Abby Schultz

Many single-family offices are planning to boost their investments in private equity over other private-market strategies, increasingly through direct investments and co-investments alongside funds, according to a study of 75 global offices.

These family offices are far from abandoning public stocks, but 40% of those surveyed expect private equity to be a "core component" of their investment strategies in the next two years, said a report published Tuesday by alternative-investment firm Bastiat Partners in Los Angeles and PE firm Kharis Capital in Brussels.

Single-family offices manage investments for the ultrawealthy and are becoming a growing force in private markets, "reshaping the standards for strategic partnerships among sponsors, consultants, companies, and investment banks," the report said.

Many are doing this through direct investments in companies through individual deals and by co-investing alongside PE firms, strategies that provide them with more control over their investments. In the next two years, more than 50% of those surveyed plan to go this route.

The findings were consistent with a larger survey of 360 global single-family offices and private multifamily offices with an average AUM of $1 billion that was released in late September by RBC Wealth Management and Campden Wealth.

In that report, family offices said PE and venture capital offered the best long-term risk adjusted returns followed by public stocks. Unsurprisingly, 42% expect to increase their private market exposure this year, while 19% expect to boost their exposure to public stocks.

That may appear to be the wrong choice. Consider that developed market public stocks returned 17.8% on average for the family offices surveyed by RBC and Campden Wealth last year, compared with an 11% return for direct investments in PE and a 7% return for PE funds.

"Certainly, we're aware of the shift in interest toward public markets, especially with recent performance metrics showing higher returns there compared to some private investments," says Nader Afshar, managing partner of Bastiat, which only works with alternative investments.

But the outperformance of public markets "can sometimes be an indicator that private markets, which tend to lag behind by a few months or more -- particularly in less efficient asset classes -- may soon follow suit, " Afshar says. "This time lag can present unique entry points, especially in sectors where private market inefficiencies reward thoughtful, long-term investment strategies -- a natural fit for patient capital like that of family offices."

Of the family offices Bastiat Partners and Kharis Capital surveyed, nearly 58% are based in Europe and nearly 31% are in North America. But they also drew from their own experience in the private markets and interviews with families to expose more subtle trends.

Among these: families thwarted by the lack of public offerings and mergers and acquisitions deals to exit their private investments are coming up with workarounds such as teaming with firms to create so-called continuation funds and providing loans backed by the net asset value of a private-equity fund. They are also getting involved injecting capital into companies with "solid fundamentals but flawed capital structures," the report said.

Write to Abby Schultz at abby.schultz@ barrons.com

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November 05, 2024 12:52 ET (17:52 GMT)

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