Perspectives 2018: The growing affinity with family offices

Family offices and foundations remain a widely unreported segment of the investor community. This is due to their relative opacity compared to larger, more institutional investors. Nevertheless, they are playing an increasingly active role in private equity. They are a stable investor group and a major provider of new capital to private equity funds.

That comes out loud and clear from our fifth annual family office and foundation private equity survey, conducted with Montana Capital Partners.

The survey provides an overview of the strategies and opinions of this sophisticated investor group. In contrast to more institutional investors, family offices are often more flexible and return-driven. Their investment behaviour is also less affected by regulations and market trends.

Headline results from this year’s survey are:

  • Family offices and foundations have the most positive view of private equity since this survey started back in 2013: 92 percent of respondents have kept their allocation to the asset class constant or have increased it over the past year. Over the coming 12-month period, 57 percent intend to keep their allocations constant and 38 percent plan to increase it from current levels.
  • Private equity continues to play a large role in the portfolios of family offices and foundations: 30 percent of respondents allocate more than 20 percent to the asset class, and 85 percent allocate more than 10 percent (up from 61 percent in last year’s survey).
  • Mid-market buyouts is the most favoured strategy. While it has always been popular, the share of respondents selecting it as their top choice has increased from 58 percent in 2016 to 70 percent in this year’s survey. Real estate and infrastructure have suffered a decline in popularity this year, but secondaries is more sought after than ever with 48 percent of respondents selecting it; the highest proportion since this survey began.
  • Large fund portfolio acquisitions are again the most unpopular secondaries strategy. For the first time, secondary directs has surpassed small secondaries as the preferred secondaries strategy. It will be interesting to see whether this trend continues in the coming years.

Some worries persist, of course.  Amid a continued abundance of cheap capital and the prospect of increasing interest rates, a record number of respondents indicate that GPs buying into companies at too high valuations is their top concern.

That said a smaller proportion of respondents – 28 percent compared to 51 percent in 2016 – are expecting a major correction in public markets within the next 12 months.  This growing optimism somewhat contradicts respondents’ concerns about high valuations.

The results prove that family offices and foundations continue to be among the most active investor groups in private equity, and are among the first investors in newer, though now established, strategies such as direct/co-investments, small/complex secondaries and smaller buyouts.

The often entrepreneurial DNA of family offices and foundations means they have a natural affinity to the asset class, making this a relationship that seems set to grow in intensity in the coming years, the survey suggests.