Many highly affluent families created their original wealth from private investments, so it’s no surprise that research we recently undertook at iCapital Network reveals that single-family offices have a notably high predilection for private equity assets, particularly private equity funds.
Six out of 10 single-family offices are investing in private equity, with 90% allocating 10% or more of their investment portfolios to PE funds or direct investments, according to iCapital Network research.
Breaking that down further, a little more than 70% allocate between 10% and 20% to private equity, while 20% maintain allocations of 20% or more. That kind of appetite is consistent with the target allocations of many institutional investors.
Most striking is that close to 9% are allocating more than 50% of their portfolio to private investments. An ultra-wealthy family has the autonomy to invest in the ways that best suit long-term goals. The relatively high allocations to private equity parallel the approach used by many large endowments to attempt to manage downside risk and increase return potential over extended periods of time. The high allocations may also represent something else: a very high level of comfort with the asset class.
Entrepreneurial DNA
Families at the center of a family office may have this higher level of comfort with private equity because their family’s capital was created by a successful private business in the first place or their approach to making money is to acquire, fix and build assets and businesses in certain industries.
With that experience can come a certain level of confidence in vetting and understanding direct investments and in the idea of investments in private equity funds more generally. Private equity investments leverage and reinforce that background by giving the family opportunities to add value and industry expertise to companies and funds that they choose to partner with.
Many wealthy families can afford to take a longer-term investment approach. They understand that the potential premium for illiquidity comes from allowing companies to pursue strategies that often require four to six years to execute. These families also appreciate the active role that fund managers play, working closely with their portfolio companies to achieve their goals. Such alignment and consistent engagement typically do not exist in the public markets.
Our research on single-family office investments in private equity identified three additional motivations that propel single-family offices toward this asset class:
Potentially superior investment returns: A large percentage of single-family offices say they have achieved strong performance with their private equity investments, especially in contrast to other vehicles and asset classes. Performance is the most influential factor in why private equity is viewed so favorably by single-family office investors. While the typical single-family office is historically sensitive to fees, it is also highly attuned to performance and always looking for superior investment returns.