In conversation with GPFO’s Hugo King-Oakley, Steffen Pauls, Founder and CEO of Moonfare shares his insights on future trends for private and the implications for family offices.
Hugo King-Oakley: To what extent do you believe the growth of private markets has been beneficial for family offices?
Steffen Pauls: The growth has ultimately given family offices exposure to investments with longer horizons that align with their goals of wealth preservation and sustaining a legacy for future generations.
To start, they provide access to asset classes that have often outperformed public equity and fixed income markets.
Secondly, stock and bond prices have in the past year seemingly broken a two-decade long negative correlation The inclusion of private markets into portfolios has allowed them to add a new diversifier, one that isn’t hostage to the daily price fluctuations of public markets
HKO: What does the increased breadth and sophistication of private markets mean for family offices
SP: Private markets now offer family offices a deeper opportunity set to choose from to suit their financial goals. Instead of just buyout-and venture-centered, they now offer family offices a wider variety of asset classes with different risk/reward spectrums.
In response, many family offices have increased their resources toward private markets by investing in their own research team and often dealing directly with general partners (GPs).
Moonfare’s platform can help family offices manage their private markets investments across their own investment team. In addition, it can provide access to institutional pricing, fund information as well networking opportunities with other family offices
HKO: What are the best strategies for family offices to access private markets?
SP: Every family office is different, so it isn’t about finding a universal ‘best’ strategy. Venture investments have a different risk profile to buyouts, for example, and the choice to invest comes down to the aims of the family office.
It’s important to consider the method by which you may want to invest, not just the strategy. Taking a stake in a company directly alongside a GP can give you more operational involvement in a portfolio company but can also be more resource intensive. Investing via a primary fund is more common, allowing family offices to target specific strategies while leaving the active management to the investment firm.
Elsewhere, secondary market funds are becoming increasingly popular targets, allowing family offices to take advantage of the liquidity needs of others
HKO: What are the advantages and disadvantages of investing in funds versus co-investment?
SP: Co-investments allow family offices to double-down on attractive deals alongside selected GPs.
An additional upside, is its ability to shorten the length of the j-curve. Co-investors usually see their capital called, and then returned, earlier.
Of course, this approach does have its risks due to less diversification;
HKO: Which obstacle is the hardest for investors to overcome when investing in private markets?
SP: Liquidity is a key concern among many investors new to private equity. While these objections are valid, private equity is a long-term asset class which, has a history of outperforming in the long run.
Other concerns apparent from our survey were the perceived risk of the asset class and a lack of industry-specific knowledge. This makes education key, and why we launched our PE Masterclass on our website, a series of in-depth articles covering the ins and outs of the asset class.
HKO: As you mentioned in the research GPFO and Moonfare conducted together, we found liquidity to be one the most flagged issues for family offices. How has the market evolved for secondary and limited partner (LP) stakes the past decade?
SP: The growth of the secondary market has boomed over the last decade. This has been fueled by growing private market investment, and the need for a marketplace to allow investors to sell stakes earlier than the full commitment indicates.
However, there is a need for proper liquidity mechanisms; the secondary market as it exists isn’t enough for those investors. That’s why we’ve pioneered the digital secondary market, a semi-annual, silent auction held on our platform.
HKO: What advice would you give to family offices looking to invest in private markets?
SP: Each family office will be different and have their own specific. However, there are probably three key things to consider.
First, manager selection is especially important in private markets.
Second, private markets are typically long-term investments, so think carefully about cash-flow planning in accordance with your overall strategy
Finally, it’s also important to diversify within private markets, not just invest in them. Many different asset classes make up private markets, all of which have different risk-return profiles and hold periods.
HKO: What do you expect to be the two major themes of private markets investing over the next three-to-five years?
SP: Firstly, the democratisation and digitisation of private markets will continue now that the door has been opened.
Secondly, we are likely to see a bifurcation of fundraising. Following the great financial crisis, funds could fundraise relatively easily. given persistently low interest rates, Now, fundraising is more difficult with higher rates and an uncertain economic backdrop.
This could effectively split GPs into two categories. top-quartile managers will likely receive increased interest because they have track records of performance. By contrast, emerging managers could struggle to fundraise given their lack of reputation.
For family offices this means making sure you can identify the top performers before you invest.
At Moonfare, we have a dedicated team of 11 investment professionals that screen over 300 investment opportunities per year, helping to ensure only the best funds are on the platform.
