Family offices, which are providing billions of dollars to a wide range of investments, are gaining speed in the world of private equity. But as their popularity continues to increase, so does the competition to raise funds from these investors. How can private equity players best position themselves to successfully access that collection of capital?
There are two central interrelated components to successfully raising funds from family offices, according to Angelo Robles, founder and CEO of the Family Office Association: preferred access and effectively communicating value. Those who are looking to raise funds from family offices would do well to critically analyze their approach to both of these principles.
Preferable means of access include specialized forums and working through professionals, such as high-end lawyers and accountants and retained intermediaries. However, there is room for significant growth when it comes to inroads to family offices. Research suggests that family offices are struggling to identify and motivate professionals to provide vetted introductions. The private equity funds that are taking the initiative to sensitively market to these potential investors, such as by leveraging thought leadership content, are reaping the benefits of their efforts. Firms need to give careful and creative thought as to their avenues to this attractive source of capital.
Once a private equity fund gets the introduction, however, it must be attentive to how best to communicate the value of the investment to the family office. The pitch that has been compelling to countless other investors may well be lost on the family office. The conversation must be geared to this specific audience in order to maximize the success of the messaging. Therefore, understanding how family offices think of value is critical to tailoring this presentation. Critically, traditional thinking may not make the grade.
In fact, there is evidence that family offices are reassessing traditional approaches to asset allocation. The 2018 FOX Global Investment Survey reports that less than a third (29%) of family office respondents reported that they use quantitative modeling to determine asset class allocations and position sizes, a core tenet of academic finance and the typical approach of many investment advisors. Nearly two-thirds (65%) of family office participants rely on the traditional building block of “asset classes,” with the remaining 35% considering other asset categories (such as portfolio objectives).
This dynamic, i.e., trending away from conventional thinking in portfolio construction, may be caused by family offices’ interest in direct investments in operating businesses and real estate. Of those that use the quantitative model to determine asset allocations, 42% exclude direct investments from the model-driven outcome. Importantly, 55% of all participants report that they do not include direct investments in operating businesses in their asset allocation. Family offices view these direct investments in operating businesses as an opportunity to invest in companies that they expect to grow, with strong returns, over a longer time horizon than typical private equity funds. Bearing this information in mind may help a private equity fundraiser to have the conversation around investment in a manner that speaks to the way that a family office sees value.
Private equity firms increasingly view family offices, which have the funds and a strong interest in alternative investments, as good potential investors. Successful access to that market is keyed off of the ability to make contact with the family offices and, once contact has been established, to have a productive and persuasive conversation about the value of the proposed investments. Those private equity firms must focus on framing their discussions around value in a way that reaches these investors and suits their appetites for investment, which will require going beyond conventional thinking.