FOs favour mid-market, shun big buyouts

Private equity-focused family offices also overweigh secondary strategies, new research shows.

Family office investors active in private equity strongly favour mid-market funds over large LBO players in their allocation plans, according to fresh research from Private Equity International’s Research & Analytics division and Montana Capital Partners (mcp).

Polled in the autumn, nearly 80 percent of the family offices and charitable foundations surveyed indicated a clear preference for investing in the mid-market, saying the strategy makes financial and strategic sense given market dynamics and the typical size of such investments. Over 60 percent said they plan to overweigh their exposure to the mid-market in their private equity portfolios.

Large buyout funds on the other hand are deemed less attractive, with only a fifth of respondents stating that these were a long-term strategic preference. Less than 10 percent are planning to overweigh large buyouts.

The survey revealed that secondary strategies are another area of focus for those surveyed. More than 60 percent of respondents confirmed a long-term strategic preference for secondaries, and more than 25 percent intend to be overweight in them. Nearly two-thirds of respondents actively invest into secondary funds already. The findings suggest that fundraising for secondary strategies is likely to remain strong in the near future.

A range of secondary strategies were identified as appealing, including smaller transactions and direct asset purchases, which are deemed effective tools to mitigate the J-curve effect and accelerate cash-flows back to the investor as a result of shorter holding periods.

“We have noticed that our deal flow at the smaller end of the secondaries market has been very stable, and in fact increasing, over the last quarters, which many considered to be slow months,” commented Marco Wulff, partner and co-founder at mcp, which is currently investing its €80 million first-time annual secondary fund. “Looking at our investors, which mainly consist of large, well-known and very sophisticated family offices, we have seen a trend towards investing in the secondary market, particularly if a specific niche with customised solutions is targeted,” said fellow mcp co-founder Christian Diller.

The findings are meaningful because family offices remain an important segment of private equity’s investor base, and tend to allocate a greater proportion of their capital to the asset class than other types of LP. The PEI/mcp survey found that over a third of respondents have more than 20 percent of their assets invested in private equity. The average target allocation for pension funds and insurance companies stands at 7.3 percent and 3.6 percent respectively, according to PEI data.

In terms of expected returns, family offices are relatively confident, with the majority (57%) forecasting IRRs in excess of 15 percent from investment in primary funds. Of those the vast majority see returns between 15-20 percent as a realistic expectation. Just 3 percent of those questioned forecast annual returns below 10 percent in the short term.

The investors interviewed are also confident of seeing increased volumes of cash returned to investors in 2014. Over half (55 percent) believe fund managers will return more cash to investors in the next 12 months relative to 2013. Around a third (35 percent) believe levels will remain consistent.

“Being Private Matters: how family offices and foundations approach private equity” – download the full report here.