UBS: Family offices favour PE funds over direct investing

Family office allocations to private equity funds rose 10% to 41% compared with a year ago, while the share of direct investing fell, according to the 2016 Global Family Office Report.

Family offices are allocating more of their portfolios to private equity as the asset class continues to outperform, with indirect investing – via funds and co-investments – favoured over direct investing, which involves an active or passive management role.

These findings are from the Global Family Office Report 2016, produced by Campden Wealth Research in partnership with Swiss financial services company UBS. Between February and May 2016, Campden Wealth, an independent provider of proprietary research for family businesses and family offices, surveyed 242 family offices with average assets under management of $759 million.

Respondents said the share of private equity investments in their portfolios rose 2.3 percent to 22.1 percent in 2016, compared with the same period last year. These private equity investments include both direct investing and indirect investing, as well as venture capital.

The share of other asset classes – such as bonds, equities, and commodities – fell, the report found. Hedge funds also lost ground to private equity, with allocations ticking down from 9 percent to 8.1 percent, “amid concerns over performance and fees”, the report said.

The “most striking shift” the report found is the move away from direct investing in private equity – which includes taking on a management role that is either active or passive, or early-stage venture capital investing – toward indirect investing in private equity,

There was a “striking shift” toward indirect investing in private equity, which entails investing in the asset class via funds, co-investments, club deals, office-to-office deals, or deals syndicated by an investment bank. The share of fund holdings in respondents' overall private equity portfolios rose by about 10 percent to 41 percent, making funds the largest allocation within the asset class, the report found.

Direct investing in private equity proved less popular: the share allocated to investments involving an active management role subsided, from 29 percent to 24 percent, while early-stage venture capital investing slid from 12 percent to 9 percent.

Family offices tend to prefer indirect investing in private equity because they lack the expertise, time, or manpower to perform the necessary due diligence to carry out private equity deals, the report said.

“I just don't understand why people would think that they can spend a small amount of time, sometimes without even seeing the companies, and do a better job than the partner in a private equity firm, who sweated guts over the deals,” the CEO of a single family office said in the report.

Despite intentions, co-investing slips

Although as many as 51 percent of family offices said that they aim to boost their holdings of co-investments, the share of these types of deals within respondents' private equity portfolios actually dipped slightly, from 8 percent to 7 percent.

“My sense is that it is really challenging [to do co-investing deals],” the CEO of a single family office from Asia-Pacific said in the report. “You have got to have very strong alignment between all the co-investing parties regarding the objectives, investment horizons and all those things before you can push the button.”

Private equity continues to outperform

Private equity outperformed most other asset classes, the report noted. In the report's global composite portfolio, private equity investments in 2015 returned 5.9 percent, based on an allocation of 21 percent, while hedge funds returned minus 1.8 percent, based on an allocation of 2.7 percent.

The composite portfolio as a whole, which includes bonds, equities, real estate, hedge funds, commodities, and cash, returned just 0.3 percent.

Private equity performance slid when compared with previous years, however; the asset class returned 14.9 percent, based on an allocation of 22 percent, in 2013, and 15 percent, based on the same allocation size, in 2014.

The report found that only 68 percent of family office private equity holdings performed as expected in 2015. Family offices have proven to be consistently overly optimistic on forecasted returns for asset categories over one-year periods, the report said.