Calista Sourcing Club

Market Watch: Family Offices & PE. Winter 2023.

February 12, 2023

“Family offices are increasingly expanding into direct investments in healthcare and technology, whether at the seed stage, growth stage or beyond. Such deals require significant due diligence and structuring advice once the deal has been sourced to reduce exposure in these risky, but potentially highly lucrative investments. Given the repricing of these deals occurring in real time due to current market conditions, well sourced and properly structured deals present an outsize risk/reward profile for family offices with significant dry powder”.

Amit Singh, Partner, Dentons Family Office Report - San Diego

With most family offices’ objective remaining to grow wealth, the changing economic landscape is causing concern. Three issues stand out: rising inflation (according to 25%), global geopolitics (21%) and valuations (20%). Levels of anxiety about each of these factors rise and fall depending on where a family office is based.

Reviewing strategic asset allocation

Family offices are reviewing their strategic asset allocation (SAA). They’re looking for alternative diversifiers including active strategies, alongside illiquid assets, and derivatives.

In 2021, SAA remained stable, largely unchanged since 2019.

Approximately a third (32%) of portfolios was allocated to equities, around a seventh (15%) to fixed income and 12% to real estate. Cash was 10% and hedge funds 4%, with 2% in private debt, and gold and commodities both at 1%. Private equity was an exception – continuing its steady rise from a 16% allocation in 2019 (funds and direct investments) to 21% in 2021.

UBS- Global Family Office Report, 2022

Private equity allocations set to rise further

Private equity’s potential for higher returns and its broad opportunity set are proving more and more popular. Eight out of ten family offices now invest in the asset class, as the number rises steadily year after year.
In the US, the world’s biggest and most diverse private equity market, the number of private equity backed companies has grown from 1,698 in 2000 to 8,892 in 2020. Meanwhile, opportunities have shrunk in equity markets as the number of new initial public offerings declined from 380 in the year 2000 to 165 in 2020.

Increased FO’s backed transactions

Another turning point has been marked, with family office-backed transactions accounting for 10% of the entire deals market – the first time they’ve reached this percentage. In the market more broadly, the number of non-single family office-backed transactions increased by some 38% in 2021 to 9,189, from 6,674 in 2020 (PWC FO Report).

The number of club deals has increased significantly over the past decade, rising especially strongly in the past five years – albeit with the total slipping back slightly in 2021 from its 2020 peak.
Even as the volume of “sole” or single-office deals has varied year-on-year since 2015, club deals have remained on a generally upwards track. Despite the pause in their growth in 2021, some 308 of the family office-backed transactions during that year can be classified as club deals against 626 sole deals – meaning club deals accounted for 33% of the total. And while the number of sole deals has roughly doubled since 2012/2013, the number of club deals has increased by almost 25 times and reached its highest ever level in 2020 (PWC FO Report).

The main drivers behind the rise of club deals are the increasing size of investments – meaning more investors are needed to contribute the required capital – and the desire to diversify risk exposures. In an uncertain world, family offices are increasingly keen to share the risks and rewards around their investments (PWC FO Report).

UBS- Global Family Office Report, 2022

Family offices are seeking mainly to enhance returns: almost three quarters (74%) of those likely to increase their private equity investments over three to five years expect private equity to outperform public markets in the future.

However, over half (52%) of them are also investing to broaden their opportunityset: to access types of investments not available in public markets.

Family offices mainly invest in expansion or growth equity, yet they’re making earlier-stage investments as equity stakes get more expensive. Three quarters (75%) of family offices with private equity invest in expansion and growth equity. But 85% declare that they’re likely to invest at earlier stages of a business’s lifecycle in 2022, up from 74% in 2021. This is also reflected in the increased popularity of venture capital: 63% state that they usually invest in venture capital, up from 61% in 2021 and 53% in 2020.

42% of family offices invest in leveraged buyouts and 21% in distressed buyouts. In the age of the tech economy, the deal pipeline is packed with potentially transformative innovation. Consequently, technology is the most common sector for private equity investments, with 82% investing currently. Healthcare and social assistance is the second most common, with 60% investing. Turning to a sector that has traditionally been favoured by family offices, over half (54%) invest in real estate and rental/leasing.

Private equity investments by region


(Dentons Family Office, Direct Investing Survey Report – January 2023)

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