Family offices have grown in size amid increased monetization events and surging equity valuations in recent years. Their influence on the private markets has grown in tandem: Many now can take on significant control and minority transactions, ranging from less than $25 million to $1 billion or more for a single asset, although under $100 million is more common.
This momentum is likely to endure, given family offices’ sophistication and long-term orientation. With multigenerational time horizons and associated long-term pools of capital, they can hold essentially in perpetuity. Families play the long game. They invest for generations with a lot less mark-to-market focus.
In today’s buyer’s market, with valuations for many companies having fallen, family offices are well positioned to find attractive investments. Management teams and founders seeking patient capital can find them to be graceful partners with the ability to weather a great deal of volatility.
Deal-making activity has slowed but not stopped; investors are being careful, taking their time. Many family offices are quietly doing their work, heavily scrutinizing private companies’ pathways to profitability, cash burn and competitive edge. That said, they have the ability to act quickly to take advantage of market dislocations to invest in opportunities with attractive risk-return profiles, while other institutions may have less balance sheet flexibility.
As large growth equity and crossover funds reduce their capital deployment, family offices are structuring private deals at favorable terms in sectors with long-term value accretion potential such as technology, fintech and health care. Those with existing portfolio companies are engaging more heavily with managements to provide additional insider funding as those companies seek to optimize expenses in a tighter market environment.
The rapid growth of family office assets under management has also resulted in an increasingly institutionalized approach. With their investment management functions mostly provided by small yet robust teams of experienced in-house investment professionals, many family offices can often invest alongside other traditional institutional investors.
Many companies raising capital view family offices as favorable investment partners among other institutional investors due to their:
- Long investing time horizons. While using similar diligence processes as traditional institutional investors, they can hold assets beyond the eight- to 12-year time horizon institutional investors typically hold private asset classes, and they need not underwrite to a predetermined exit time line;
- Flexibility. They have the latitude to invest creatively across the capital structure in asset classes, strategies and geographies, free from benchmarks or outside capital constraints; and
- Straightforward decision-making. Lean organizational structures allow for expedited decisions without the need for formal, multistage investment committee approvals.
As far as their investment focus areas, family offices tend to have outsized exposure to alternative investments. In a recent Goldman Sachs survey, they reported allocating roughly 45% of their investments to private equity, real estate, private credit and hedge funds. This reflects their higher return hurdles, patient capital pools and professional diligence capabilities.
Even with illiquidity risk and higher complexity, many family offices believe private markets can generate higher returns than public markets. They tend to be more aggressive than taxable ultra-high-net-worth individuals, who already allocate more than average investors to equities and alternatives and less to fixed income.
Almost universally, family offices have exposure to private equity, investing through both funds and direct transactions. Venture capital continues to be top of mind, also directly and through funds, with up to 90% of family offices globally reporting VC investments.
Private real estate is another major thrust, particularly in the current inflationary environment in the U.S. and other major markets. Family offices can take a more hands-on approach, particularly if they have ample experience owning and operating real estate, which can provide good hedges against inflation. Others invest through managers who can execute at scale.
A majority of family offices are actively implementing environmental, social and governance (ESG) principles across their philanthropic efforts, workplace policies and investing strategies. Regulatory tailwinds, the next generation coming into decision-making seats, and technological and business innovation will serve as key catalysts for continued shifts into ESG.
Families also appreciate the potential for philanthropy and investing to converge as they commit capital to opportunities that serve their personal passions.
Successful entrepreneurs often are comfortable aligning with family offices because they are generally hands-on and collaborative, participating on boards and leveraging their networks to help companies as long-term, strategic partners. They rely on these trusted networks to source opportunities. Club deals allow family offices to pool expertise, infrastructure and capital.
Family offices are becoming an increasingly important part of the global market structure. Their ability to weather major volatility without looking for exits can make them sought-after partners. As they continue to gain in capital and size, and with managements changing with generational succession, family offices promise to be even more hands-on market players in the years ahead.
Sara Naison-Tarajano is a partner and global head of private wealth management capital markets and Goldman Sachs Apex.