Single-Family Offices Drawn to Private Equity

Allocations from current and first-time investors likely to increase in the coming year

A new study released Thursday by iCapital Network finds that single-family offices favor private equity investments mainly because of their strong performance, especially in contrast to other vehicles and asset classes in their portfolios.

The study found that 62% of SFOs currently invested in private equity. Of those, 94% used funds and 40% also invested directly, possibly alongside managers and in “club” deals with other family offices.

“In our view, the potential for superior investment returns is the single most influential factor in why private equity is viewed so favorably by single-family office investors these days,” Lawrence Calcano, managing partner of iCapital Network, said in a statement.

The report was based on data collected in 2013 and 2014 from 162 single-family offices with an average net worth of $919 million and average investable assets of $407 million.

Fifty-five percent of the SFOs were located in the U.S., 20% in Europe, 19% in Asia and 7% in South America.

According to the study, 91% of SFOs allocated 10% or more of their total portfolio to private equity investments. Within that group, 13% allocated between 20% and 50%.

Another 8% allocated more that 50% of their portfolios to private equity. The report said this could be a result of the family’s investment strategy or a big privately held asset or a combination of the two.

(The Tiger 21 network of ultra-wealthy U.S. investors recently reported that its members’ allocation to private equity accounted for 20% of their overall portfolios.)

Private Equity’s Appeal

Seventy percent of SFOs surveyed said private equity provided better returns than their traditional portfolios, which comprise stocks, bonds, equity and fixed income mutual funds and separate accounts, ETFs and other indexed vehicles.

SFOs also reported success as investors in small and midsize companies. Of those that do direct deals, 75% said these investments had performed better than other holdings in their portfolios.

The report also identified two other factors that account for the appeal of private equity for SFOs.

Family members, in Calcano’s words, have “the potential opportunity to take more of a hands-on role in managing or supervising a direct investment also adds to the appeal — because in many cases, families can provide valuable insights and leadership drawn from their own experience as business leaders.”

In addition, a few SFOs avail themselves of preferential terms for investment in all types of private equity, often working with another family office to source investment and pool assets to improve their negotiating position.

Fifty-six percent of SFOs in the survey said they would increase their allocation to private equity through 2016. As well, 28% of those that did not already invest in private equity said they would do so.

iCapital Network, which provides a financial technology platform that bridges high-net-worth investment capital with private investment opportunities, drew out implications of the report’s findings:

  • For SFOs: Have systematic methods of sourcing and conducting due diligence on new opportunities.
  • For wealth advisors: Offer access to high-quality private equity funds and direct investments.
  • For fund managers: Develop specialized processes and mechanisms to reach SFOs and to aggregate and administer their commitments.
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