Q&A: The draw of private markets for family offices

Q&A: The draw of private markets for family offices

Family offices often have little to identify them except a small brass plate on a nondescript building. But looks can be deceiving. These offices often have considerable assets under management to deploy in alternatives, including private equity.

Family offices are motivated by wealth preservation for future generations, so liquidity constraints aren’t as keenly felt compared to some institutional investors that have liabilities such as pension funds to match.

Antonio Curia is the executive director of London-based Wimmer Financial, which advises family offices on their investments. His role focuses specifically on private market allocations. His 20-plus year career in private markets has included working for Brazilian PE firm FIR Capital Partners.

We asked Curia about his clients and their goals. The following interview has been lightly edited for clarity.

PitchBook: What is the general sentiment regarding private equity among family offices?
 

Curia
Curia

Curia: Family offices are all different, so it is important to understand risk preferences and liquidity requirements. There is a diverse set of private market strategies available to investors to meet these different needs. Within the big basket of private markets, PE is an asset class that has been added to many of my clients’ portfolios, especially in the last couple of years. We are also developing a new plan for the coming years related to this asset class.

My advice for family offices is to remember that while investing in illiquid, closed-end funds for an average of 10 years can be daunting, it is critical that PE vehicles are afforded the time to drive performance. From the GP’s perspective, having this headroom to invest, manage and exit businesses across a long time frame gives them the space necessary to create value.

From my client’s’ perspective, affording GPs this time can help them reap the benefits from the return profile—the J-curve. While LP returns will be negative in the early days of the fund due to capital calls, returns will steadily increase into the positive territory toward the end—assuming good performance—as the fund stops investing and begins distributions. While this lack of liquidity can be concerning, the growth of the secondary market in recent years has helped alleviate this to a degree.

Why have family offices been drawn to private markets?

The track record of certain private market strategies could prove beneficial, particularly in an environment where bonds and stocks are underperforming. PE and private credit outperformed global public equity and credit markets in 19 of the prior 20 years. The macroeconomic environment is certainly helping us towards allocating to private markets.

Adding private markets can help family offices broaden their base away from an ever-shrinking set of listed companies. It also means owning a wider and more diverse selection of the investment landscape, including access to companies and industries too early for public markets.

This diversifies and spreads risk at a lower level throughout the portfolio, rather than concentrating it in one area.

The premium placed on adding value highlights that family offices appreciate private markets as an area that can generate true operational value for businesses rather than just produce returns through financial engineering.

Do family offices have preferred sectors or managers within private markets?

The main objective of the client’s investment has been on what we think will be one of the major trends in the coming years, such as sustainable investing and anything linked to ESG strategies. The sectors [in which] I’m mostly seeing interest from family offices are real assets such as renewable energy infrastructure of various types including wind and solar.

I work very closely with managers that I know well [who are specialists] in the asset class, but predominantly in the primary market as opposed to secondaries. We can mitigate more risks by building up a trustful professional collaboration directly with the specialist in the field.

On manager choices, we try to apply a criteria of diversification either on size or in terms of the expertise they can offer us. This means we will have relationships with core GPs with whom we’ve already got a long track record of working with, and then we will begin new relationships to build up for the years ahead. This takes time, but we are not rushing to our recommendations.

In terms of deal size, which part of the market do family offices want to take part in?

I think the sweet spot for my clients is within the mid-market, whereas the big ticket investments are taken by institutional investors such as pension and insurance funds. Another benefit of the mid-market is that we get to work with GPs with whom we can have words around the table with in order to have a much more active way of being a LP. I don’t think you can make any substantial change as a minority LP, but it varies from family office to family office.

Featured image by dgmata/Shutterstock

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