Family office investment in private equity goes beyond simple asset allocation


Suppose you run a family business. Suppose this company is the second largest manufacturer and distributor of instant coffee in Singapore, with a coffee, tea and cereal distribution footprint throughout Asia. You are independent, enterprising and forward-looking. You build a strategy to take the business to the next level. Then you get an offer you can’t resist. You sell: it transforms you and your family overnight, from owner-manager to investor in charge of a very substantial post-liquidity heritage.

This is the story of David Teo and his family, the founder-managers of the Super Group. The company made headlines in April 2017 for attracting the highest-value takeover bid on the Singapore stock exchange of $1.45 billion, before its new owner, Dutch drinks giant Jacobs Douwe Egberts, who is himself part of the Reimann family’s beverage empire, does not take the company public. again.

Reflection time
Whether it occurs as a result of a carefully planned and delivered strategy or in response to an unexpected supply, a liquidity event creates a tabula rasa in terms of investing and a space for reflection on the purpose of wealth, how it should be invested and with what impact. As such, it can provide impetus for the creation of a formalized family office and governance framework where none previously existed and a renewal of the advisory team that supports the family in its journey.

After selling Super Group, the Teo family went on to found their family and investment office, Apricot Capital. The briefest glance at its website projects a family whose ambitions transcend the branded consumer sector, with investments as diverse as flagship real estate, venture capital interests in TechEd and other start-ups. , private equity, maritime logistics and fund management.

The example of Apricot Capital is just that, an example that cannot even begin to capture the diversity of family office structures, configurations, sizes and strategies. However, it is representative of a broader trend of family offices managing increasingly large amounts of capital internally, with increasing sophistication and professionalism. These families have allocated an increasingly larger share of the “portfolio” to actively managed direct private equity and away from “institutional private equity” via a classic fund-of-funds model.

Recent surveys put the figure of family offices investing in private equity at around 80% and venture capital at nearly 90%. A 2021 UBS Investment Lab survey then identifies private equity as the preferred source of opportunity for more than half (52%) of family offices, of which 47% use a combination of funds and direct private equity, while that 30% focus on direct private equity. investments only.

Among the reasons for this trend, according to a 2021 Goldman Sachs family office report, are families’ dual concerns (contradictory as they may seem) to operate in a prolonged environment of low interest rates and inflationary pressures. growing. As these macro-level considerations are expected to continue into 2022, the demand for outright acquisitions or majority stakes in mature operating businesses with proven cash flows will likely intensify. Family offices with direct experience of running operating businesses are therefore well placed to seize such opportunities and provide more than just “patient capital” to the recipient business – through their expertise in the field, their hands-on approach to value creation and their valuable relationships.
Exposed to higher growth potential, venture capital actions will more likely involve the acquisition of minority stakes or club deals, with more family offices poised to lead a capital raise.

Thematic call
Within private equity, thematic investments in sectors with high growth potential such as digitization and automation, healthcare, new housing and decarbonization are particularly attractive to family offices. This is not surprising, given the socially responsible mindset of future generations and the fact that many of the recent releases have involved young, tech-savvy entrepreneurs, who are now leading a new generation of multi-family offices.

However, with family offices and institutional investors looking for the same transactions, it is a fiercely competitive space. Larger, more established family offices with excellent investor and professional relationships, exclusive deal flows and access to co-investment opportunities (including alongside their fund managers) will be able to easily take advantage of opportunities in the current market. In addition, family offices that have strengthened their internal capacities, both human and technological, will see their investments pay off; with overheated valuations of the most attractive companies and ever shorter due diligence periods, the ability to assess and decide on opportunities with agility and speed will be even more important in the months ahead.

This market dynamism, when coupled with supply chain disruption, labor shortages, inflationary pressures and increasing regulation, is likely to cause potential headwinds to the growth in 2022.

Succession plans
While the desire for attractive returns may be the main draw to direct private equity investments, many families will also treat them as an opportunity to develop and transfer skills to future generations – including through roles within Boards of investee companies – who can focus on their leadership skills and gain exposure to technological innovation. This can accelerate succession plans, providing a credible track record and evidence of leadership readiness for future generations. More often, these opportunities are a component of families building a shared and purposeful vision, which can support families beyond patriarchal models of family governance by encouraging intergenerational decision-making and parallel, highly impactful pathways for generations future realize their talents and vision.

Families are currently managing the largest intergenerational transfer of wealth in modern times. In this context, the trend towards more direct participation in private equity by family offices, with a more concrete involvement and a better alignment between the fundamental values ​​of the family and those in which they choose to invest, will only increase. accentuate. This makes sense in terms of good financial and family governance and can also be reflected in different private equity investment structures, with more active investors than was the case in the transitional limited partner/general partner model.

Antoaneta Proctor and Edward Craft are partners in the London law firm Wedlake Bell


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