Mastering private assets: expert insights for family offices

Private equity and venture capital markets are complex and constantly evolving, with family offices increasingly playing a key role in shaping their future. In an insightful conversation with Professor Florin Vasvari, Academic Director of the Institute of Entrepreneurship and Private Capital at London Business School, we explored the growing influence of family offices in private markets, how they can become successful investors, and what the future holds for them.

Family offices: a unique investor profile

Family offices have become significant players in the private equity and venture capital spaces. Many of these originate from liquidity events where families sell their business, creating large pools of capital that need to be managed. This capital is often invested back into private markets, a familiar space for families with entrepreneurial backgrounds. Initially, family offices tend to gravitate toward investments that align with the industries they know best - private businesses. However, over time, this focus has begun to shift, with even large institutional investors moving more capital into private markets.

The potential of private assets in family offices

Professor Vasvari's insights highlight the immense potential for family offices in private markets, particularly as they move from passive participants to active investors. Whether they choose to invest directly, partner with others, or work through Funds Of Funds, the future of family offices in private equity is poised to be an exciting and impactful one.

Interview facilitated by Vybros Capital Partners.

Transitioning from entrepreneurs to investors

Family office owners are often successful entrepreneurs who are accustomed to running businesses, not necessarily investing in them. The shift from entrepreneur to investor requires a new set of skills. To overcome this challenge, family offices can either hire professionals with expertise in private equity or partner with experienced private equity funds to co-invest.

In the best-run family offices, professional Chief Investment Officers (CIOs) often oversee day-to-day operations, with family members serving in more strategic, non-executive roles. Hiring the right talent is crucial for family offices that wish to thrive in the private market space.

The co-investment model: a path to success

Co-investing involves family offices partnering with private equity funds to invest alongside them, typically without the fund's associated fees. Co-investments are often considered a way to avoid the high fees that come with fully investing in a private equity fund. A common misconception is that co-investment deals are often the "worst" or least profitable deals, but evidence suggests the opposite. Co-investments often outperform the funds they are tied to, because they do not involve the standard fund fees.

One key advantage of co-investing is that it allows family offices to gain exposure to high-quality deals without the burden of management fees. Moreover, the larger the deal, the more attractive the co-investment opportunity, as it can offer additional capital beyond the fund's initial investment limits. Family offices can choose to accept or reject these deals based on whether they align with their investment strategy.

Navigating Fund Of Funds: an option for new investors

For family offices new to private equity, a Fund Of Funds (FOF) can be a more accessible entry point. Although investing through a Fund Of Funds comes with its own set of fees, it can be an attractive alternative for smaller family offices that lack the resources to build a dedicated investment team. Fund Of Funds provides immediate diversification, which can mitigate the risks of investing in a limited number of private equity funds.

For smaller capital allocations, a Fund Of Funds can be a cost-effective way to access a broader range of private equity opportunities. As the capital allocation grows, family offices may consider building their own teams and directly investing in private equity funds, thus avoiding the additional layer of fees.

How to select the best private equity funds

Choosing the right private equity fund is not a simple process. There are numerous factors to consider, including the fund’s strategy, the experience of its team, its financial terms, and the operational structure of the firm. According to Professor Vasvari, investors must conduct extensive due diligence, evaluating the strategy, the track record of the fund's managers, and the fund's operational risks (such as cybersecurity and compliance issues).

The power of long-term capital: family offices vs. private equity funds

Family offices possess one distinct advantage over traditional private equity funds: patient capital. Unlike private equity funds, which are under constant pressure to raise new funds and exit investments within a set timeframe, family offices can take a more long-term approach to value creation. This freedom to hold onto investments for longer periods can result in less transactional cost leakage, allowing family offices to compound value over time.

While family offices may have a strategic advantage with their patient capital, attracting top-tier investment talent can be a challenge. To remain competitive, family offices must create an incentive structure similar to that of private equity funds, such as offering carried interest or other performance-based rewards. This would allow them to compete with established private equity firms for the best talent.

Conclusion: the evolving landscape of private markets

Family offices are becoming increasingly sophisticated in their approach to private equity and venture capital. With patient capital, a growing pool of resources, and the flexibility to invest without the pressures faced by private equity funds, family offices have the potential to outperform traditional investors in the private markets. By leveraging the right strategies, including co-investing, hiring professional talent, and embracing the learning curve of private equity investing, family offices can unlock significant opportunities in the years to come.