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Private Equity Is Family Offices’ Biggest Investment: Study

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Private equity makes up an average 21% of a family office portfolio, a higher proportion than any other asset class, according to a new study from Campden Wealth, with support from investment manager KKR.

Private equity’s position is likely to strengthen going forward as eight in 10 family offices in the study said they intended to maintain or increase their allocations to this asset class.

Fifty-one percent planned to increase co-investing, and 40% said they would increase direct investments in the future.

The study was based on data collected in 2016 from 242 family offices in North America, Europe, Asia/Pacific and emerging markets, representing family offices with an average $759 million in assets under management. Of these, 115 responded to questions specifically related to private equity. Six qualitative interviews with family office executives followed in April to clarify key private equity-related trends that emerged from the data.

Campden said family office executives who participated in qualitative interviews pointed to diversification benefits and the potential of higher returns as the key factors that attracted them to private equity.

According to recent research, many types of investors today consider private equity a core holding.

The Campden study found that allocations to private equity funds represented the highest proportion of the family office private equity portfolio in 2016, 34%, and among multiyear survey participants between 2015 and 2016, the allocation to funds increased from 31% to 41%.

In interviews, family office executives said the chief attractions of funds were diversification and consistent deal flow. They also highlighted the advantages of access to a skilled pool of investment professionals, which can appeal to family offices with insufficient resources.

One North American family office executive told researchers: “One significant advantage that private equity funds have over direct investing is the sector-specific skill-set and knowledge of their managers, and the resources that they can put towards each deal. My recommendation for those who want to invest in private equity would be — work with fund managers first, they know how to do it.”

Other families preferred to invest directly, citing higher expected returns, absence of agent fees and greater sense of control over operations and exit.

These investors expected an average return of 16% on their direct deals, compared with 14% on all indirect investments.

At the same time, interviewees stressed the challenges posed by the direct approach: restricted access to high-quality deals, limited team resources and knowledge gaps.

As key success factors, they highlighted the importance of rigorous due diligence and a team’s ability to grow the businesses they intend to invest in.

One executive told interviewers: “If you want to invest directly, be aware that for the potential of generating higher returns, you will have to burn some shoe leather and get some work done. It’s very time consuming and stress levels are significantly higher.”

— Check out The Mainstreaming of Private Equity, Phase II on ThinkAdvisor.


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