Private equity accounts for 22 percent of the average family office portfolio worldwide, according to the Private Equity Investing and Co-Investment Activity by Family Offices report by Campden Research in partnership with global investment firm KKR.
More than 75 family offices globally completed a survey on the topic, and senior family office executives discussed their experiences with private equity and co-investing in case studies.
“Across the globe, family offices’ allocations to private equity are predicted to rise over the coming year,” said Dr. Rebecca Gooch, director of research at Campden Wealth. “The family offices we studied for this report predicted a significant 73 percent climb in investment between 2017 and 2019. That translates into an average allocation of $51 million per family office in 2017 to a projected $88 million in 2019. This will certainly solidify private equity’s place as the second most significant asset class to family offices, trailing only behind equities.”
The second edition of the Private Equity Investing and Co-Investment Activity by Family Offices report found:
- Allocations to private equity are predicted to rise 73 percent between 2017 and 2019, or $51 million to $88 million per family office over this period.
- Family offices reported 91 percent of their private equity investments either met (53 percent) or outperformed (38 percent) their expectations in the last 12 months. Their average private equity return stood at 14 percent in 2017, and respondents predicted that their average return for 2018 will again be 14 percent, but will rise to 18 percent in 2019.
- Healthcare is the most popular sector for family offices’ private equity fund investment, according to 55 percent of respondents.
- More than half (53 percent) of all private equity fund investments are put towards growth capital deals, while 28 percent go towards leveraged buyouts and 19 percent, venture capital.
- 67 percent of respondents believe that family offices’ demand for co-investing opportunities will increase over the coming 12 months. Zero argued that the demand would decline.
- More than half (57 percent) of the family offices stated that “lower middle markets” offer the best opportunities for co-investment deals, followed by middle markets (26 percent).
“It is also interesting to report that a significant nine out of 10 of family offices’ private equity investment returns either met or exceeded expectations this last year,” said Gooch. “With family offices projecting that their average returns will increase from 14 percent in 2018 to 18 percent in 2019, this supports the position that many have been taking in terms of embracing a somewhat higher risk, more illiquid investment strategy within their portfolios.”
Gooch continued, “Demand for co-investing is increasing, with two-thirds of family offices expecting to see a rise in calls for co-investing opportunities over 2019. Family offices would be wise, however, to choose their co-investment partners carefully. The report uncovered that experience and most importantly a track record of value creation are key criteria. Financial alignment is also key.”
Jim Burns, head of EMEA client and partner group and head of individual investor business at KKR, added, “Large family offices are often well-suited to invest in private equity, given their long-term investment horizon and flexible investment mandates. Additionally, many family offices have a different liquidity profile than other investor types — a characteristic that lends itself nicely to investing in private equity.”
Burns continued, “Beyond regular-way fund investing, family offices are increasingly looking for creative ways to gain private equity exposure, including co-investing and direct investing into companies. While this can prove cost-effective in certain situations and gives investors the comfort of diligence assets on a deal-by-deal basis, this approach requires an appropriate amount of committed capital, as well as dedicated investment resources, to deliver the returns expected by the family over time.”