In an age of unprecedented innovation, it’s no secret that the private business domain has seen explosive growth globally. According to analysis by PWC, it’s forecasted that assets under management in private markets will expand up to $5.5 trillion in the years up to 20251. While this hive of activity is hungry for liquidity, family offices need their investments to work harder than ever as uncertainty, volatility, and the low interest rate environment creates complexity. With investors growing in sophistication and knowledge, family offices should leave no stone unturned in their quest for returns, diversification, and risk mitigation.
Private equity investments for the family office
When managing financial portfolios family offices need to gain a bird’s eye view of the private equity investment opportunities that exist. This big picture vantage point is key to the performance of a wealth plan as private market funds can help to build on strategic asset allocations across geographies, sectors, and instruments.
Since family offices generally have a sophisticated knowledge of investment instruments, the goal is to find a varied and bespoke repertoire of investment avenues that match their risk appetite and other personal preferences and beliefs, and most importantly, deliver consistent returns in varying market scenarios.
Private assets are becoming a popular route as they help to achieve a diversified portfolio that works hard for them in good times, and adequately protects them when markets turn turbulent. By accessing attractive deal flows, private equity investments can be crucial differentiators.
The tilt towards private assets – what’s behind it?
Private assets have long been the domain of the ultra-wealthy, tucked behind secret doors that are open to a select club of elite investors. However, as information is now abundant, investors are right to expect a simplified means of exposure to a broad range of assets.
The basic tenet of financial investing is to seek the highest return for a given degree of risk. In our era of transformation, geopolitical shifts, and growing uncertainty, the race for higher returns is becoming increasingly complex. Amid this complexity, alternative asset classes are continuing to draw the attention of the ultra-wealthy.
Our world has entered an era of unprecedented affluence, fueling a growing interest in new and exciting avenues for investment. On the back of a remarkable bull run in capital markets, and the boom in technology entrepreneurship, liquidity has been abundant. Investors are channeling this liquidity into a cross-section of instruments in search of growing returns from diverse sources.
As high-net-worth families seek access to the confluence of philanthropy and commerce, Environmental, Social and Governance (ESG) and thematic investing has also garnered greater interest. Private assets meet this demand as they allow clients to invest in a nuanced manner in areas they care about.
Roadblocks in private asset investing
In offering private asset investments to their clients, the biggest challenge for family offices is access to investee companies. Avenues for direct private investment are often limited to their personal and professional networks. Conversely, funds with deep multi-jurisdictional and multi-sectoral roots can access a significantly larger deal flow.
The other challenge is direct investment in private equity, real estate, and other non-public assets typically entails a longer time horizon, as well as high minimum investment amounts. This opportunity cost is a significant factor in lengthy, illiquid, and risky investments, given the wide range of alternatives on offer.
Further adding to this complexity of private equity are valuations and exit plans which are often opaque to minor shareholders. This opacity becomes magnified when investing in a multi-jurisdictional arena. China, for example, is a rapid growth market that has birthed a significant number of unicorns2 but at the same time, barriers to direct investment still remain.
The waters are further muddied by the complex documentation and fine print that is often involved in private equity investments. This can impact the exit clauses and eventual profitability of the investment – an onerous and risky feature of private equity investment.
Private market funds are the solution
Private asset investment funds are a vehicle that can address many of the above-mentioned roadblocks. Well-managed private funds can gain greater access to investee companies given the size of their assets under management. Their size allows them to participate in deals that would be inaccessible to individual family offices, allowing investors to own fractions of the underlying assets.
As private funds can acquire more significant stakes in the underlying private asset, they often enjoy greater access to updates and information, allowing them to react to changes in a timelier manner. Reporting is more transparent and regular, which keeps the client and their relationship manager abreast of what is happening in the fund’s portfolio.
Asset managers for such structured fund products proactively prioritise diversification, address risk management, and build hedges into their instruments. The taxation implications of these funds are driven by the underlying investee, and the tax domicile of the individual investor. Family offices can collaboratively address these structures at the individual investor level to structure the most favourable outcome.
But wait, aren’t private assets risky?
Compared to capital markets, private assets are indeed considered more illiquid, opaque, and potentially more volatile. However, as part of a well-crafted portfolio of wealth, family offices can benefit from private assets as they play a vital role in adding a layer of diversification.
Family offices have a significant vantage point in that they manage their clients’ wealth in their entirety. They can take a more thorough approach to risk management and achieve true diversification from a holistic perspective.
True diversification considers each client’s business interests, sources of income, and assets, both financial and physical, to construct a portfolio that complements these factors. In other words, no two investors are subject to the same risks when viewed in the context of their whole portfolio.
In a situation where strategic asset allocation encompasses all of the above factors, private asset investments via a family office can be a valuable vehicle for achieving deeper diversification. Family offices can structure baskets of underlying private investments while considering their impact on the portfolio’s exposure to geographies, industries, sectors, and currencies.
Wrapping it up – family offices need access to flexible private market funds
Portfolio design is an intricate balancing act, one that calls for multiple components and layers of complexity. Paradoxically, ultra-wealthy families need ever-expanding complexity to grow – while engaging family offices to streamline and simplify wealth management.
A well-curated allocation of private assets can work as a valuable complement to client portfolios, offering enhanced returns, diversification and thematic opportunities to discerning investors. Family offices can further enhance the success of their client relationships by engaging with a cross section of private equity asset managers and global private equity experts.