Family Offices: The year in 2015 and the year ahead
March 11, 2016
2015 was a strong year for family offices, and for our own growing family offices team across the firm. I thought I’d summarise some of the most useful areas of the UBS Family Office Report 2015 and include some information that we’ve gathered speaking with clients in the first three months of the year.
Less Two-and-Twenty, more direct sourcing
2015 marked the continuation in trends for family offices to take more calculated risks across their portfolios. The year was disappointing when it came to equity investments, and with the convulsions in the equity markets expected to continue through in 2016 we may see a continued pivot away from index tracking equity investments into direct investments (direct includes for definition private equity and patient investment funds). 22% of the average family office portfolio is allocated to private equity (this includes venture capital and co-investing). This is a common investment class for family offices given the bias toward long-term growth capital. Two thirds of the private equity funds that family offices invested in were direct, rather than through limited partnerships – a trend that looks likely to continue into 2016 given the aversion to the fee and management charge structure of most PE houses.
Some 61% of the private equity allocation of total family office portfolios are for direct investments while 30% of the direct funds (of that 61%) are invested in companies where a family office or family head will take an active management role. 8% (of 39% in indirect investments) are in co-investments, club and office-to-office deals – an area we believe will grow exponentially in 2016 and beyond.
Strong performance in Europe can be attributed to the higher allocations to direct investments and real estate. In terms of real estate being on home ground provides a sound basis for purchasing real estate assets, and with the exceptions of a few mid-year hiccups Europe has been a strong performer in 2015.
Investment trends
The family offices we speak to continue to be interested in real estate, hotels, hospitality, and in retail assets. In a highly competitive market, the opportunity for investment can be a challenge, and for a family office looking to make investments, deal flow can be the main element preventing the efficient allocation of capital.
The top-line in investments is this – family offices continue to be an increasingly important source of capital, and alone, or in syndicated deals can rival PE houses in their financial firepower. Their main investments are characterised by long term, patient holdings with a view to take an active role in the management of the company, or steer it through board positions. They tend to invest in companies that they have strong industry experience of, or are interested in from a growth area perspective. On the whole “illiquid” asset investments account for around half of the family office portfolio, which shows a great bias towards buy-and-hold strategies for their direct investments.
Growing conversions
What potentially next for 2016? After the initial volatility in the equity markets, and the under performance of the hedge funds in general we expect to continue to see more hedge, credit and other external capital funds into family offices. SAB Capital, Blue Crest and JAT were the most high profile hedge to family funds conversion of 2015. Add to that the continuing exclusion of “Family Offices” from the SEC Investment Act 1940 – we’d expect the upward trend to continue in 2016. "Given 2016 volatility in listed equity, and the spread widening for High Yield, added to which underperformance of listed PE firms, it’s likely that PE returns will suffer as IPO exits are curtailed and cost of equity and debt go up" Philip Higson, Vice Chairman of the Global Family Office group suggested.
In addition to this, we are, through our family office and sovereign wealth fund teams, seeing tentative interest in investor in co- deals across these two investor bases.
What does this mean for a business, family or otherwise who is hoping to attract investment from a family office and their patient capital source? Clearly they need to ensure that they are dealing with a true family office, and don’t let a friendly fox into the chicken coop under the guise of long term investing, only for it to get hungry for quick returns. Equally, “pure” family offices need to continue to ensure they do deals with the right partners and select the right investee companies.
