Family Offices Continue to Favor Private Equity for High Returns

Private equity funds will continue to appeal to family offices for their potentially high returns, with the average allocation projected to rise 73% next year from 2017, according Campden Wealth.

Last year, the average family office portfolio invested US$51 million in private equities, trailing behind only public equities. The figure will climb to an average of US$68 million in 2018, and to US$88 million in 2019, according to a report released Tuesday by the London-based information provider on global family offices.

Family offices’ increasing investment in private equity is primarily driven by the consistent, oversized return of this asset class. In 2017, the average private return of 76 family offices surveyed by Campden Wealth from May to July this year was 14%. The respondents predicted this year’s average return will be 14%, but will rise to 18% next year.

“It is also interesting to report that a significant nine out of 10 family offices’ private equity investment returns either met or exceeded expectations this last year,” says Rebecca Gooch, director of research at Campden Wealth.

The report also incorporates findings from interviews with 13 family office executives, investment advisors, and wealth managers.

Health care is the most popular sector for family offices’ private equity fund investment, with 55% of respondents choosing to park their money in that area, followed by technology (52%), and real estate (52%).

One marked trend is the growing demand for co-investment opportunities, says Jim Burns of KKR & Co., the New York-based investment firm that supported the Campden report.

“Private equity co-investment has emerged over the last few years as a promising complement to investing in private equity funds for those investors seeking additional ways to gain exposure to the asset class,” he says.

More than two-thirds of family offices surveyed expect demand for co-investing opportunities will increase over the coming 12 months, while none argued that the demand would decline.

In choosing co-investment partners, 86% of respondents say the most important criteria is one’s track record for value creation; 84% prioritize industry-related experience; and 84% look for co-investing experience.

Of course, Gooch says, “Financial alignment is also key.”