Strikingly, there is a wide divergence among family offices in the amounts they allocate to private equity. Generally, Single Family Offices have higher allocations to private equity than Multi Family Offices or Private Bank Family Offices. This divergence indicates that the representation of only one family leads to a higher risk tolerance and a more idiosyncratic portfolio.
As families look to buy into the real economy and get away from products, the private equity story becomes even more compelling. Thus, it is not surprising that 92% of respondents regard private equity as a suitable asset class for their family members. The remaining 8% were concerned about liquidity and expressed an unwillingness to tie capital up for long © LPEQ Ltd and Scorpio Partnership 2010 periods. There is also concern that transaction values look steep given that private equity naturally has a longer time horizon for producing significant returns.
Family offices consider a range of strategies and investment vehicles for private equity investment. While the hands-on nature of private equity is one of its appeals, a quarter of family offices also invest in listed private equity as a complement to their direct investments or unlisted private equity funds. Listed private equity still provides the opportunity to meet with the private equity manager – whether of a listed vehicle investing directly in unlisted companies or indirectly as a fund-of-funds investing in unlisted private equity funds – but opportunities for portfolio company interaction are more limited.
The perceived negative of reduced portfolio company interaction should be weighed against the significant benefits of listed private equity. These include immediate access to a diversified portfolio of underlying investments, liquidity in a historically illiquid asset class and the flexibility to increase or decrease allocation to private equity investments with ease. Listed private equity vehicles can also be used in conjunction with unlisted private equity holdings to manage allocations more efficiently or to expand and contract concentrations in various components of private equity investing (e.g. geographic, sector or investment type).
Smaller family offices seeking diversification or anticipating a liquidity event are strongly attracted to the more liquid nature of listed private equity. In addition, some of the administrative burdens that exist in direct investments in private equity are not present in listed private equity investments. The absence of such burdens can lead to significant efficiency gains for family offices.
Family offices and foundations make up 13% of total private equity limited partners by number and by assets according to Preqin (provider of data and analysis for the alternative assets industry). The LPEQ Scorpio Partnership survey demonstrates an increasing commitment to the asset class, which many families regard as a natural extension of their interests. As families become more aware of the liquidity and the administrative ease listed private equity offers to complement unlisted offerings, the acceptance of and allocation to private equity of all kinds in the family office will continue to increase.
