One-fifth of family offices lose faith in PE’s ability to outperform – report

The proportion of family offices intending to increase their direct PE activity also nearly halved during the pandemic, a study by UBS has found.

Family offices are losing faith in private equity’s ability to deliver alpha amid an uncertain environment and coronavirus-induced stock market volatility.

The percentage of family offices that expect private equity returns to exceed those from public investments fell to 51 percent in May from 73 percent in March, according to UBS’s Global Family Office Report 2020, published Thursday.

“I think one of the headwinds that is prevalent, whether we are pre- or post-pandemic, is the amount of dry powder that private equity is sitting on, as well as the deal multiples that are getting more expensive,” an unnamed family office member and chief investment officer in the US said in the report.

Private equity’s performance relative to the public markets has come under renewed scrutiny in recent months thanks to a report from Oxford University professor Ludovic Phalippou alleging that, after fees, funds have returned about the same as public equities since 2006.

UBS noted the shift in sentiment found could reflect the appeal of lower stock prices following March’s financial crash. The report, though, did not differentiate between funds already invested and those that will be invested in the months to come.

Just over three-quarters of family offices reported that their overall portfolios matched or exceeded their respective target benchmarks over the year to May.

These institutions made significant changes to their portfolios due to macro-economic uncertainties, the prospect of recession, changes in interest rates and to take profits, the report said. Two-thirds switched up to 15 percent of their portfolios between March and May.

Some 10 percent of family offices increased their allocation to direct private equity and 7 percent to funds during this period. Cash and gold were the most popular switch.

“Instead of investing in private equity funds, be it leveraged buyout, venture or growth capital funds, we were finding opportunities in direct lending,” an unnamed Hong Kong-based CIO noted. “That was a conscious move to a senior part of the capital structure, so there was an added level of protection should you see some stress in the markets.”

Only 28 percent of family offices intended to increase their direct private equity at the time of the survey, compared with 49 percent at the beginning of 2020.

Just over three quarters of family offices invest in private equity, with an average allocation of 16 percent, according to the report. Expansion or growth equity is the most popular, attracting 71 percent of family offices, while only 40 percent dabble in buyouts.

“I think [private equity is] just a game you have to play now because companies are coming to public markets so much later than they have in the past,” a European CIO added. “In fact, you could easily live your life as a private company and never touch public markets.”

UBS surveyed 121 family offices representing $142.4 billion.