity firms are professional investment entities that pool capital from various investors to acquire and manage private companies. They often have stringent performance targets and a focus on high returns within a specific timeframe.

Family offices, on the other hand, are more flexible and can tailor their investment strategies to fit the unique needs and goals of the families they serve. While they often invest in private equity, they generally diversify across various asset classes such as real estate, public equities, fixed income, hedge funds, and commodities. This diversified approach helps mitigate risks and enhance returns.

You can read more about the family office structure in our article: The family office structure: A comprehensive guide.

Private equity vs. family office approaches to direct investment in private companies

When comparing private equity firms and family offices in relation to their direct investments in private companies, their approaches can differ markedly. Private equity firms typically employ aggressive growth strategies, leveraging extensive due diligence and operational improvements to drive value.

Family offices, however, may prioritize stability and legacy, opting for investments that align with their broader wealth preservation goals. This difference in approach can influence the types of companies they invest in and the strategies they use to grow their investments.

Family office private equity investing: Benefits and challenges

Investing in private equity comes with both benefits and challenges. Let’s take a look at what these may be.

Benefits:

• Long-term horizon: Family offices can hold investments for extended periods, allowing for potential higher returns.

• Control and influence: By investing directly in private companies, family offices can exert significant control and influence over business strategies.

• Diversification: Private equity offers an avenue for diversification, reducing reliance on public markets.

• Access to unique opportunities: Family offices often have access to exclusive investment opportunities not available to the general public, allowing them to invest in high-growth potential companies early on.

• Alignment with values: Family offices can choose investments that align with the family’s values and philanthropic goals, fostering a sense of legacy and purpose.

Challenges:

• Illiquidity: Private equity investments are not easily liquidated, which can be a drawback if sudden cash needs arise.

• High entry barriers: Significant capital is often required, limiting access to only the wealthiest families.

• Complex management: Managing private equity investments requires specialized knowledge and expertise, which might necessitate hiring skilled professionals.

• Risk of capital calls: Family offices must be prepared for capital calls from private equity funds, requiring them to maintain liquidity to meet these obligations.

• Valuation challenges: Private equity investments can be challenging to value accurately, leading to potential discrepancies in portfolio valuation and performance assessment.

Why family offices are increasingly turning to private equity

According to a UBS survey of 320 family offices from more than 30 different countries, 22% of family office assets are allocated to private equity investments (UBS 2024). In the US, the share is an impressive 35%.

And more than a third of the surveyed family offices even plan to increase their allocation to private equity.

...private equity has surpassed public equity as the number one asset class family offices invest in...

J.P. Morgan has also carried out a global family office survey with responses from 190 single-family offices and found that 86% of them have invested in private equity, and that 17% of their assets are allocated to this asset class (J.P. Morgan 2024).

Deloitte reports similar findings. They’ve surveyed 354 single-family offices from around the world as well as carried out interviews with 40 senior family office executives (Deloitte 2024).

They found that private equity has surpassed public equity as the number one asset class family offices invest in with an average of 30% of assets allocated to private equity. Almost 30% of the surveyed SFOs even plan to increase their allocation to the popular asset class.

According to UBS, 71% of the family offices that invest in private equity are doing so to diversify their portfolio, and an equal amount (71%) believe that long-term returns on private equity investments are better than on public equity investments.

But these are not the only reasons why family office private equity investments are so common. Other factors driving family office private equity investing are:

Control over investments: Family offices appreciate the ability to directly influence company management and strategy.

Legacy building: Investing in private companies can align with the family's values and long-term vision, contributing to a lasting legacy.

Customization: Private equity allows family offices to tailor their investment strategies to the specific needs and preferences of the family, ensuring alignment with their broader financial goals.

Exclusive access: Family offices often gain access to unique investment opportunities that are not available in public markets, providing a competitive edge.

Philanthropic alignment: Family offices can invest in private companies that align with their philanthropic goals, promoting social and environmental impact alongside financial returns.

Long-term growth: The extended investment horizons in private equity match the long-term financial planning goals of family offices, fostering sustainable wealth growth.

Maximizing success in family office private equity

To succeed in family office private equity investing, it’s essential to consider the following strategies:

• Due diligence: Conduct thorough research and due diligence before committing to any investment.

• Skilled management: Hire or consult with professionals who have expertise in private equity and can navigate its complexities.

• Diversification: Spread investments across different sectors and geographies to mitigate risk.

• Long-term planning: Align investments with the family’s long-term goals and risk tolerance.

Conclusion

Family office private equity presents a compelling opportunity for high-net-worth families to achieve substantial returns, exert control over investments, and build a lasting legacy.

With strategic planning, thorough due diligence, skilled management, and the utilization of advanced family office software, family offices can navigate the complexities of private equity investing.

However, one must not forget that private equity investments come with a price, and that price is illiquidity. It's crucial to keep this in mind before investing in the popular asset class.

Sources

Deloitte (2024): Top 10 Family Office Trends

J.P. Morgan (2024): Global Family Office Report

UBS (2024): Global Family Office Report