Family offices, which manage the financial and personal affairs
of the wealthy, are increasingly taking stakes in companies and committing
staff to such efforts rather than investing in private-equity funds.
About
81 percent of offices have at least one full-time employee sourcing and
evaluating direct investments, according to an annual survey by the Family
Office Exchange released Wednesday. Of the 118 offices polled, firms had an
average of three employees involved in the investment process, two of
whom had some responsibility for direct stakes.
Driving
this push is the perceived lack of returns elsewhere, said Kristi
Kuechler, president of the organization’s private-investor center. The average
family office surveyed reported a 7.2 percent return last year and there’s less
conviction that stocks, bonds and hedge funds will provide stellar returns. In
fact, those surveyed reduced their allocation to hedge funds on average in 2016
and most don’t plan to increase it this year.
“The
one place family offices think they can still generate double-digit returns is
in operating businesses and real estate,” Kuechler said.
Direct
investing in companies has become increasingly popular among wealthy families
that see value in sidestepping private equity firms’ fees, which typically are
2 percent for annual management and 20 percent of profits. Going direct can
also give families more say in investments and allow them to hold stakes longer
than many funds permit.
The strategy
requires manpower to find opportunities and investigate their financials, and
then complete the transactions and manage stakes. In some cases family offices
are teaming up on deals, said Kuechler. “That’s a huge trend,” she said.
It
also means family offices need to ramp up their deal-making expertise. Such
firms are already competing more for investment talent against traditional
financial firms, said David Druley, chief executive of Cambridge Associates,
which advises investors including family offices.
“They
need people that are good at manager selection, that are good at strategy
selection and understanding where to deploy capital and how to be effective,”
Druley said Tuesday at the Milken Institute Global Conference in Beverly
Hills, California.
More
than half of families in the survey said they plan to increase direct
investments in operating businesses or real estate this year. Returns from
those direct investments averaged 8 percent last year, according to the survey.
That figure may not reflect realized gains because some investments in private
companies may not have been sold, Kuechler said. In 2016, family offices
dedicated an average 12 percent of their portfolios to private investments, 7
percent directly and 5 percent through private-equity funds, according to the
report.
On
the hedge fund front, family offices dropped their average allocation to 10
percent in 2016 compared with 12 percent in 2014, said Kuechler.
“We’ve
seen a steady decline in the hedge fund allocation over the last several
years,” she said. “And there appears to be very little appetite for increasing
the allocation.”
When
asked if they plan to increase their allocation this year, 85 percent of
respondents said no.
Natural
resources, including commodities, had the best return last year for the
respondents, averaging 15 percent. Domestic equities followed with a 13 percent
return, compared with a total return of 12 percent for the S&P 500 index.
Real estate investments by families returned an average of 9 percent, according
to the survey
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