Although institutional-grade family offices have long prized directly investing in companies, rather than working with private equity firms, concerns about liquidity, rising interest rates, and inflation have some choosing to sit on the sidelines, new data showed.
Citi’s Private Bank recently released a survey of 268 family office investors that revealed a new trend in this subset of allocators.
According to the survey, 80 percent of family offices globally are interested in engaging in direct investments. However, more than a third — 38 percent — are slowing down new investments due to economic uncertainty. This is especially the case for family offices managing less than $500 million.
“When we look at the data, we definitely are seeing a bigger number of people who are careful of direct investments,” Hannes Hofmann, global head of the family office group at Citi in the U.K., said. “What we’ve seen in previous years is every family office wanting to be in direct investments.” To make a direct investment, family offices need cash on hand. They can also stop doing deals when markets change. With funds, investors commit capital years in advance, decisions that are not easily reversed.
Hofmann was quick to add that this year’s survey sample size was larger than in years past, given the growth of the family office industry. Even with that in mind, he added that there is a marked difference year-over-year.
“They have too much illiquidity,” Hofmann said.
Pennington Partners co-founder Brian Gaister said he is seeing a bifurcation between family offices that have liquidity and those that do not. “The people who have liquidity are looking to invest,” he said. “People who don’t have liquidity are trying to figure out and navigate that.”
For those that do have liquidity, roughly half of the family offices said they are still relying on their personal networks, both within the team and at other family offices, to source deals.
“What it indicates is that family offices have a bigger need to learn from each other,” Hofmann said. “They’re looking for more information about best practices and what others are doing globally than they have been doing before.”
It makes sense, then, that these families are primarily focused on minority stakes, looking to partner with other investors in deals rather than acquiring a controlling stake in the company. The survey showed that 78 percent of respondents were interested in minority-owned deals.
“They’re weighing how much they put in versus how much they partner with families and other institutions,” Gaister said.
Most direct deals are getting done in the venture market. The survey showed that 56 percent of respondents prefer early-stage deals, while 55 percent are interested in growth-stage companies. Just 19 percent of family offices are open to leveraged buyouts.
Perhaps unsurprisingly, the majority of family offices want to acquire stakes in companies within the technology sector — 63 percent. The next-most-popular sectors, real estate and healthcare, trailed technology by about 20 percentage points.
Gaister said he is seeing less of a sector-specific focus and more of an emphasis on a family office’s expertise. Most families have built their wealth in a specific sector, whether it’s running a food manufacturing company or a tech startup. Gaister urges his family office clients to use that type of knowledge to their benefit.
“It’s really important for families to understand where their expertise lies when they’re doing directs,” he said. “A simple way to think about this is why is this opportunity coming to me, or did I source it because I have expertise in this space? Why am I so lucky to see this opportunity?”
