Executive Director and family office expert, Richard Joynt explores how family office's (FO's) investment relationship with private equity has considerably evolved over the past 15 years, leading to a much higher concentration of private equity investments on their balance sheets.
In the early 2000s, private equity was an asset class still very much seen as 'niche'. To many private client practitioners who have regular dealings with the asset class and executives, this may be difficult to remember. However, this is evidenced by the fact that in Australia investors were still monitoring the outcome of the first institutional investment fund, raised in 1998.
Fast-forward to the present day, and in the past five years more money has been raised, invested and distributed back to investors than in any other period in private equity's history. With private equity providing attractive returns compared to those of public markets, limited partnerships (LPs) remain enthusiastic, continuing to inject fresh capital into the market.
Among the yield and predictable rates of return, and by working closely with clients and their asset allocation preferences, we have witnessed first-hand the growing trend of FOs increasing allocations to private equity. During the prolonged period of minimal returns on low-risk investment categories (prevalent since 2008), families have been looking for investment classes that can produce 'super' returns and private equity appears to be providing the answer.
Allocations continue to climb, UBS and Campden Research's The Global Family Office Report 2019 revealed that private equity now accounts for 19 per cent of the average FO portfolio globally (of which 88 per cent met or exceeded performance expectations).
Similarly, of PwC's Private Equity Trend Report 2019 survey respondents, 73 per cent thought FOs would be the investment partner that would significantly contribute to the LP structure, above pension funds and banks.
Family offices must adapt
It is difficult to see the low-income environment for lower-risk assets changing in the near future. Therefore, it is not too much of a stretch to extrapolate from the many examples of families that have heavily polarised asset bases comprising two main categories, roughly of equivalent size:
- cash and long-term exposure to public equity markets; and
- private equity exposure.
A family with that profile 15 years ago would have been considered quite unusual. In the current environment, with a sophisticated investor in place, it looks like today's version of 'balanced'. As an industry, we must therefore embrace this change and be able to support clients' financial interests.
One type of structure that we see more frequently in this area is the hybrid private client structure, such as a trust or family investment holding company, along with an underlying partnership fund structure. This calls for tax advisers, legal advisers, FOs and offshore administrators to apply a multidisciplinary approach.
As a result, there is a blurring of the lines between fund services, corporate services and private client, which is a particular challenge for the FO industry as this is how advisory and wealth management firms have traditionally organised themselves.
There is also a new class of wealth owner. The increased number of high-net-worth individuals with a background in private equity has led to the mobilisation of legal, accounting and wealth advisory services in a new way. These are highly financially sophisticated clients who have an excellent track record of investing, and they expect to continue doing so throughout their active investment life.
It is not just private equity or former private equity executives that have changed their appetite towards this asset class either; advisers working with non-private equity entrepreneurs are also finding this to be the case. Therefore, in order to remain relevant to our clients, we must adapt and facilitate these trends and changing models.
As family office allocations to private equity funds correlates with recent global records for private market fundraising and shows little sign of stopping, there is a notable need for expertise that can assist with the procedures involved.
With dedicated professionals in our Private Client division that have clients who are heavily involved in private equity, we have the necessary experience to assist with executing private equity investments. We also have the benefit of working with our colleagues in the Fund Services division, who have day-to-day experience in running the back office processes for the offshore aspects to the funds they administer. To learn more about our Family Office services, click here or get in touch using my profile below.
This article first featured in the STEP Journal (Vol28 Iss1), Richard Joynt, 'A growing relationship', p.67
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