Michael Denenga | Partner | Webber Wentzel | mail me |
Alyssa Smith | Senior Associate | Webber Wentzel | mail me |
In recent years, family offices have emerged as formidable players in the global financial landscape, managing substantial wealth on behalf of ultra-high-net-worth individuals.
Although there is still a preference by some family offices to adopt a more hands-on approach by directly acquiring private companies and properties, many are mitigating risk by co-investing with seasoned private equity professionals in direct investments. This co-investment approach allows family offices to benefit from expertise while optimising tax efficiency, agility and limiting liability.
Family offices are diversifying their investment strategies
With their growing prominence, family offices are diversifying their investment strategies, seeking alternative sources of return in today’s rapidly evolving investment landscape. This shift is creating new opportunities for alignment and synergy between family offices and the private equity and venture capital sector.
Families are participating in private equity and venture capital investment by leveraging multi-family offices that service the needs of two or more families.
The multi-family office service has become a fast-growing wealth management segment in South Africa and Africa, which is not surprising given that the AfrAsia Bank Africa Wealth Report 2021 predicts that total private wealth in Africa will rise by 30% over the next eight years, reaching USD 2,6 trillion by 2030.
According to research by Knight Frank, between now and 2026, less than 4,400 individuals in Africa will become ultra-high-net-representing the fastest growth rate in the world after Asia at 33%. This rise in family office wealth has led to a significant increase in their private equity allocations.
According to the latest surveys, private equity now represents a major portion of family office portfolios, second only to traditional asset classes like equities and fixed income.
Understanding family office priorities
Private equity and venture capital managers are encouraged to be mindful of the peculiarities of a family office investor.
Family offices are looking for value preservation and legacy protection. At the same time, they are looking for structures that will allow them to appoint professional, expert advisors while ensuring that the governance structures provide them with control and flexibility in response to the changing market dynamics.
A growing number of family businesses are establishing special-purpose vehicles that invest as limited partners in fund-of-funds structures and directly into private equity and venture capital funds.
Driven by a desire to align their investment with positive social and environmental impact, a growing number of new generations, and ESG-aware family office stewards, family offices are increasingly attracted to the impact investing strategies offered by private equity firms. This allows family offices to leverage existing expertise, track record and relationships of established fund managers to make a meaningful contribution, rather than designing their own impact programmes.
Tailoring the offering to family offices
To attract family offices, fund managers should prioritise flexibility, transparency, and innovation in their approach to structuring and administering funds. Family offices value agility and simplicity, and are often wary of complex fee structures or opaque investment vehicles.
In addition, family offices, particularly single-family offices with permanent staff, have a strong need to ensure the interests of the family and the staff are aligned. Incentive structures that address this alignment are paramount. While employee share incentive structures may not be the best solution for all, family offices can leverage existing private equity carry structures and incentive structures to fulfil this need. These incentive structures need to be tailored for longevity, flexibility and efficiency.
Ultimately, successful engagement with family offices requires a deep understanding of their goals, preferences, and constraints. By listening attentively to the needs of family offices and demonstrating a commitment to innovation and partnership, private equity fund managers can unlock significant opportunities for growth and collaboration in the evolving landscape of family office investing.
Related FAQs: Family office investment strategies
Q: What are the primary investment strategies used by family offices for effective portfolio management?
A: Family offices typically employ a variety of investment strategies, including direct investment in private equity, venture capital investment, fixed income investments, hedge funds and impact investing. These strategies are tailored to meet the specific investment objectives and risk tolerances of the family office.
Q: How do family offices approach asset allocation in their investment portfolios?
A: Asset allocation is a critical component of portfolio management for family offices. They tend to diversify their investments across various asset classes such as equities, fixed income and alternative investments like private equity and hedge funds, to balance risk and return while aligning with their long-term investment goals.
Q: What role does risk management play in family office investment strategies?
A: Risk management is essential in family office investment strategies. Family offices assess their investment risk by evaluating market volatility, conducting due diligence on investment opportunities and implementing strategies like diversification and leverage to mitigate potential losses.
Q: How do family offices make informed investment decisions regarding private equity investments?
A: Family offices typically conduct thorough research and analysis when considering private equity investments. This includes evaluating the management process of the private equity firm, understanding the investment horizon and reviewing the fund’s historical performance to ensure it aligns with their investment objectives.
Q: Can family offices engage in impact investing, and if so, how?
A: Yes, many family offices are increasingly engaging in impact investing as part of their investment strategy. They allocate a portion of their investment portfolio to sustainable investment opportunities that generate positive social or environmental impacts while still achieving competitive financial returns.
Q: What are hedge funds, and how do family offices incorporate them into their investment strategies?
A: Hedge funds are pooled investment funds that employ various strategies to generate high returns, often using leverage and derivatives. Family offices incorporate hedge funds into their portfolios for diversification and to access sophisticated investment strategies that can enhance returns and manage risk.
Q: How do family offices determine their investment objectives and risk tolerance?
A: Family offices typically assess their investment objectives and risk tolerance through discussions with family members and investment advisors. This process helps them understand their financial goals, liquidity needs and willingness to accept volatility in their investment portfolio.
Q: What is the significance of an investment policy statement for a family office?
A: An Investment Policy Statement (IPS) serves as a formal document that outlines a family office’s investment strategy, objectives, asset allocation and risk management guidelines. The IPS provides a framework for making consistent and informed investment decisions and helps ensure that the family office stays aligned with its long-term financial goals.
Q: How do family offices balance investments between public and private markets?
A: Family offices often balance their investments between public and private markets by allocating funds based on their investment horizon, liquidity needs and risk tolerance. This strategy allows them to benefit from the growth potential of private equity investments while maintaining some liquidity through public equity and fixed income investments.
