Family offices and private markets have enjoyed a symbio­tic rela­ti­onship for deca­des. Large fortu­nes are crea­ted in Germany by foun­ding compa­nies or by buil­ding up a real estate port­fo­lio that is often initi­ally finan­ced by loans. This implies a natu­ral “sympa­thy” for these two asset clas­ses, namely private equity and direct invest­ments on the one hand and real estate on the other. A study by the Bava­rian Finance Center in coope­ra­tion with Black­Rock and KPMG confirms the prono­un­ced prefe­rence for private equity. It is now on par with equi­ties when it comes to the most popu­lar asset class for future allocation.

Accor­din­gly, family offices are signi­fi­cant inves­tors in private equity funds. They have always been invol­ved in compa­nies via direct invest­ments — with the help of their own invest­ment vehic­les, or direct parti­ci­pa­ti­ons by the prin­ci­pals. Fund-of-fund invest­ments are equally suita­ble for family offices, espe­ci­ally if they do not yet have any distinct invest­ment expe­ri­ence of their own.

Family offices’ inte­rest in private equity invest­ments conti­nues to grow: accor­ding to a recent study by UBS in coope­ra­tion with Camp­den Wealth Rese­arch, private equity and real estate are the most produc­tive asset clas­ses. Accor­ding to the survey, 46% of fami­lies want to make more direct invest­ments, while 42% want to invest more in private equity funds.

For some time now, we have been noti­cing a remar­kable diffe­ren­tia­tion of invest­ment models on the part of family offices. Direct invest­ment by prin­ci­pals remains the predo­mi­nant form of invest­ment. Howe­ver, the number of those tran­sac­tions that have also attrac­ted public atten­tion has increased.

Howe­ver, family offices are not only active in direct invest­ments. Some promi­nent examp­les in Germany show that family offices can also very successfully estab­lish inde­pen­dent private equity mana­gers. In a second step, these are then also able to attract exter­nal third party inves­tors as LPs for the fund, which not only covers the costs of the plat­form, but can even gene­rate signi­fi­cant returns. Between direct invest­ments and the estab­lish­ment of an own mana­ger, there are many vari­ants, which are now incre­asingly all played out in the market.

As a result, plat­forms have deve­lo­ped that offer invest­ment oppor­tu­ni­ties to indi­vi­dual family offices. Each family office can decide whether to parti­ci­pate in the oppor­tu­nity. In addi­tion, there is alre­ady an insti­tu­tio­na­li­zed form in which family offices make a basic commit­ment to the plat­form, but can then decide whether they want to parti­ci­pate in the indi­vi­dual invest­ments. This enables a family office to form its own picture with regard to the sector or even the valua­tion level of the respec­tive tran­sac­tion and is not only depen­dent on the skill of the mana­ger. This model may suit family entre­pre­neurs because they often have very speci­fic ideas about the invest­ment objects, espe­ci­ally if the prin­ci­pal is invol­ved in the manage­ment of the family office.

The two criti­cal chal­lenges facing a family office will be what is known as sourcing and risk diver­si­fi­ca­tion. The latter aspect results for an insti­tu­tio­na­li­zed private equity player from the number of invest­ments per fund — usually at least ten invest­ments are targe­ted. As an inves­tor, the family busi­ness owner must be aware of the poten­tial clus­ter risk he is taking if he invests in only a few, perhaps even only one, direct invest­ment. In most cases, howe­ver, this idio­syn­cra­tic risk is deli­be­rate and is consciously accepted. After all, the forma­tion of the asset base was based precis­ely on such a deli­be­rate focu­sing of risk. Sourcing descri­bes the problem of how best to access invest­ment oppor­tu­ni­ties. Often, family entre­pre­neurs have large networks and well-known names that faci­li­tate access to the compa­nies. Howe­ver, the chall­enge remains to be able to see a large enough number of targets to be able to make a ratio­nal selec­tion. This is where these networks often help.

With regard to the expec­ted returns, amounts of up to 20% are circu­la­ting on the market. Howe­ver, such figu­res can usually only be gene­ra­ted if the company is sold again within a mana­geable time frame. Howe­ver, this would deprive family offices of their key advan­tage of not being tied to fund cycles and not being subject to often inef­fec­tive selling pres­sure. In the private equity indus­try, too, there is an incre­asing tendency to switch to fund struc­tures that include an ever­green struc­ture, as is usually the case with family-owned companies.

These are just a few aspects of the inter­ac­tion between family offices and private equity. The market has tremen­dous momen­tum, as eviden­ced by new fund struc­tures and invest­ment vehic­les. We hope that the present work can give you a deeper insight into this dynamic.

Theo Weber