A very private affair: The rise of private equity investing by family offices
A very private affair: The rise of private equity investing by family offices
With private equity an asset class proving increasingly popular among wealthy families, Executive Director for Family Office, Richard Joynt draws on his experience to explore the reasons behind its rise and how wealth professionals should consider responding to their client's changing needs.
Once an asset class seen as 'niche' and 'alternative', private equity is now a go-to for investors, offering them the opportunity to flexibly and successfully scale-up their investments. As noted by The Economist, "Private equity has prospered while almost every other approach to business has stumbled."
Over the past few years, volatile market conditions have set in motion a relentless search for yield and predictable rates of return. Private equity has - particularly in the European and North American markets - provided a lucrative sanctuary. It has performed consistently well over the last 20 years, with the industry more than twice the size it was a decade ago and valued at over US$3 trillion in assets. Among the clamouring equity hordes, family offices have emerged as notable players, and successful ones at that.
According to data from UBS and Campden Research's The Global Family Office Report 2018, family office investments in private equity heralded a significant average return of 18 per cent in 2017. The same report also revealed that allocations to private equity continue to climb, accounting for 22% of the average family office portfolio globally (of which 80% met or exceeded performance expectations). Yet what does this pursuit of what was once considered a non-traditional asset class mean for private wealth professionals?
The shifting role of the wealth professional
As the allocations that family offices put towards private equity investments grows, the respective allocation towards other asset classes (discretionary portfolio management, real estate, hedge funds, and commodities) decreases. Consequently, asset managers and family office professionals need to appreciate that different skill sets are needed when reviewing, entering into, and disposing of private equity investments compared to other asset classes.
Wealth advisory practitioners to ultra-high net worth families in particular, need to be aware of what is driving their business decisions and their asset allocation choices. They need to increase exposure to the pipeline of private equity opportunities, and have open dialogue with clients about which fund managers are raising funds, and how the client can gain access to the best performing.
Some of the best funds are only open to institutional investors, or have very high minimum asset participation limits, but sometimes these can be handled through syndicated investment groups.
In practice: Family offices and private equity
In order to comprehend the nature of services required to fully support family offices turning to private equity, at Ocorian we are in a privileged position to provide family office expertise and first-hand insight into the decisions that are driving that choice.
As experienced family office professionals, we have been assisting our family office clients execute private equity investments for decades. This experience has enabled us to gain a real appreciation of the risks involved, the profiles of the main private equity fund managers, and perform asset performance monitoring services for our family office clients.
Our Private Client team recently had the opportunity to demonstrate our strong capabilities in the private equity and family office sectors in connection with an ultra-high net worth client. The client in question and the individuals within their family office have strong track records in acquiring and enhancing the value of trading businesses in the following sectors: consumer goods and services, healthcare services and business services.
Catherine Prendergast (Associate Director) and I have worked extensively with the client, a sophisticated member of a prominent wealthy European family, and his recently-founded family office which is headquartered in London. We have assisted them with the execution of a number of direct private equity investments that totalled £180m over six months. On our cooperation, the client's family office said, "From the very start Ocorian has been an invaluable partner to our family office. From easing the creation and incorporation of our core entities (trusts, companies, LPs, etc.), to thinking through a robust and practical investment process, to understanding our financial, tax, legal, regulatory goals, and to making their organisation work for us, we couldn’t be happier… We have yet to come across a financial, legal, HR, tax or other issue they haven’t seen before, and they efficiently help us get to solutions and then execute transactions. And finally, and very importantly, we trust their judgement, integrity and discretion without question. Couldn’t ask for a better, more valued added partner as we continue to grow and change."
As a fundamental pillar of our service, we worked closely with the client's 'big 4' tax advisers to ensure implementation of an efficient operating structure for the asset base. A senior director at one of the 'big 4' international accounting firms added, "The team balances providing insight themselves with asking the right questions, at the right time to advisers. This thorough and balanced approach ultimately enables transactions to happen without undermining the integrity of structures and the legal framework.”
We were able to form key partnerships with all advisers to the structure, including its key banking partners, to ensure transactions are effected within required timescales. The focal bankers to the client and structure commented, "The specialists from Ocorian are very professional, reliable, pro- active partners when it comes to the implementation of complex structures and projects. Their in- depth expertise in tax, legal and financial matters makes life easier for their clients as well as for related service providers. The Ocorian team is foreseeing potential challenges early in the process and addresses them accordingly. There are no negative surprises. It is always a pleasure to work with them and find together the best solutions for the clients."
Speed of response is a critical factor in these relationships, ensuring you are available to discuss possible investments and execute key transactions and their associated documents. In this case, we engaged with UK and Jersey lawyers to document essential transactions. Ogier, the client's Jersey legal counsel added, "Ogier has worked closely with the Ocorian Private Client team in relation to the client's structure over the past year and a half, providing a range of Jersey law advice. The team is clearly committed to providing an excellent client service and is responsive and proactive, which ensures that transaction deadlines can consistently be met. It is clear that the team possesses a good cognizance of commercial issues and is able to process and effectively apply the advice it receives."
The client also commented, "Richard Joynt and his team at Ocorian assisted me in the establishment of a family trust and subsequent deployment of capital into private equity opportunities. During that time, I have found them to be very professional and commercially minded. They are always very responsive and have executed transactions in a very efficient manner well within required timeframes. I would definitely recommend Ocorian to other high net worth families that I know."
As family office allocations to private equity funds correlates with recent global records for private market fundraising and shows little sign of stopping, there is a notable need for expertise that can assist with the procedures involved.
With dedicated professionals in our Private Client division that have clients who are heavily involved in this asset class, we have the necessary experience to assist with executing private equity investments. We also have the benefit of working with our colleagues in the Alternative Investments division, who have day-to-day experience in running the back office processes for the offshore aspects to the funds they administer. To learn more about our Family Office services, click here.