The prolonged, low return environment has been fuelled by record low interest rates and a monetary policy that is holding back yields, forcing investors to look to alternatives in the search for portfolio growth – and family offices are no exception, says Bill Nixon, managing partner at Maven Capital Partners.
Nixon offers his insight into the strategies family offices are adopting to meet their long-term investment return horizons and twin goals of wealth preservation and appreciation.
We have seen an increased appetite from family offices for private equity co-investment opportunities in small and medium sized enterprises and commercial property. Through this model, family offices have regular access to diverse opportunities in high quality, thoroughly appraised private company and property transactions and invest on a deal-by-deal basis, controlling the level of commitment on each occasion.
Private equity once again outperformed most other asset classes, beaten only by real estate and agriculture, the new 2016 Global Family Office Report by Campden Wealth with UBS found. The research into 242 family offices, with an average assets under management of $759 million between February and May this year, shows private equity investments returned 5.9%, compared with an overall portfolio performance of 0.3%.
Multi-year research participants recorded a 2.3% point increase in holdings of private equity investments to 22.1%.
Family offices tend to construct their private equity portfolios to reflect their allocation requirements, investment aims and risk profiles, with a preference for sector diversification to minimise their exposure to any one industry. Typically investing in two to four opportunities a year, family offices allocate between £25,000 and £1 million on each occasion, in investments which are held for a period of up to five years and with a target return of 2.5 times or more.
To illustrate, one long-standing family office that Maven works with has invested around £4.5 million in nine transactions over the past two years across the telecoms, engineering, manufacturing, healthcare and support services sectors, typically investing up to 25% of the total co-investor funds raised in each transaction.
The growing small and medium sized enterprises sector offers considerable opportunity for private equity investment, with the number of new businesses registered last year reaching a record high of 608,000, a 4.6% increase on 2014. As part of a structural move towards entrepreneurialism, driven by a desire for flexibility and independence in terms of job security, and supported by favourable tax regimes and a policy environment which incentivises start-ups, we expect further growth and investment prospects from this sector.
Within commercial property there is a continued strong appetite for prime office investments, hotel development and conversion, student accommodation and the growing private rented sector due to their stable income streams and, in the case of student and PRS accommodation, above inflation rental growth. Family offices often favour property opportunities which offer income and capital gains through a “buy and renovate” approach. This involves investing in non-income generating assets, such as empty offices and refurbishing or redeveloping buildings into high quality offices, hotels, student or private rented sector accommodation, which provide steady cash flow and capital upside.
With uncertainty likely to persist in traditional equity and fixed income markets, access to high quality, carefully appraised private equity and property opportunities should increase, becoming a core element of many family office portfolios.