Harmonising family offices with private equity for mutual growth

10th April 2024

Harmonising family offices with private equity for mutual growth

In recent years, family offices have emerged as formidable players in the global financial landscape, managing substantial wealth on behalf of ultra-high-net-worth individuals.

Although there is still a preference by some family offices to adopt a more hands-on approach by directly acquiring private companies and properties, many are mitigating risk by co-investing with seasoned private equity professionals in direct investments. This co-investment approach allows family offices to benefit from expertise while optimising tax efficiency, agility, and limiting liability. 

With their growing prominence, family offices are diversifying their investment strategies, seeking alternative sources of return in today's rapidly evolving investment landscape. This shift is creating new opportunities for alignment and synergy between family offices and the private equity and venture capital sector. Families are participating in private equity and venture capital investment by leveraging multi-family offices that service the needs of two or more families. The multi-family office service has become a fast-growing wealth management segment in South Africa and Africa, which is not surprising given that the AfrAsia Bank Africa Wealth Report 2021 predicts that total private wealth in Africa will rise by 30% over the next eight years, reaching USD 2,6 trillion by 2030. According to research by Knight Frank, between now and 2026, less than 4,400 individuals in Africa will become ultra-high-net-representing the fastest growth rate in the world after Asia at 33%.

This rise in family office wealth has led to a significant increase in their private equity allocations. According to the latest surveys, private equity now represents a major portion of family office portfolios, second only to traditional asset classes like equities and fixed income.  

Understanding family office priorities

Private equity and venture capital managers are encouraged to be mindful of the peculiarities of a family office investor. Family offices are looking for value preservation and legacy protection. At the same time, they are looking for structures that will allow them to appoint professional, expert advisors while ensuring that the governance structures provide them with control and flexibility in response to the changing market dynamics.

A growing number of family businesses are establishing special-purpose vehicles that invest as limited partners in fund-of-funds structures and directly into private equity and venture capital funds. Driven by a desire to align their investment with positive social and environmental impact, a growing number of new generations, and ESG-aware family office stewards, family offices are increasingly attracted to the impact investing strategies offered by private equity firms. This allows family offices to leverage existing expertise, track record, and relationships of established fund managers to make a meaningful contribution, rather than designing their own impact programmes.

Tailoring the offering to family offices

To attract family offices, fund managers should prioritise flexibility, transparency, and innovation in their approach to structuring and administering funds. Family offices value agility and simplicity, and are often wary of complex fee structures or opaque investment vehicles.

In addition, family offices, particularly single-family offices with permanent staff, have a strong need to ensure the interests of the family and the staff are aligned. Incentive structures that address this alignment are paramount. While employee share incentive structures may not be the best solution for all, family offices can leverage existing private equity carry structures and incentive structures to fulfil this need. These incentive structures need to be tailored for longevity, flexibility and efficiency.

Ultimately, successful engagement with family offices requires a deep understanding of their goals, preferences, and constraints. By listening attentively to the needs of family offices and demonstrating a commitment to innovation and partnership, private equity fund managers can unlock significant opportunities for growth and collaboration in the evolving landscape of family office investing.

Written by Michael Denenga, Partner & Alyssa Smith, Senior Associate at Webber Wentzel