Campden Wealth and Silicon Valley Bank have recently released reports, along with FINTRX in partnership with Charles Schwab, that analyse recent global trends in family office investments. Here’s a look at some of their findings:
More Family Offices Choosing Direct Investments
As family offices have continued to grow over the last decade, the interest in direct investments has been noted. Family office investment trends can be due to various factors, such as the accumulation of assets and talent needed to effect investment on a single family’s behalf. Other factors include robust networks, better decision-making and greater control, as well as interest alignment and returns that these deals bring.
Both the Campden and FINTRX reports show a continuation in this trend despite potential barriers, such as high valuations and increased competition. Campden’s data shows that 76% of surveyed family offices invest directly in companies, and 26% source opportunities themselves.
FINTRX on the other hand draws data from various sources, such as public filings, strategic industry relationships, and data mapping. After, they harvested the data using the multi-faceted, bottom-up methodology. Their findings indicate that 83% of single family offices worldwide consider direct investments, while around 30% of multi-family offices do the same.
Rise in Venture Capital Investments
According to Campden Wealth Research family offices have increasingly allocated capital to venture and in-house venture investment opportunities. The top reason for increasing their venture allocation in 2022 is because of diversified portfolios amidst volatility and risks. 41% of participants chose this as their primary motivation, and 19% of participants said their second was recent strong returns. Out of the 139 ultra-high net worth families surveyed, 12 % constituted venture investments in their overall portfolios, which was divided between direct investments (55% on the average VC portfolio), and 45% in funds. Family office participation in venture capital has been increasing, in 2021, Family offices participated in 5% of global venture deals.
Family Offices Prefer Early-stage Ventures
While early-stage ventures are risky, they have delivered strong returns for many family office investors. The data from both Campden and FINTRX shows that the majority of single family office investment allocations are done during the early stage seed and venture rounds.
Family offices continue to allocate the most to Series A funds and direct investments (24%), at a point where they can capture early-stage value and reduce the risks of their investments after product-market fitting. Allocations across funding stages segmented by AUM shows no change in 2022 as compared to 2021. Smaller family offices have seen to allocate more to angel, pre-seed, and seed stage deals (32%) as compared to larger family offices at 22%.
The majority of the start-ups are searching for smart money and patient capital, and family offices are positioned to deliver, especially since the pandemic. Many family offices are “demonstrating their strength as nimble, responsive, and patient investors, often with cash reserves to carry them through turbulent times,” says Dr. Rebecca Gooch, the Director of Research at Campden Family Wealth.
High Average Returns
The family offices surveyed by Campden Wealth reported an average internal rate of return (IRR) for their venture capital portfolios was 24% in the previous year. These returns reportedly met or exceeded the expectations of 75–90% of respondents.
Enthusiasm to Co-invest
The FINTRX report shows that along with the rise of direct investments, single family offices also have the desire to co-invest in such opportunities. According to the report, 42.5% of family offices globally invest directly, along with other family offices, venture capital, private equity, and real estate investors. While this trend is apparent worldwide, it is predominantly prevalent in North America and in single family offices.
Co-investing with other ‘like-minded’ family offices and organisations can be a great solution to overcoming several in-house issues ranging from family conflict to inadequate resources. There are a plethora of benefits, such as pooling resources to gain better deals, benefitting from others’ experiences, and better risk management, among others.
Growing Interest in Impact and ESG Investment Opportunities
According to the data from Campden, 83% of family offices expect to engage in venture ESG or impact investment opportunities, which is up from 79% in 2021, and 47% of participating family offices in 2020. Common industries for these investments include food and agriculture, health and wellness, energy, and sustainability.
Family offices expect to increase their allocations to venture ESG or impact investing on average to 29 percent in 2022 as compared to 20 percent in 2021.
The next generation of family office leaders are actively engaged in these causes and are driving investments that help them make a difference while making money and these numbers are set to increase in the coming years.
As the roles of direct investment and private equity continue to involve, family offices and investment advisors have much to think about. The current macro environment is causing family offices to reduce their venture investments. However, family offices expect to grow their venture portfolios in 2022 due to lower valuations. Private market access and investment sourcing will remain significant in the months to come, keeping in mind the degree of control required in every deal.