Family offices: The IT crowd

“I felt naked walking into parties saying I don’t have a family office,” David Rubenstein, co-founder and co-executive chairman of The Carlyle Group, told in the International Finance Corporation’s global private equity conference earlier this year, explaining why he had joined the growing throng of high net worth individuals who are institutionalizing the management of their fortunes.

Rubenstein expects family offices to become an increasingly important source of capital for private equity, given they tend to be more flexible and have a greater risk appetite than other investors. Such characteristics should make this investor group more open and adaptable to opportunities in emerging markets – something that EMPEA’s latest global LP survey appears to confirm. More than half of respondents said they planned to ramp up emerging markets PE exposure over the next two years, with family offices the most bullish.

The Rubenstein family office is among those making commitments in emerging markets. It comes as no surprise that groups within emerging markets are doing the same. UBS and Campden Wealth’s recently published 2019 global family office report found that family offices in Asia Pacific and emerging markets were the strongest performers globally last year – because they have higher allocations than their peers to direct private equity investments, developing markets public securities, and commodities.

Asian family offices specifically generated a 19% return on their direct PE investments – the highest return of any asset class in any market – with fund commitments delivering 9%. Their combined growth capital and venture exposure is comfortably the highest globally: 77% of Asian respondents to a survey that forms part of the report are invested in growth assets, ahead of Europe on 73%, while 66% are in VC, ahead of North America on 62%.

There is robust appetite among investors globally for strategies that tap into technology-enabled growth and emerging markets offer this as an add-on to general increases in household incomes and consumption power. It stands to reason that family offices in Asia are well-positioned to capitalize on this opportunity: they are familiar with macro and micro trends within the region; they have core operating businesses that can provide deeper insights; and their extensive professional networks can deliver access to deals that might be beyond the reach of others.

These dynamics are already apparent in the family offices that have formed around the wealth of China’s first-generation internet entrepreneurs. Having made their own journey from start-up through institutional funding rounds to IPO or trade sale, these individuals are recycling a portion of the proceeds into succeeding generations of companies. They rely on their networks for deals, share allocations among friends and family, and hopefully everyone enjoys the upside.

The next step is institutionalization and it can happen in several ways. Entrepreneurs establish formal family offices rather than dipping in and out of deals; they build up a track record and start raising capital from third-party investors, turning the family office into a venture capital firm; and high net worth individuals or families coalesce around a single management team, in effect creating a version of a multi-family office that lives in part on deals that come through members’ networks.

For those that don’t become a Shunwei Capital (family office turned VC firm) or a Jeneration Capital (multi-family office turned private equity firm), the levels of participation are nuanced. Gaorong Capital, for example, has two classes of entrepreneur LP: those that are highly involved in deal sourcing and due diligence processes – whether they investing individually or through a family office or go into a sidecar vehicle which doesn’t charge fees or carried interest – and those who are largely passive and get treated as standard family office LPs.

The problem is that not all family offices constitute smart money. There are exclusive networks, some built around industry verticals such as technology, through which high net worth individuals can identify direct investments. However, the quality of deal flow – indeed the quality of the networks themselves – varies markedly. It is no coincidence that when industry participants talk about inexperienced investors flooding into funding rounds at crazy valuations, they are often referring to family offices.

The UBS-Campden Wealth study doesn’t capture the full extent of this phenomenon; the survey covered 360 family offices globally and on only one-quarter are based in Asia Pacific. But the instincts reflected in the headline numbers offer a snapshot of behavior all along the food chain, from established, professionally staffed family offices to those that barely qualify for the designation. Some will profit from their forays into direct VC and growth deals; others will get burnt.

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• Topics
• LPs
• Technology
• Early-stage
• Expansion
• Asia
• Family office