Over the past decade, family offices have become a significant driving force in global investment and innovation. Despite uncertainties caused by the COVID-19 pandemic and the threat of an encroaching global recession, family offices remain cautiously optimistic about investing.
Two recently released reports, one by Campden Wealth and Silicon Valley Bank along with another by FINTRX in partnership with Charles Schwab both examine recent global trends in family office investment. Here is a look at their key findings.
As family offices have grown in sophistication over the past decade, interest in direct investment opportunities has been increasingly noted. Family office direct investment trends can be attributed to several factors including the accumulation of assets and talent required to effect such investments on the single family office's behalf, more robust networks, as well as the greater control and decision-making ability, as well as better value and interest alignment and returns that these deals afford.
Both the Campden and FINTRX reports indicate continuations in this trend despite notable barriers, including increased competition and high valuations. Campden's data shows that 76% of family offices surveyed invest directly in companies, with 26% sourcing opportunities themselves.
FINTRX, drawing information from various sources including public filings, proprietary data sources, strategic industry relationships and data mapping, then harvested their data using multifaceted, bottom up methodology.
Their findings show that eighty-three percent of single family offices worldwide consider investing directly, while only thirty percent of their multi-family office counterparts do the same.
Campden Wealth Research shows that based on strong historical returns, family offices have increasingly allocated capital to venture and developing in-house venture investment capabilities over the past decade.
Of the 110 representatives of ultra-high net worth (UHNW) families surveyed, venture investments constituted, on average, 10% of their overall portfolios, divided between direct investments (54% of the average VC portfolio) and funds (46%).
Early-stage venture investments, while risky, have delivered strong returns for many family office investors. Both FINTRX and Campden's data shows that the majority of single family office investment allocations are made in the earlier stage seed and venture rounds.
With the majority of start-ups searching for patient capital and smart money, family offices are uniquely positioned to deliver, especially since the COVID-19 pandemic. According to Dr. Rebecca Gooch, Director of Research at Campden Family Wealth, many are "demonstrating their strength as nimble, responsive, and patient investors, often with cash reserves to carry them through turbulent times."
In addition to capital, Campden's report shows that 72% of family offices provide strategic guidance, 70% participate on boards, and 70% facilitate investment networking. Adding value in this way enhances value-alignment and can drive growth and returns for all involved as seasoned veterans guide entrepreneurs and their organizations through the turbulent start-up phases.
The family offices surveyed by Campden reported, on average, 14% return rates within their venture portfolios in the preceding year. Fund investments generated 16% returns while minority stakes direct deals returned 17%. These returns reportedly met or exceeded the expectations of more than 85% of respondents.
The FINTRX report indicates that along with increasing appetites for direct investment deals, single family offices also have a growing need and desire to co-invest in such opportunities. According to their data, 42.5% of family offices globally who invest directly, do so alongside other family offices, private equity, venture capital and real estate investors. While this trend is evident the world over, it is most prevalent in North America and within single family offices.
Co-investment with other 'like-minded' family offices and organizations is often the solution to overcoming several in-house issues ranging from inadequate resources to family conflict. Boasting a host of benefits from the pooling of resources to gain access to higher-value deals and transactions, more formalized structures, and governance disciplines, benefiting from others' expertise and experience while reducing costs, broader diversification, and better risk management, among others.
According to Campden's research, 47% of the family offices surveyed are involved in impact and ESG (Environmental, Social and Governance) investments. Popular verticals for these investments include healthcare and wellness, food and agriculture, energy, and sustainability.
With the next generation of family office leaders actively engaged in these causes and driving investment decisions that enable them to make a difference while making money, these numbers are sure to increase significantly in the coming years.
As the roles of private equity and direct investment within family offices continue to evolve, both families and investment advisors have much to consider. With 63% of family offices reporting that their allocation to venture will stay the same or increase in Campden's survey, private market access and how investments are sourced will remain top priorities in the months to come, all while considering the degree of control required in each deal.