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Wealthy Families Raise Their VC Investment Profile

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Family offices have invested in venture capital funds and startups for many decades, and in the 10 years to 2019, the pace accelerated sixfold, according to a new report from SVP Financial Group, the parent company of Silicon Valley Bank, in partnership with Campden Wealth Research.

Family offices have become more sophisticated venture allocators, investing through funds and directly into companies, the report said.

“In the last decade, family offices have emerged as a significant source of capital fueling innovation globally,” John China, President of SVB Capital, said in a statement.

“They are increasingly more open and active in venture, particularly in early-stage companies through direct investments and funds.”

Most of the data for the report was collected in a survey and 16 interviews between October and February from representatives of 110 ultra-wealthy families with experience in venture investing. In the second quarter, researchers sent out an addendum survey and conducted additional interviews in order to capture the effect of the coronavirus on family office venture investment activity.

The responding single-family offices had an average of $797 million in assets under management, and the responding multi-family offices had an average of $1.5 billion.

Robust Performance

Family offices have increased allocations to venture over the last decade and built in-house venture investment capabilities, mainly motivated strong historical returns, according to the report.

Venture investments constitute 10% of participants’ overall portfolios on average, divided between direct investments, 54% of the average venture portfolio, and funds, 46%.

Nine in 10 families said they favored co-investing with other families and venture funds as a way to share infrastructure and expertise. Co-investments make up 19% of the average family office venture portfolio among survey participants.

“We expect to see more family office investors in the venture ecosystem, collaborating and syndicating with like-minded investors and providing a differentiated pool of capital to founders,” China said.

On average, family offices in the study hold eight funds and 10 direct deals. The average investment is $6.1 million per company and $7.9 million per fund.

Eighty-five percent of respondents said their venture investment returns in the 12 months before the survey had met or exceeded their expectations.

Family offices’ venture portfolios returned an average of 14% in the 12 months prior to the survey. Fund investments generated 16% returns, and direct deals where family offices had minority stakes returned 17%.

Families reported 15% returns from their co-investments, compared with a 10% IRR from direct investments where they have a majority stake.

According to the report, family offices are revising their future return expectations downward given current market conditions.

Where the Action Is

Seventy-six percent of family offices reported that they invest directly in companies. A quarter of these said they source their own opportunities: 81% in North America and 53% in Europe, with significant interest in Israel.

Prior to COVID-19, 28% of family offices said the main barrier to direct investing was competition for deals, and 22% pointed to high valuations.

Four in five family offices said they invest in funds, considering them an efficient way to outsource deal flow and due diligence, with sector-focused funds and ones with less than $100 million in assets being the most popular.

Before the pandemic, 23% said the biggest barrier to fund investing was access to compelling managers, while 18% said it was valuation levels.

Ninety-one percent of family offices reported that they were most active in early-stage venture investments — seed and Series A. The report said this strategy has delivered strong returns and resonates for family offices with patient capital.

For their part, startups are looking for patient capital and smart money, according to the report. Seventy-two percent of family offices deliver by providing strategic guidance, 70% by participating on the board and 70% by facilitating connections to other investors.

Forty-seven percent of family offices in the study said they currently engaged venture investments that have impact strategies and environmental, social and governance strategies. The report noted that interest in this sector was growing particularly among the next generation of family office leaders.

Among these investors, 65% focus their impact and ESG investments on health care and wellness, 63% on agriculture and food, and 63% on energy and sustainability. North American families are heavily invested in health care and wellness: 74% versus 59% for the rest of the world.

Treading Carefully

Looking ahead, 61% of family offices surveyed prior to the pandemic said they expected emerging/breakout fund managers to provide the highest returns in the coming decade.

Sixty-three percent of respondents said their capital allocation to venture would stay the same or increase despite the pandemic. However, they also said they may deploy capital more slowly, place greater emphasis on quality managers and move further toward sector diversification.

“At present, many family offices are taking a cautious approach to weather the storm, both with their VC investments and overall portfolios, Campden Wealth’s director of research Rebecca Gooch said in the statement.

“Families need time to digest the ramifications COVID-19 will have on financial markets and their portfolios. However, some are bullish given current market conditions and are waiting to capitalize on opportunistic deals, and in the VC realm, lower entry valuations.”

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