July 1, 2023
This section will now provide a succinct overview of the current area in which Family Offices operate within.
Demand for Directs from Family Offices
“ Demand for private-equity participation in funds and direct investments by family offices is strong and continues to grow. Given the complexity of these illiquid investments—which are often higher-risk and higher-reward in nature— combined with the highly competitive private markets, family offices more than ever need experienced talent and external partners to provide quality deal flow, efficient screening, due diligence rigor, and structuring. With billions in dry powder competing for transactions, it is important to have a 360-degree view of the landscape and all the players.” Merchant Banking, William Blair
Interest in making direct investments from Family Offices has continued to grow as we have moved through 2023. The number of Family Offices which make direct investments now amount to 63%, whilst 22% of those who do not, say that they have interest in doing so. Family Offices find themselves attracted to the potentially higher returns available, with lower fees and greater transparency of the investments. Additionally, many families have interest in pursuing investments relating to their method of creating wealth, stemming from both their interest in the area and also expertise aiding in selecting investments.
Source: Family Office Direct Investing Report 2023 - William Blair
For those currently investing in Directs, and others considering investing in doing so, they face a number of challenges. Direct investments possess a significant degree of risk, which accompanied by their illiquid nature, mean that precise research must be undertaken before making an investment. Given these problems, the challenges which Family Offices currently find most significant include: operational risk (45% of FOs), high quality deal flow (43%), exit options (42%), time management (41%) and ability to perform due diligence (34%).
Family Offices are therefore turning to experienced professionals to provide their expertise to alleviate these problems without the need of significantly increasing the size of their FO team.
Average Size
As mentioned, a significant number of Family Offices are making direct investments. The Family Offices which are making these investments will typically allocate around 37% of their private equity assets to direct investments, varying by region (40% in Europe and 27% in the Middle East). However, when considering Offices with $1 billion or more in assets, they allocate on average 45% of their private assets.
The overall average size of direct investments amount to $19.3m, however, this can be further broken down to the given size of the family office. The average size for family offices less than $250m in size is $3.7m; $250m-$500m is $6.5m; $500m-$1bn is 14.3 and above $1bn is $39mn.
Source: Family Office Direct Investing Report 2023 - William Blair
Where are Family Offices investing?
Considering the areas which Family offices invest, the key sectors of which they are focusing on so far in 2023 include: healthcare, disruptive technology, digital tech, and commercial property investment, as indicated by recent research. European investors have shown a preference for disruptive and digital tech whereas Middle Eastern investors find healthcare particularly appealing. There is a growing trend towards investing in socially and environmentally impactful projects, as well as in innovative startups, as a number of Family Offices look for ways in which they can have a positive impact when investing. Nevertheless,recent occurrences like the pandemic and the increasing dominance of online retail could affect the investment prospects for office and retail properties. It is vital for family offices to maintain a diversified investment portfolio that aligns with their investment strategy and risk tolerance to achieve their financial objectives.
Source: Family Office Direct Investing Report 2023 - William Blair
Family Office portfolios saw declines in value over 2022
Over 2022 Family Office portfolios battled with significant levels of volatility with also unfavourable economic climate. These conditions therefore led to the majority of Family Offices (74%) recording losses for their portfolio over the year. For those who managed to increase the value of their portfolio, the gains were relatively subdued – 16% of Family Offices only increased their portfolio value between 0-10%, whilst 4% increased by 10-20% and 2% over 20%. Comparing the losses, whilst less than 13% of Family Offices reported any loss of value in their portfolios over 2021, 31% saw a loss of up to 10%, 38% decreased by 10- 20% and 5% more than 20%.
However, although the last 12 months have not been a good time for Family Office portfolios, there is strong optimism for the upcoming year. It is reported that 80% of Family Offices believe that their portfolio’s will gain value over this period with the majority estimating a gain of between 5-10%. From these Family Offices, it is those with a size of below $1bn who are most confident in their ability to realise these gains.
Source: Family Office Direct Investing Report 2023 - Citi
The current considerations for Family Offices
Moving into 2023, Family Offices have a few key areas of concern for the performance of their portfolios within the short term. The most prominent of which include inflation, fear of recession and geopolitical uncertainty. These fears are shown to not be equally shared across the larger and smaller Family Offices, since those which are larger do not view the potential recession and market volatility as much as a problem – 56% vs 41% and 20% vs 9% respectively. Leading Family Offices, in fact, have reportedly said that the increased market volatility represents an opportunity to leverage the market dislocations to strengthen their portfolios alongside their long-term strategy.
A significant proportion of other Family Offices, however, are prioritising assets which are able to withstand economic storms and instead allocate capital to lower risk assets or simply cash. They exercise a degree of patience, waiting for lower valuations before taking on additional risk to safeguard long-term financial well-being. Risk management is of upmost importance to the families, which can be then further highlighted by the fact that over 70% of families are opting for minimal leverage.
It can therefore be concluded that overall families are sceptical of the current market conditions, however those who are surrounded by the right the team to source and evaluate deals view it as a prime moment to strengthen their portfolios.
Source: Family Office Direct Investing Report 2023 - Citi
We were happy to present our findings based upon the following key studies:
• Wharton Global Family Alliance – Family Office Benchmarking Report 2022 • William Blair – Family Office Direct Investing Report 2023
• Goldman Sachs – Family Office Investment Insights 2023
• Pitchbook – European Venture Report Q1 2023
• Citi Private Bank - Family Office Survey Report 2022
