RESEARCH
                     
Single-Family Offices and Private Equity

Nov 2015

SFO and PE CoverWe provide findings from our survey of 162 single-family offices about their investments in private equity over the past two years, including allocations, preferred ways of accessing the asset class, performance results and future plans for their private equity programs.

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The ultra-private organizations that help the world’s wealthiest families oversee their financial and personal affairs— single-family offices—are long time investors in private equity. 

Moving forward, allocations to private equity from current and first-time investors are expected to increase on
the heels of strong performance in both funds and direct investments.


KEY FINDINGS

Six out of ten single-family offices are currently investing in private equity. Of those that invest, more than 90% use funds and about 40% invest on a direct basis.

The primary reason that single-family offices invest in private equity is the potential to achieve superior investment performance.

About 90% of single-family offices allocate 10% or more of their total portfolio to private equity investments; within that group there is a smaller population that allocate at much higher levels in keeping with an endowment-like strategy.

The large majority of single-family offices report that they have achieved strong performance results via private equity, with roughly 70% saying their PE funds outperformed other investments within their portfolios and three-quarters saying their direct investments outperformed other holdings.

More than half of the single-family offices that are currently investing in PE plan to allocate more to the asset class, while nearly 30% of those that aren’t investing are planning to do so in the future.


SINGLE-FAMILY OFFICES ARE BOUTIQUE ORGANIZATIONS CATERING TO THE FINANCIAL AND LIFESTYLE NEEDS OF AN ULTRA-WEALTHY FAMILY. THE TREMENDOUS INCREASE IN PRIVATE WEALTH HAS PRODUCED A CORRESPONDING INCREASE IN THE NUMBER OF SINGLE-FAMILY OFFICES. THIS IS A WORLDWIDE PHENOMENON AS ILLUSTRATED BY OUR RESEARCH; THE UNITED STATES AND EUROPE ARE AT THE FOREFRONT, BUT WEALTH CREATION IN ASIA, AUSTRALIA, AFRICA, AND SOUTH AMERICA IS FUELING THE EXPANSION OF THIS COHORT GLOBALLY.

The vast majority of investors are familiar with one market: a liquid and public one where prices quickly reflect new data, almost everyone sees the same information, and news spreads in seconds across the global Internet. But there is a second, much larger market—the private company market—where information is highly inefficient. The lack of transparency in this vast market offers opportunity for investors who are able to access information about private companies and negotiate attractive terms to provide select companies with capital to help them pursue growth strategies and improve their operations.

This paper addresses the basic differences between private equity and public investments, such as stocks, bonds and mutual funds. It also explains how private equity fund managers create value, the mechanics of private equity, the fees charged in this asset class, and historical net returns. It describes the traditional institutional profile of PE investors, the various types of private equity strategies, how to think about a PE allocation within a high-net-worth portfolio, and concludes with some final observations for investors considering the asset class for the first time.

A well-run family office can be expensive to staff and operate and can carry considerable administrative burdens. The primary reasons most families choose to establish their own family office—rather than relying on a combination of private banks, investment managers, attorneys and other professionals—is to have maximum control and privacy over their personal and financial affairs.

A critical function of most, but not all, single-family offices is the management of the family’s liquid wealth. There are a number of approaches a family office can take to invest its assets, ranging from outsourcing the entire process to acting as a manager of managers to maintaining an in-house investment committee and personnel. It’s not uncommon for single-family offices to employ a combination of these approaches in a way that suits the family members and the family's overarching goals.

One asset class that is getting considerable traction among single-family offices is private equity, which includes everything from venture investments to later stage opportunities, and is accessed on a direct basis and through professionally managed funds. 

The strength of recent and long-term performance—as reported by investment research providers1 and the families themselves—is prompting many family offices to consider increasing their allocations to private equity.

A critical function of most single-family offices is the management of the family’s liquid wealth.

BENCHMARKING SINGLE-FAMILY OFFICES AND PRIVATE EQUITY

To help establish a benchmark for how single-family offices invest in private equity, iCapital Network partnered with R A Prince & Associates, Inc. for its long-standing experience conducting primary research in the high-net-worth markets. Their research operation has studied family offices consistently over the past 30 years and the firm’s principal, Russ Alan Prince, worked with us to build and analyze a custom data set from their proprietary database.

In this report, we share data collected from 162 single-family offices between 2013 and 2014. This data set allowed us to examine how single-family offices invested in private equity over the previous two calendar years, with particular attention to their portfolio allocations, preferred ways to access, performance results and future plans regarding the asset class.

The single-family offices surveyed provided a perspective of significant, global wealth, with the responding organizations representing families from four continents with average net worths of approximately US$900 million and investable assets of approximately US$400 million (Exhibit 1). More than half of all the single-family offices we surveyed were based in the United States, approximately 20 percent of the respondents were from the Europe and Asia, respectively, and fewer than 10 percent were from South America (Exhibit 2).

