Family Office increases their preference for Private Equity
Moris Beracha.- Forbes magazine recently published an article stating that in a survey of 101 family offices with an average asset of around one billion dollars, nine out of 10 respondents said they were investing in Private Equity funds. Likewise, it shows that about 70% of the respondents said to hold placements of between 10% and 20% of the total in investments in Private Equity; while 20% of the family office said they had 20% of their portfolio or more in Private Equity
What raised my attention the most of the research is that about three out of five of the respondents said that in the next two years have thought of increasing its placements in Private Equity funds.
There are several definitions of family office, but we could say that this term has to do with the constitution of a private platform that assists the families of high incomes in the administration, organization and maintenance of their assets. At the same time, this platform seeks to achieve scale benefits in terms of purchasing power of new resources as well as in terms of operational efficiency. Many of these family offices are located in the United States, Switzerland and London.
Why has the Private Equity business model liked so much in this sector? That is the question we must ask ourselves. The answer may lie in the fact that, according to the survey, seven out of ten respondents indicated that the result of their investments in these funds was higher than that they used to get through their traditional investments.
In the specific case of Spain, I recently read in an article published by the business newspaper Expansión that large family assets were increasing their appetite for the so-called venture capital funds. There are several reasons in the environment that explain this behavior.
The first is the fact that the financial crisis that hit Europe is already receding and investment is being reactivated. But there is also the fact that low interest rates reduced the returns on other investments that were considered safer; which has encouraged the search for alternative assets to diversify the portfolio and achieve greater profitability.
A study called The Unicorn Economy: Opportunities for Spain on seed funding, determined that investments in Venture Capital or Private Equity have soared 300% in just two years. 27% of the investment in Venture Capital in Spain comes from public funds; while family offices — also called small investment management agencies — and private investors finance another 25% of the total.
It is important to take into account when you are part of a family office that the millenium generation may not be interested in managing business as it has been traditionally done. Hence the vision of the patriarch or the matriarch of the family will be fundamental to accommodate new ideas that will surely be at risk.
In some cases the investment in traditional assets may work but in other cases it may also be positive to use Private Equity as a business model that could increase assets or even contribute to the philanthropic work of the family.
On this last point I have to say that one must be very careful since an initiative with excellent intentions to influence within society can end up being a financial disaster that could end the main objective.
Thus, it is essential to understand that when a family office decides to invest in a Private Equity fund, it must have the right staff. To do this, we must develop the expertise or found partnerships, with a highly trained staff that at least minimize the risk of a bad step. A quality management is the only thing that can guarantee a high return. This is fundamental for those family offices that want to continue to exist over time and from generation to generation.
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