Most Favored Investments of Family Offices
Art by Michela Buttignol
As family offices grow in size and sophistication, they are exploring new ways to put their money to work and earn higher returns.
Today, there are an estimated 10,000 single family offices globally, up from just 1,000 in 2008, according to EY. And these family offices now control assets in excess of $4 trillion, according to Campden Research, making them a powerful force in the financial markets, able to compete alongside more traditional institutional investors such as private equity firms and endowments.
“Family offices are getting more institutional and more sophisticated, which, compared to 20 years ago, is leading them away from investments in just the public markets,” says Angelo J. Robles, founder and CEO of the Family Office Association, an organization dedicated to single family offices. “They are looking to a wider range of investment opportunities to generate stronger returns. I would not want to be a hedge fund manager in public equities right now if most of my clients were family offices.”
Indeed, family offices have started to flex their financial muscles by investing directly in private companies rather than investing in private equity firms as limited partners. Family office are also pursuing impact investments across a variety of sectors to address social and environmental issues across the globe. And they’re increasingly partnering with each other on an investment-by-investment basis because families trust and like working with other families.
Here’s a closer look at the some of the most favored areas of investments for family offices today.
Direct Investing: Cutting Out the Middle Man
Making direct investments in private companies is quickly becoming a preferred strategy of family offices. The number of direct deals has skyrocketed by more than 100% in the past decade, growing from about 80 per year to 180, with the average investment per deal climbing to $4.8 million in 2018, compared with $1.3 million in 2008, according to PitchBook.
But why go direct and have to worry about sourcing and managing deals when you can simply invest in a private equity firm and let them do all the hard work for you?
“The issue family offices have with investing in private equity [PE] firms is that PE firms typically prefer a short time frame of about five years for exiting a deal and this rapid schedule is often in misalignment with the long-term wealth-building objectives of family offices,” says Francois de Visscher, founder of de Visscher and Co. LLC, an independent financial adviser to single family offices in North America, Latin America, and Europe. “By going direct, families have greater control over the exit strategy, so they can better align the investment with how they want to develop their wealth over the long term.”
Another reason why families are making more direct investments is that they want to feel that their money is not being intermediated, says de Visscher, who has also served as a director and shareholder of his own family’s $5 billion global enterprise, N.V. Bekaert S.A.
“Direct deals are principal to principal investment, so families can actually partner with a real person,” he says. “That is a lot more exciting to them then investing in a PE fund and having to deal with the manager of that fund rather than dealing directly with the entrepreneurs or owners who are running the business.”
The third and perhaps most compelling reason is that direct deals have outperformed investments in private equity funds, with families achieving an average return of 16% on direct deals, compared with just 11% for funds-based investing, according to Campden Research. And when family offices go direct, they don’t have to pay the high fees associated with private equity, such as the 2% management fee and the 20% carry.
One family office that has successfully executed a direct investment strategy is the Werklund Family Office in Canada, whose patriarch Dave Werklund has a reported net worth of $1.43 billion. In 2010, the Werklund family invested directly in Xplornet Communications Inc., a Canadian rural internet service provider and mobile network operator. After helping grow the company, Werklund was part of group of investors that recently sold Xplornet to Stonepeak Infrastructure Partners for a reported $2 billion.
Impact Investing: Doing Well by Doing Good
Impact investing is on the rise because Millennials and Generation Xers are poised to inherit about $30 trillion from their parents and grandparents in the coming decades, according to consulting firm Accenture. As part of this generational transfer, family offices are increasingly eager to make investments not just because of their economic merits, but also because of their impact on society and the environment.
In other words, family offices want to ensure not only that their wealth survives for future generations but that the planet does as well.
“The younger generations in families are very passionate about impact investments,” says Robles of the Family Office Association. “I’ve seen families that made money in fossil fuels that are now investing their money in clean energy. These kinds of investments will only increase because they are being demanded by the under 40-year-olds that are coming into a position of more authority in their family office.”
A perfect example is Blue Haven Initiative, run by heiress Liesel Pritzker Simmons and Ian Simmons. Blue Haven is one of the first family offices created with impact investing as its mission and focus. Its investments include the likes of Zoona, which brings financial services to underserved communities in Africa, and M-KOPA, which is connecting more than 750,000 homes and business in Africa to affordable solar power.
Currently, 25% of family offices globally are now engaged in impact investing where they can help create positive returns while preserving long-term wealth, according to Campden Research.
“As generations turn over, younger family members are profoundly interested in trying to do well by doing good,” says Peter Sasaki, co-founder and managing member at SDS Family Office LLC based in New York City. “I’m impressed by number of opportunities that aren’t just high quality investments but also have a measurable impact.”
Sasaki adds that his family office recently made an investment in a solar farm and is currently looking to invest in a wind farm.
Multi-Family Investing: Strength in Numbers
Family offices have an increased appetite for pooling their resources with other families and investing together in specific opportunities. Why is this happening? Because there is a compatibility of values among family offices in terms of exit horizons and what they want to accomplish with their investments. What’s more, there is a certain level of trust that develops between family offices.
“Our family office has been investing with other families for decades,” de Visscher says. “That fact that we are all family groups means it is a more intimate and personal experience than just partnering with institutional investors.”
He adds that when operating on a global scale, size becomes important. Families need an ever-increasing amount of capital to complete and grow deals, and what could be a better source of capital for families than another family office?
Sasaki at SDS Family Office is in full agreement. SDS combines Sasaki’s family wealth with the family wealth of his two partners. SDS also invites other families in its network to participate in the deals it sources.
“The nice thing about our club of families is that it increases our deal flow and allows us to tap into a broader range of opportunities we probably wouldn’t be able to access if were just a single family,” he says.
For instance, SDS is an investor in a venture capital fund whose minimum threshold for investors is $10 million per fund.
“Every time the venture firm launches a new fund, you have you to show up or they will stop inviting you,” Sasaki explains. “So that is about a $50 million commitment over five to 10 years. That may be difficult to do for one family, but when you pool several families together, you can do these kinds of investments and really start to broaden your horizons.”