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Private equity attracts new investments from family offices

By James Beech

Family office executives say skills and resource gaps are the major challenges facing those who choose to invest directly, according to new research.

Family office principals interviewed by Campden Wealth researchers for the new Private Equity and Co-Investing forFamily Offices report, out today, said restricted access to high quality deals, limited team resources, and knowledge gaps were obstacles on direct investments.

However, higher expected returns, absence of agent fees, and greater sense of control over operations and exit were attractions which prompted families to invest directly.

Interviewees highlighted the importance of thorough due diligence and a team's ability to grow the businesses that they intend to invest in as the key success factors.

One family office executive from North America explained: “If you want to invest directly, be aware that for the potential of generating higher returns, you will have to burn some shoe leather and get some work done. It's very time consuming and stress levels are significantly higher.”

Family office executives pointed to the benefits of diversification and consistent deal flow as additional factors which attracted families to funds.

Family offices are expected to bolster their already sizable investment in private equity in the coming years, the report added.

On average, private equity made up 21% of a family office portfolio – the highest proportion of any asset class. Eight in 10 family offices intended to maintain or increase their allocations to this asset class going forward.

“Allocations to private equity funds represent the highest proportion (34%) of the family office private equity portfolio, with the key pull factors being diversification and consistent deal flow,” the report said.

Asked what message family offices should take from the report, Zuzanna Sojka, research manager at Campden Wealth, said the main factor which attracted family offices to private equity was the potential of higher returns.

“We've learnt, however, that certain characteristics of this asset class and challenges related to co-investing and investing directly in particular mean that the actual returns achieved by family offices are not always in line with their expectations,” Sojka said.

“Therefore, those who consider investing in private equity need to be aware of its specific demands. Executives who were interviewed for the purpose of this study pointed to skill gaps, insufficient resources, and flows in risk assessment as the key challenges faced by family offices.”

Campden Wealth, with support from US multinational private equity firm KKR, published Private Equity and Co-Investing for Family Offices today. The report built on quantitative data collected for Campden Wealth's Global Family Office Report 2016 (GFO).

It provides insight based on interviews with family office executives, which explain and contextualise some of the key trends, including factors which motivate family offices to invest in private equity, the problematic gap between expected and realised returns; as well as advantages and disadvantages of passive and direct approaches to private equity investing.

Based on data collected for the GFO 2016, allocations to private equity represented over a fifth (21%) of the average family office portfolio. A 2% increase from 2015 was reported among multi-year participants in the study (family offices who participated in the GFO in 2015 and 2016).

Family office executives who participated in qualitative interviews earlier this year, pointed to diversification benefits and the potential of higher returns as the key factors that attract them to private equity.

“Private equity is expected to further strengthen its position within the average family office portfolio as eight in 10 GFO 2016 participants indicated they intend to either maintain or increase their allocations to this asset class,” the report said.

“There is an indication family offices will co-invest and invest more directly in the future as 51% and 40% respectively stated they plan to increase their activity within those areas.”

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