There is a growing view that by embracing a deal-by-deal approach to alternative investing – retaining greater flexibility and more control – family offices are well placed to realise the benefits of investing in alternative assets.
Family offices are in the business of generational wealth. As custodians to huge pools of capital belonging to some of the world’s wealthiest people, they are well known for their prudence and careful stewardship. However, these institutions are also well positioned to take the long view, making investments with lengthy lead times that have the potential for greater returns in the future.
It is little surprise, then, that family offices – whose number has trebled worldwide over the past five years – are sharply increasing their exposure to alternative investments. According to the market data provider Preqin, family offices increased the average percentage of their portfolios allocated to alternatives from 42 per cent in 2022 to 52 per cent in 2024.
In an uncertain macroeconomic environment, where interest rates remain high, alternatives such as private equity are seen as a prudent hedge to listed equites and fixed income investments. They also offer the potential for greater long-term returns than traditional asset classes. As family offices enter the market in force, there is a growing view that embracing a deal-by-deal approach to alternative investing – retaining greater flexibility and more control – is one of the best ways to realise these benefits.
Bucking market trends
Over recent months, family offices have tended to adopt a cautious posture towards traditional assets such as listed equities. Projections for their performance have been mixed. For example, Morgan Stanley has predicted that 2024 will be better than the preceding year for the global stockmarket. However, there are continued concerns for volatility, not least due to the crop of elections in major economies such as the US, the EU and the UK.
Though the ECB and the Bank of Canada have recently cut interest rates, it will take time for the effects to be felt. Stubborn inflation may yet lead to delays in cuts elsewhere, or even force rates back up. There is also the broader trend of fewer companies choosing to list on stockmarkets at all. Listings on the London Stock Exchange have declined by 75 per cent since the 1960s.
These factors have prompted family offices to look elsewhere for the steady returns they seek. Alternatives have demonstrated that they can buck market trends. Over the past 20 years, private equity has generally outperformed public equity. British Private Equity & Venture Capital Association (BVCA)’s Performance and Measurement Survey Report showed that private capital funds in the sample have collectively outperformed the public market as represented by the FTSE All Share Index every year since 2001, and the MSCI Europe Index in all but two recent vintages.
Since family offices are generational in their outlook (with average IRRs of 20-25 per cent), they can afford to make these kinds of long-term investments, sacrificing liquidity in the present for greater longer-term returns.
Deal-by-deal approach
However, there is a distinction between acknowledging these benefits and realising them in practice. Alternatives such as private equity funds are frequently thought to be reserved for institutional investors. Family offices tend to fall somewhere on the spectrum between asset management and wealth management. Smaller family offices, who do not have the professional team required to transact in direct co-investments, can in particular benefit from a deal-by-deal approach using an experienced investment manager.
Pursuing a deal-by-deal approach comes with significant advantages. It provides family offices with much more flexibility, allowing them to choose specific opportunities that align with their particular investment philosophy. It gives them access to a select pool of curated deals, each of which can be considered individually. Not least, this is a risk mitigation strategy; by spreading investments in private equity across multiple deals, family offices can reduce the impact of any one investment on their portfolio’s overall health, while retaining autonomy over their investment choices.
Such an approach also gives family offices greater transparency over their investments. They are given detailed information to evaluate each deal individually, with access to in-depth information about the company, its financials, its management, its business model, and its prospects for growth. The upshot is to empower family offices to consider each opportunity in turn, as an alternative to investing money in a blind pool.
This all gives deal-by-deal private equity investing the potential to outperform other alternative investment strategies. Discerning managers can focus their capital on companies with promising growth prospects and strong potential for robust returns, and since long lead times are more viable, family offices can wait for their investments to fully grow and mature. This approach, supplemented with active involvement from an experienced investment manager in portfolio companies, can help family offices enhance their investment performance in a still challenging economic climate.
Victoria McGurran, director of private client relations at Maven