Wealth of Single-Family Offices Surveyed in $US Millions

USE OF PRIVATE EQUITY

Private equity investments are common among the majority of single-family offices. Almost two-thirds of single-family offices surveyed were actively investing in private equity in one way or another during the past two calendar years (Exhibit 3). It’s worth noting that these figures are consistent with, while also indicating a slight increase, over the 56.7% of single-family offices that reported investing in private equity in Prince’s 2010 book The Family Office: Advising the Financial Elite (Charter Financial Publishing Network).

Exhibit 3 - Investing in Private Equity

Private equity can be accessed in a number of different ways and single-family offices are taking advantage of multiple vehicles and structures. Of the group that invests, more than nine out of ten respondents invested in funds while about 40 percent were also investing directly in companies, which may include co-investing alongside managers and 'club' deals with other family offices (Exhibit 4).

EXHIBIT 4 | Ways SFOs Invest in Private Equity

The nature of family offices means they are customized to the needs and preferences of the family members. This also means it can be difficult to identify standards for investment strategy and asset allocation, and this is reflected in the private equity allocations of the survey respondents. Roughly 90% of single-family offices that invest in private equity maintain allocations of 10% or more, which is consistent with the target allocations of many kinds of institutional investors (Exhibit 5). Interestingly, about 20% of single-family offices maintain allocations of 20% or more, and almost 9% allocate to the asset class at levels above 50%, which could be a result of the family’s investment strategy, a significant privately held asset or a combination thereof.

EXHIBIT 5 | Private Equity as a Percentage of Investment Portfolios

APPEAL OF PRIVATE EQUITY

Private equity is a unique type of investment that doesn’t suit everyone. There are, however, some key reasons why it holds considerable appeal for certain types of investors. Using a statistical method called factor analysis, Prince helped us further mine the results of studies conducted over a five year period between 2009 and 2014 to identify the top three motivations for single-family offices to invest in private equity.

1. Potentially superior investment returns.

A large percentage of single-family offices say they have achieved strong performance with their private equity investments, especially in contrast to the other vehicles and asset classes held in their portfolios. As such, it is the single most influential factor in why private equity is viewed so favorably by single-family office investors these days.

2. Family involvement.

A somewhat distant second factor is the option for family members to take a hands-on role in managing or supervising the investment in some way. This pertains almost exclusively to direct investments and there are times when the family can provide valuable insights and leadership drawn from their own experiences as business owners.

3. Negotiating power.

A relatively small percentage of single-family offices cite preferential terms as a meaningful benefit of investing in all forms of private equity. Often this is the result of working in conjunction with another family office to source investments and pooling their assets to maximize their negotiating position. It’s worth noting that proportionately few single-family offices operate in this way, but that is likely to change as these organizations become increasingly professionalized.

PERFORMANCE OF PRIVATE EQUITY

Seven out of ten single-family offices investing in private equity reported that they had better returns in their PE investments as compared to their traditional portfolios comprised of instruments such as stocks, bonds, equity and fixed income mutual funds and separate accounts, exchange-traded funds and other indexed vehicles (Exhibit 6).

EXHIBIT 6 | Performance of Private Equity Funds

Along the same lines, single-family offices are having success as investors in small and middle-market companies as well. According to three-quarters of single-family offices that do direct deals, the returns from these investments have outperformed the other holdings in their broad portfolios, whether it’s done on a direct basis, as a co-investment with a private equity firm or as part of a syndicate of similar investors. (Exhibit 7).

EXHIBIT 7 | Performance of Direct Investments

LOOKING AHEAD

Of the single-family offices currently investing in private equity, more than half expect to increase their allocation in the next two years (Exhibit 8). Of the group that was not investing, nearly 30 percent plan to allocate to private equity in the coming 24 months (Exhibit 9).

EXHIBIT 8 | Increase Allocation to Private Equity in Next Two Years

EXHIBIT 9 | Invest in Private Equity in Next Two Years

Many single-family offices are experienced private equity investors and have achieved strong returns in both funds and direct investments. As a result, the appetite for private equity among family offices and other high-net-worth advisory organizations is much greater today than we’ve seen in the past and the demand for interesting and exclusive deals and high-quality funds is escalating. These factors signal a shift in how significant private wealth will be deployed moving forward and the growing need for best-in-class tools to facilitate informed decisions.

IMPLICATIONS

In addition to providing a useful snapshot of how single-family offices are investing in and thinking about private equity at the present time, the research data in this report may have some future implications for a broader group of professionals.

- Single-Family Offices

As single-family offices continue to embrace private equity as a meaningful component of their investment portfolios, these types of organizations and the underlying family members will benefit from having systematic methods of sourcing and conducting due diligence on new opportunities.

