Family Offices around the world are being very optimistic about making investments in Venture Capital. The pandemic has also accelerated the interest of family offices in the venture capital and according to financial experts, they are going to stay in this industry for long.
Family offices offer a perfect way to connect with successful professionals, entrepreneurs, businesses, and individuals that have the same perspectives. Over the last decade, the family offices have been producing in-house venture investment capabilities and they are also increasing allocations to venture. Despite the uncertainties caused by the pandemic, the family offices are still positive about investing.
The Rise of the Family Office Venture Investments
Family Offices offer a wealth management system where the individuals and families with very high net-worth come together with their liquid wealth with an aim of safeguarding and growing it. Family offices can be single-family offices or the multiple family offices where different families come together to create a single office.
According to Ernst and Young’s Family Office guide, there are more than 10,000 Family Offices across the globe with around $5.1 trillion of ultra-high net-worth wealth. During these years, the FOs have been more active in VC, especially in early-stage companies through funds and direct investments. The FOs have also been performing the roles of strategic advisor to the firms they are investing in and they see the potential of favorable returns in the asset class.
The above graphical representation explains how the number of direct VC deals have increased over the years over the decade. It is also believed that the Family Offices will continue investing in VC because of the exceptionally large returns that were generated by startups during the economic downturn.
On an average, the VC investments make up around 10% of the overall portfolios of the participants, which is divided between funds (46%) and direct investments (54%). Around 92% of family offices are co-investing with venture funds and other families. When we talk about the venture portfolio of the FO, the co-investments make up around 19% of the share. See the chart below to get an idea about the average FO portfolio distribution in 2019:
Most of the FOs are most active in funds and direct deals; around 76% of them invest in the companies directly and around 26% of them source their own opportunities. The hotspots for the deals are Europe and North America. Also, according to stats, 91% of FO are the most active in early-stage venture investments that have delivered favorable returns. 80% of FO invest in funds and around one third of them believe that the highest returns in the coming years will be from the emerging managers.
Trends in family office VC investments
The Silicon Valley Bank, Campden Wealth, and FINTRX in partnership with Charles Schwab recently released reports that evaluate the global trend in 2020 regarding the FO investment. Following are some of the FO trends in direct and VC investments:
*Family Offices are taking interest in direct investments:
It is noted that there is an increased interest by FOs in direct investment opportunities during this decade. Though there was increased competition and there were some notable barriers, there was still continuation in this trend. According to the survey by FINTRX, 83% of the FO around the world are investing directly while 30% of the multi-family offices are doing the same too. The Campden’s reports show that 76% of the FOs invest directly in the companies while 26% source the opportunities themselves.
*FO investors are preferring early-stage venture:
Though early-stage venture investments are risky, they tend to deliver stronger returns for FO investors. The data from Campden and FINTRX show that the majority of the single FOs have made investments in earlier stage seeds. The FOs are a good option to deliver smart money and patient capital to the startups during this pandemic. Apart from the providence of capital, 70% of FO also provide strategic guidance, 70% of them facilitate investment networking, and around 70% participate on boards.
*VC investment is on rise:
Based on strong historical returns the FO have been increasing the allocation of Venture Capital. On an average, the VC investments constituted 10% of their total portfolios with 54% on direct investments and 46% on funds, as stated in the above section.
*Average returns of 14%:
Campden surveyed the family offices and reported that they had an average 14% return rates within the venture portfolios. The minority stakes direct deals had a return of 17% while the fund investments had 16% returns. These returns were recorded for more than 85% of the respondents surveyed by these companies.
*ESG investment opportunities:
The research also showed that 47% of the FO that were surveyed were involved in impact and ESG (Environmental, Social and Governance) investments. The popular industries or sectors in this regard are energy, healthcare and wellness, sustainability, and food and agriculture.
*An increased desire of co-investing:
Along with the rise of direct investment deals, there have been a desire to co-invest in these opportunities by the FO. The data shows that around 42.5% of FO that invest directly have been also involved in investments alongside other private equity, family offices, real estate investors, and venture capital. Co-investment is quite popular because it offers a lot of benefits such as more formalized structures, high-value deals and transactions, and governance disciplines.
Why Family Office investment in VC is different from other investments?
An analysis was done by Crunchbase News in 2018 which shows the progression of FO venture investment from 2010 to 2017. Following is the chart that will help you understand the growing trend during these years:
You might be wondering the effects and meaning of the increase in FO investors for venture capital. Following are some features that make this type of investment unique from others:
Long term capital:
One of the main benefits that the Family Offices offer is that they are long-term focused. FOs have always existed to grow, preserve, and shift wealth to the next generations. Venture Capital firms offer short term capital so if you’re in the short game, you must consider them. FOs have a different approach to investment opportunities as they concentrate resources on such opportunities.
However, it shouldn’t be mistaken that FOs want their capital to be stuck forever. Just like any other investment companies the FOs also develop objectives for different types of investments. As family offices are joining the VC investment landscape, the startups will get more opportunities for getting funds.
Close relation between founders and family office:
In addition to the connections and insights of the family, the founders benefit a lot from the entrepreneurial characteristics of the founders of the family offices. Family offices have this edge over the VC firms because they provide strategic introductions, advice, surgical focus, and capital beyond early-stage investing. So apart from funding you can experience networking, mentorship and experience too.
The family offices use their professional ties and personal networks with local business activity to source the deals. The FOs also take much interest in each company and portfolio and thus invest capital in local ventures in order to keep themselves updated with the company developments.
Family offices are not financial partners, they are strategic partners:
Like explained earlier, family offices do more than just providing capital to the firms. The early stage companies should know that a family office has long term plans and they want to deliver long time value. The firm will have access to the network of the FO to provide market intelligence, strategic advice, and other benefits that require proper insight.
Family Offices are very interesting as you get to know more about them. They provide an opportunity to grow; you get to network with other individuals and professionals and get invitations to events. A family office keeps you because it really wants you to be a part of the team and not just because you’re just another portfolio.
As the roles of direct investment and private equity within the family offices continue to progress, the investment advisors and the families, both have a lot to consider. The family offices represent long-term and most patient sources of capital in the market.