Over the past decade, the landscape of family offices in the private equity sector has evolved considerably, driven by the imperative of diversification amidst a financial milieu characterized by persistently low-interest rates and market uncertainties. In this dynamic environment, the growing appetite for alternative assets among these influential asset owners has become increasingly apparent.
At Zero One Hundred Conferences, we’ve proudly collaborated with Steve Balaban CFA, an eminent figure in the field. As an investor, advisor, award-winning lecturer, and Chief Investment Officer of Mink Capital, Balaban is an essential figure for family offices. He provides invaluable advice and consultations to family offices, offering critical educational insights on the complexities of private equity investing.
As part of our commitment to delivering the most pertinent insights, we engaged in a series of insightful talks with Steve, anticipating his exclusive Family Office Workshop at the upcoming 0100 Conference DACH.
Why do you think the interest of family offices buying private equity companies has been growing?
I think the reason private equity has been growing in the family office portfolio since the financial crisis is that you've had fairly low interest rates and you've had the ability for private equity returns to actually outperform the public markets and also to be uncorrelated, depending on your private equity strategy. If family offices can have an uncorrelated asset in their portfolio that adds diversification benefits. This is the underlying main reason.
*To see a summary of how family offices invest in private equity based on three surveys by Citi, Goldman Sachs, and UBS, please see this video: How family offices should invest in private equity.
What are the major challenges family offices face when they decide to invest in this type of fund?
The two main challenges would be knowledge and access. Knowledge is the ability to ask the right questions through the due diligence process to ensure that they find the right funds that are there. Access refers to the difficulty for family offices to get access to private equity fund managers. Some funds are only open to investors that have invested before or only accept very big investors, such as large families or institutional investors.
Even if a family office gets access to a private equity fund, it's difficult to conduct due diligence on these funds. That's what we're going to be covering in the Zero One Hundred Conferences workshops in Vienna and Amsterdam. We will help family offices better understand the private equity fund due diligence process, which includes knowing what questions to ask every private equity fund.
Family offices also have an issue with the fees charged by private equity funds. A lot of family offices created wealth through building their own business. and don't like paying fees to private equity funds to build businesses. The question is, is it worth it to pay the fees to have an expert invest in private equity for you? Well, that's a question that every family must answer.
*Here is a fantastic video on the Seven Things to Look for When Investing in a Private Equity Fund.
And is it worth it? From what you've seen and experiences that family offices have had when throwing themselves into the pool and then going through an expert.
In my opinion, the first thing that family offices should do is figure out what are the constraints for their entire portfolio. What are their liquidity needs? What's their time horizon? Is the goal to preserve wealth for the next generation? What are the tax considerations? What are the unique circumstances? Are there any legal considerations with their portfolio?
Based on the above constraints, they should have a target return for their portfolio that is based on a certain level of risk. Then, once they have an idea of the risk/return profile of their entire portfolio, they should try to figure out how to achieve the objectives of their portfolio. Many times, to achieve the objectives of the portfolio, a family will invest in a mix of traditional assets, such as stocks and bonds, as well as alternative assets such as real estate, infrastructure, private equity, private credit, and other alternative assets.
When building a portfolio, families should think of how private equity can best fit in the portfolio and complement the other asset classes. For example, if you wanted to invest in technology in the US, you may decide to access US technology through the public markets through one of the many public US tech stocks. That being said, if you want to invest in emerging technology in Europe, you may be able to better access it through venture capital. If you are truly trying to build a diversified portfolio, in addition to looking at the various asset classes to include in your portfolio, you would also want to at the sector exposure and the geographic exposure. Private equity may be able to help you access certain sectors and geographies better than the public markets.
I think it's dangerous sometimes when a family office says, “I want to put 20% of my portfolio in private equity”, and they just invest in a generalist global private equity fund, and then they invest a big portion of their public equities portion of the portfolio in large global stocks. This may cause family offices to have public equity and private equity investments that are highly correlated with each other. If there's a large correction in the markets like a financial crisis, having a highly correlated portfolio be a big problem. believe it is important to fully understand how private equity correlates with the rest of your portfolio.
On that line, do family offices specialize in sectors or just invest in different things?
When it comes to private equity, I would like to highlight two different types of family offices The family office that invests directly in private companies in the same sector where they created their wealth, and the family office that invests in private equity funds with the objective to diversify their portfolio away from the sector where they created their wealth.
The first type of family office may invest directly in an affiliated business to their family company. Maybe in a supplier, a customer, or a similar type of business. The family knows the business, and sometimes can have a family member sit on the Board of the company that they invest in.
The second type of family office may have made their money in a manufacturing business in the US and may want to diversify this exposure by investing in private equity funds in Europe or in Asia, in sectors that are uncorrelated with the manufacturing business. Since the family office wouldn’t have many connections in new geographies, they may want to invest in funds in the new regions. Both types of family offices are interested in private equity but have different strategies for accessing the asset class.
Mark your calendars for February 28th, 2024, as Steve Balaban takes the lead in facilitating the workshop, 'How Family Offices Invest in Private Equity and Venture Capital in North America, Europe, and Asia,' at the '0100 Conference DACH.' Don't miss the second part of our insightful conversation with Steve, releasing on December 19th, where we delve into the distinctions between family offices investing in buyout private equity funds and VC funds.
