Family offices lean on private equity to dampen losses

Organisations with a higher allocation to the asset class significantly outperformed their peers, a report has found.

Private equity has been the top-performing asset class in family office portfolios, according to research by an industry body.

Overall returns for family offices were negative. However, direct private equity generated a 16.8 percent return and fund commitments 11.1 percent in 2018, according to the 2019 FOX Global Investment Survey from Family Office Exchange. The network includes over 8,000 family leaders and advisors from 500 organisations in 27 countries.

Traditional asset classes, such as stocks and bonds, generated low or negative returns, driving the overall family office portfolio to a -0.2 percent loss for the year.

Non-US families outperformed US families in 2018, returning 4.6 percent and -1.3 percent, respectively. Non-US families had a 26 percent allocation to private equity, compared with 15 percent for those in the US.

Asian family offices tend to be less established than their US counterparts and are more driven by their entrepreneurial background, Richard Tan, portfolio specialist for Asia at investment advisory Mercer, told Private Equity International.

“The more developed US market has a greater number of fund managers and advisors, whereas Asia is more nascent, so entrepreneurs have a stronger idea of where they want to put their own capital,” he said.

Asia’s heavy focus on manufacturing also lends itself to the asset class, he added. “Many Asian family offices were founded by entrepreneurs with a manufacturing nexus who therefore had an affinity for private equity,” Tan said.

Private equity comprised 17 percent of the average overall portfolio, with real assets accounting for a further 16 percent. An increase in private market allocations away from traditional asset classes improved overall performance, the report noted.

Family offices have recently loaded up on private equity in anticipation of a slowdown and will change the game, Carlyle Group co-founder David Rubenstein told delegates at Invest Europe’s Investors’ Forum in March.

“You now see multi-billion-dollar family offices in the Middle-East and Asia,” Rubenstein said. “Staggering amounts of money in family hands, and they are allocating a higher percentage to private equity than pension funds ever did or even that SWFs are. This money is now coming in and you are seeing in many cases family offices saying that they will do deals directly and that they don’t need to give money to Carlyle, Blackstone, KKR, Cinven and CVC. We’ll see that phenomenon occurring.”

Almost half surveyed by FOX stated that they were either “very satisfied” (18 percent) or “somewhat satisfied” (30 percent) with their 2018 investment performance, while 41 percent said “neither satisfied nor dissatisfied” and 11 percent said they were “very dissatisfied”.

The report helps explain why private equity is the most popular alternative asset class for global family offices. The average family office had a 45.4 percent exposure to alternatives last year, of which 14 percent was in direct private equity investments and 7.6 percent in private equity funds, the UBS/Campden Wealth Global Family Office Report 2018 found.

Private equity funds remained most popular among North American family offices, accounting for 9.9 percent of the average portfolio. Asia-Pacific investors had the greatest appetite for direct private equity deals, which represented 15 percent of the average portfolio in this region.