Family Offices and High Net Worth Individuals – The Holy Grail

For those in the private equity industry, Family Offices and High Net Worth Individuals (“HNWIs”) are some of the most coveted relationships to have. These types of investors can be a significant source of funding to private equity firms and private companies. In addition, unlike traditional institutional investors, family offices and HNWIs can make investment decisions quickly and be patient financial partners for the long term.

The vast majority of HNWIs have been business owners themselves and understand the opportunities in privately held businesses that aren’t readily available in publicly traded equities. For example, private equity investments grow in value more consistently over time as compared against public equities that experience frequent volatility and are more susceptible to macroeconomic forces. Private equity historically has also offered better returns than public equities.

In a recent survey by Somerset Capital, family offices showed a continued strong interest in private equity investments with nearly half of the respondents stating they intended to increase their exposure to the asset class. Particularly noteworthy was that a large majority indicated growth equity transactions as their preferred investment style. The least favored investment styles were large buyouts and venture capital.

And just how common is private equity investing among family offices? According to a Grant Thorton survey, approximately 80% of family offices invest in private equity, which has increased significantly since 2009 when only 30% reported exposure to the asset class. Nearly one half of all family offices surveyed invest 10 – 25% of their portfolio in private equity.

HNWIs, as reported in the World Wealth Report, have aggregate investable assets of $4.6 trillion allocated to alternative investments, which includes private equity. Private equity can be classified as venture capital/early stage investing or more traditional private equity investing in growth stage or large mature companies with significant cash flows. Although the predominant way HNWIs and family offices invest is through private equity funds or fund of funds, more than half report investing directly in private companies.

For private companies in particular, access to family offices and HNWIs is the Holy Grail. These investors are typically patient, less demanding and look for their investments to build value over time; they’re not looking to make a quick buck. They are also well aware that they are trading liquidity for a higher return and are predisposed to remain supportive to management until the optimal exit can be pursued.

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