As the appetite for alternative investments continues to grow in these times of macroeconomic uncertainty, nowhere is the trend more conspicuous than in the burgeoning family office sector. According to the financial data provider Preqin, the number of family offices has more than trebled globally since 2019, and they in aggregate manage more than $6 trillion. As of 2024, these firms now allocate more than half (52%) of their portfolio to alternatives, up from 42% two years ago.
Central to this story is a growing focus on private equity. Private companies are increasingly looking to the distinct advantages of funding from family offices – which often have a longer-term outlook than the typical investor – in a climate in which banks are tightening lending. This is a standout opportunity for family offices that embrace a deal-by-deal approach to private equity investing, offering higher potential returns, more flexibility to choose appropriate investments, and greater transparency and control. This approach also allows for shorter investment periods – a deal-by-deal investment typically targets around 3 to 5 years, while other fund terms are typically 10 years.
Drive towards alternatives is accelerating
The drive towards alternatives has been accelerated by the current global economic instability, rooted in factors including the uncertainty over the pace and timing of potential interest rate cuts in major markets; geopolitical tensions; and lingering effects from the pandemic. When interest rates are high, traditional investments such as listed equities and fixed-income markets often fail to deliver the returns that family offices typically seek.
Alternatives such as private equity are valued for their ability to buck general market trends, cushioning investor portfolios against market volatility and unexpected downturns. The benefits of diversification are broader, though, than simply hedging risk in uncertain times. In fact, over the past two decades, private equity has generally outperformed listed equities – yielding an average annual return of 14.6% (according to Cambridge Associates’ U.S. Private Equity Index), compared to 6% annually across the S&P 500 over the same period. In the UK, according to the British Private Equity & Venture Capital Association (BVCA)’s Performance and Measurement Survey Report, private capital funds in the sample have collectively outperformed public markets as represented by the FTSE All Share Index every year since 2001, and the MSCI Europe Index in all but two recent vintages.
Benefits of pursuing a deal-by-deal approach
Yet family offices operating outside the institutional world and seeking to access opportunities in private equity frequently face frustration. The larger private equity funds are often exclusive, especially in terms of minimum investment; most established PE funds require a minimum ticket size of £5m to £10m, which would be beyond comfortable for a smaller family office. Even when these funds are more accessible, having to commit money to a blind pool may not fit with the bespoke investment objectives that family offices tend to seek. Larger family offices will also often employ a direct co-investment strategy, managed in-house, which requires a highly skilled and experienced team to be able to source and manage an investment from the due diligence stage right through to exit.
On the other hand, pursuing a deal-by-deal approach to private equity by using an experienced investment manager overcomes the issue of blind pool. Family offices are able to choose specific opportunities that match their own investment philosophies, asset allocation requirements and, crucially, their appetite for risk. Each deal is assessed individually and the family office has access to detailed information about each company’s financials, management, and prospects for growth – data which can be used to develop a more comprehensive understanding of the potential risks and rewards. However, it is the investment manager who is responsible for the sourcing and management of the investment. There are few private equity funds – or, indeed, investments across the broader world of alternatives – that can offer this degree of granular insight and transparency and asset selection.
Identifying suitable deal-by-deal private equity opportunities can be an intimidating proposition for a family office, particularly if they are not well versed in the process. This is where access to the right expertise is vital. Discerning managers, such as Maven Capital Partners, help family offices navigate these waters and provide enhanced investment performance.
Reimagining investment strategies
Embracing the advantages of alternative investments allows family offices to reimagine their investment strategies, driven by the pursuit of superior returns, greater diversification, and enhanced risk management. Additionally, the benefits of deal-by-deal private equity investment extend beyond portfolio performance, allowing family offices’ capital to fuel innovation, support emerging industries, and contribute to the dynamism of economies.
By Victoria McGurran, director of private client relations at Glasgow-based private equity firm Maven Capital Partners