With assets in the trillions, a healthy penchant for private equity and autonomy over their investment strategy, family offices have a lot to offer fund managers.
What does a private equity fund manager want from a limited partner? It goes without saying that ‘capital’ is likely to be at the top of the list, and ‘loyalty’ might come a close second.
But many GPs, if they had the choice, would also opt for investors that could offer them more than that. Insight, advice, contacts. A knowledgeable sounding board.
“If we’re in a situation where we’re choosing between which investors come into our fund, we would err in favor of people with greater experience and knowledge, and a longer-term perspective on the market,” John Carter, chief executive, at secondaries firm Hollyport Capital told sister publication Private Equity International.
He added that consistency of investment strategy is key, “One of the challenges with private equity is it’s a long-term asset class, and too many investors change their strategies too often.”
And these are just the sorts of attributes family offices – not all, of course, but some – can bring to the table.
“Private equity is very intuitive for a family, because for most families, that’s where their wealth came from, it was created by a private company of one sort or another, so they get that,” said Richard Clarke-Jervoise, head of private capital at multi-family office Stonehage Fleming – an investor with Hollyport.
“They understand risk completely from that point of view.”
Appetite for risk
This sentiment resonates with Summit Partners, another firm with which Stonehage Fleming invests.
“Often the families [behind a family office] are themselves entrepreneurial or have entrepreneurial roots; Summit looks to invest in and support the growth of entrepreneurial businesses,” Scott Collins, managing director and chief operating officer of Summit told PEI.
“It can be a great partnership. They can often offer advice, perspective and ideas – both as investment professionals and also from the business background or entrepreneurial experiences of the family itself.”
Their networks can also be fruitful.
“Because [Stonehage Fleming] is rooted in Europe, the team has a deep network of relationships that we are able, from time to time, to tap into – whether for new investment opportunities, due diligence insights or otherwise,” Collins said.
No two families are the same, Clarke-Jervoise pointed out. But they are often extremely long-term in thinking, yet impatient to see results; considered in investment decisions, yet willing to take risks well beyond an institutional investor. Above all, they are their own masters.
The exact number of family offices out there – and the exact amount of capital at their disposal – is, for obvious reasons, hard to pin down, but recent estimates have put their wealth at around $4 trillion.
And they’re becoming increasingly interested in alternatives. Respondents to the UBS/Campden Wealth Global Family Office Report 2016, a survey of 242 family offices, indicated on average 22.1 percent of their assets is allocated to private equity, up 2.3 percent from 19.8 percent the previous year.
What’s more, having some key family offices among your LP base can act as “external validation”, said Bracken White, a managing director at Probitas Partners.
“These are people that invested with you because they chose to, whereas certain institutional investors may invest with you because they have an allocation they need to get out the door.”
If a family office that is particularly well-known for being thoughtful and highly disciplined in assessing investments is an LP in your fund, “that can tell other investors that smart money is investing in you”, White added.
It is that thoughtfulness that Clarke-Jervoise is known for among the GPs with whom Stonehage Fleming invests.
“Richard Clarke-Jervoise is a very knowledgeable, experienced private equity investor who has been around a long time and has a lot of sensible insights into what’s happening in the market,” Carter said.
Collins agreed, describing Clarke-Jervoise as “an incredibly thoughtful investor” who is “always willing to take the time to offer advice or perspective on a particular market issue”.
“We appreciate the perspective of limited partners who invest across a number of different asset classes and are able to ‘see the forest through the trees’. Richard – and the team [at Stonehage Fleming] – are that kind of investor.”
It is likely that family offices will play an increasingly crucial role going forward as more and more firms begin innovating, making adjustments to the standard 10-year fund structure and pushing into new strategies. Devoid of constraints around investment ‘buckets’ and such like, family offices can assess new strategies purely on their own merits.
“Family offices with established programmes are willing to entertain things that are slightly different than normal,” said White.
“You need people like that if you’ve got a strategy that makes a lot of sense but isn’t very common.”