Over the last decade, Private Equity as an asset class has grown in importance for families. We wanted to examine some of the most important factors behind this trend, whether this is likely to continue and the alternative strategies open to families in accessing this asset class.
So why are families increasing their exposure to Private Equity?
While every family is different, we see the following as the most common themes driving this trend:
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- Higher returns: in an environment of low interest rates, Private Equity has achieved an average annualised return of 12% to 15% net per annum, or circa 500bps above public equity markets.*
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- Long-time horizons. Private investments (PE, VC, distressed securities) were the three best performing asset classes over the past 10 years outperforming all public equity and bond indices.*
- Shared entrepreneurial spirit: families often identify with the ambition and aspirations of business owners, understanding their needs, concerns and long-term goals.
- Long term partner: unlike most Private Equity Funds, families invest for the long term and can be more pragmatic regarding exit timetables and growth strategies generally. This makes families an attractive investor class for many business owners and has led to families competing aggressively and successfully for direct Private Equity investments. (* Source: Nevastar Finance, an FCA registered Private Office in London, Geneva and Luxembourg)
Although much is changing from a global political and economic perspective, we expect the growth in Private Equity investments by Family Offices to continue.
Governments and politicians across the globe are encouraging entrepreneurs, fiscal and tax incentives are pushing capital towards private businesses, advancements in technology are accelerating and people are generally more willing to take greater control of their destiny by starting and creating their own businesses.
These trends strongly suggest the momentum behind Private Equity will continue for the foreseeable future and in such an environment, family money is increasingly attractive.
We therefore anticipate allocations to Private Equity from Family Offices to increase both due to its propensity to provide a higher economic return and because families understand the market and its participants.
How do families expose themselves to Private Equity?
Exposure to Private Equity can be achieved through two main routes.
Historically, the most popular route has been through funds and limited partnerships. The challenge with funds is identifying the best managers, gaining access to those funds that are often difficult without a substantial investment, and gaining attractive co-investment rights. Although a relatively passive approach in nature, it’s perfectly valid and is pursued successfully by many families globally.
Increasingly, however, families are looking to take greater control of their investments by investing directly or in partnership with specialist Private Equity firms. Families are now recruiting some of the best talent in the industry and competing directly with the established Private Equity investors and funds. While this latter approach requires greater effort and commitment, it will appeal to certain families and the rewards may be substantial.
How to allocate to Private Equity
We appreciate the importance of Private Equity as a distinct investment class and have developed a process for investing in Private Equity that achieves the following key objectives:
- Provide access to proprietary investments originated or identified by us.
- Assist clients in reviewing and investing in deals that they originate or receive directly.
- Assist on allocations to Private Equity funds and limited partnerships.
Strategy for providing clients with access to Private Equity and Due Diligence
- Ensure the process for investing in deals is robust and the reputational risk to our clients is minimised.
Given Private Equity deals are characterised by high returns but also high risk, we have established a stringent process for looking at Private Equity investments.
On the funds side, we work with our partners to identify funds that provide above average returns and gain access for clients within these fund structures. We aim to identify new, smaller funds where the returns can be higher, carrying out a thorough review of their approach, performance and process.
These individual funds will be used to enhance and compliment our core approach.
On the direct investment side, we will source Private Equity deals from our network and having carried out our own internal due diligence, work with our regulated partners who will arrange funding for the deals from our clients and other investors as required.
Article first published July 20, 2017. Mark Estcourt is CEO of Cavendish Family Office in London. For more information, see cavfo.com.