- Wealth Advisors

Succeeding as a partner (or outsourced provider) to single-family offices and ultra-affluent families usually calls for a special mix of sophisticated products and high-touch services, and may require certain wealth advisory professionals to offer access to high-quality private equity funds and direct investments in order to compete effectively.

- Private Equity Fund Managers

Single-family offices and wealthy families represent a serious and extensive pool of capital for private equity fund managers. Reaching these types of investors, and aggregating and administering their commitments, entails specialized processes and mechanisms that may be different from what is in place at most private equity firms.

ABOUT THE SAMPLING METHODOLOGY

When conducting research with limited and hard-to-reach populations (like single-family offices and high-net-worth individuals) it is virtually impossible to rely on probability sampling, which involves random selection. In these cases, it is accepted practice in applied social science research to employ non-probability sampling. The research data presented in this report was collected using a non-probability purposive sampling approach called snowball sampling, wherein qualified research subjects act as "recruiters" for other research subjects with similar demographics, psychographics and other defined criteria. Despite the use of statistical controls, the risk of this approach is that subgroups in the target population that are readily accessible may be overweighted.


Research Director

Russ Alan Prince is President of RA Prince & Associates, Inc., a globally-recognized research and consulting firm specializing in the study of private wealth creation and management. Mr. Prince is the author of 49 research-based books including the widely acclaimed The Middle-Class Millionaire (2008), High-Net-Worth Psychology (1999), Cultivating the Affluent (1995) and The Seven Faces of Philanthropy (1994). He is a Co-Founder and the Executive Director of Private Wealth magazine and writes the Serious Money blog for Forbes.com. Prince received an MBA with distinction from Columbia Business School and an MA in sociology with a concentration in research methodologies from the State University of New York at Stony Brook. www.russalanprince.com

Contributing Partners

Bruce K. Benesh is the Partner-in-Charge of the Compensation and Benefits Consulting practice at Grant Thornton LLP, an independent provider of audit, tax and advisory services, where he works with companies ranging from closely held family businesses to multinational corporations. www.grantthornton.com

Grant Thornton

Usha Bhate is an Executive Director of Institutional Investor and the head of its Family Office Network, a global private membership group for single-family offices that provides a confidential environment to share knowledge around operational issues, governance and investment opportunities. http://www.thefamilyofficenetwork.com

Family Office Network

Keith M. Bloomfield is President of Forbes Family Trust and an Advisory Director to LGL Partners (formerly the Lenfest family office)., The two organizations have formed a strategic alliance to operate as a multifamily office, offering a full range of integrated services to a select group of goal-oriented families and individuals. http://www.forbesfamilytrust.com

Forbes Family Trust

Martin L. Okner is chairman of the New York chapter of the Association for Corporate Growth,, an industry group for middle market dealmaking and corporate professionals, and managing director of SHM Corporate Navigators, an advisor to middle market private equity firms and their portfolio companies. http://www.acg.org/nyc/ http://www.shmcnglobal.com

ACG NY - SHM Corporate Navigators

Meghan McAlpine is Director of Product Marketing for Alternative Investments at Intralinks, a trusted provider of easy-to-use, enterprise strength, cloud-based collaboration solutions that enable the exchange and control of information between organizations securely and compliantly. http://www.intralinks.com

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(1) According to an analysis from Cambridge Associates, US private equity funds have produced net returns of 13.0%, 10.2%, and 13.5% over the last 10, 15 and 20 years, respectively. Cambridge Associates US Private Equity Fund Index as of March 31, 2015: End-to-End Pooled Net Return. Past performance is not indicative of future results.


IMPORTANT INFORMATION

This material is provided for informational purposes only and are not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security described herein. Any such offer or solicitation shall be made only pursuant to a fund’s final confidential offering documents which will contain information about that fund’s investment objectives and terms and conditions of an investment and may also describe certain risks and tax information related to an investment therein. Investing in private equity funds may involve significant tax consequences. Clients should speak to their tax advisor before investing.

Past performance is not indicative of future results. Private equity funds are complex, speculative investment vehicles and are not suitable for all investors. They are generally sold only to qualified investors through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder. An investment in a private equity fund entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Private equity funds can carry high costs, substantial risks, and may be highly volatile. There is often limited (or even non-existent) liquidity, long lock-up periods, and a lack of transparency regarding the underlying assets. They do not represent a complete investment program. The investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Private equity funds are not required to provide investors with periodic pricing or valuation and are not subject to the same regulatory requirements as mutual funds. Investors should carefully consider the risks of investing in a private equity fund as described in that fund’s offering materials before investing.

The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Third party firms mentioned in the report are not affiliated or employees of iCapital Network and were not compensated for their participation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Securities offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. These registrations and memberships in no way imply that the FINRA or SIPC have endorsed the entities, products or services discussed herein.

Additional information is available upon request.