5 years ago

By Aziza Kasumov  September 24, 2019

Family offices are eager to step up their allocations to direct investments, signaling a shift away from private equity funds as these institutional investors garner more expertise.

For the coming year, 46% of family offices surveyed in UBS’ 2019 global family office report conducted with Campden Research said they wanted to increase their allocations to private equity direct investments. There’s still an appetite for more private equity fund commitments — 42% plan on increasing their exposure. However, roughly 14% of surveyed offices said they were planning on decreasing their allocation to such funds. Only 6.5% of the surveyed family offices were planning on decreasing private equity direct investments.

“We’re in this historic environment of low interest rates and higher volatility, and that’s why we see many more families looking to do direct deals,” Susan Elolampi, head of family office coverage at UBS Investment Bank, said at a launch event for the report Friday. While that doesn’t mean family offices getting into direct deals are done with funds once and for all, their activity in fund investments once they learn how to do things themselves “is severely limited,” Elolampi said.

“The idea is, I’m paying all this money to have this infrastructure [to do direct deals], and I have this expertise, and I am a long-term holder,” she said, adding that those circumstances are not as well aligned with investing in private equity funds as they are with doing direct deals.

UBS surveyed 360 family offices globally for its 2019 report, 80% of them single-family offices. Roughly one third were based in North America. The average wealth of all families surveyed was $1.2 billion, with an average of $917 million in assets managed by their respective offices.

The results showed that, between February and May, when responses were collected, the family offices surveyed in North America allocated 14% of their portfolio to fixed income, 38% to equities, 19% to private equity, 21% to other alternatives, 2.3% to commodities and 5.9% to cash. The average hedge fund allocation was just 6% as family offices continued a multi-year pullback from this asset class, as reported.

In the survey, North American family office allocations to private equity were nearly split down the middle between direct investments and funds — with direct investments representing an average 9.5% allocation and private equity funds representing 9.7%.

Beyond direct deals in this asset class, family offices also appear to be ready to put more cash into direct real estate investments. Of all offices surveyed globally, 34% wanted to increase their allocation to this asset class. In North America, family offices on average had a 14% allocation to direct real estate, paired with another 1.3% in REITs. Roughly 42% of direct investment activity by family offices in the global survey happened in this industry — second only to technology, which accounted for 49% of direct investment deals.

“There has been an explosion of activity by real estate independent sponsors over the past seven years,” says Richard Wilson, CEO of the Family Office Club, an industry group. Within the technology sector, Wilson says he has recently seen increased interest in artificial intelligence (AI) and blockchain investments. Direct investments in the Cannabis industry also appear to be getting more demand, Wilson adds.

In general, however, families tend to stick with what they know, says Samira Salman, who works at a single-family office in the Northeast and is the founder and CEO of Salman Solutions, a firm that advises families on private direct investments.

“In the family office investment world, there’s always hot topics and trends,” Salman says. “But most families tend to invest in industries that they know and understand,” such as where the wealth was created, she adds.

UBS’ report also points to an overlap between the sources of a family’s wealth and the industries they are most interested in for direct deals. Finance and insurance, for instance, is where 21% of respondents made their money, and it represents 30% of respondents’ direct deals.

Familiarity with an industry might make it easier for family offices to dip their toes into direct deals, which can be complex undertakings.

“Not every family can go out and do direct deals,” says Elolampi. “You don’t just wake up in the morning and decide, ‘I’m going to invest in this company.’ You have to hire infrastructure in order to be able to do that, build some expertise, get into the flow, learn how to structure a deal,” she says.

Some family offices might try to get involved with direct deals in a more passive manner, for example by partnering with more experienced offices, Elolampi adds.

Building a network of partners for direct deals can take time, says Salman. “You have to build trust before you can do deals together,” she says.

Families don’t appear to be deterred by the challenges. “These ultra-high-net worth families are looking for outsized returns,” says Elolampi.

The portfolios of North American family offices surveyed by UBS returned an average of 5.9% in the 12-month period before they were surveyed. Direct investments brought home 16% in private equity and 11% in real estate during that period.

Contact the reporter on this story at akasumov@fundfire.com or (212) 542-1209.

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