Family offices and the private growth landscape
The private growth capital landscape can typically extend to venture capital, growth equity and private equity funds. These on the whole continue to serve the private growth market well as resilient financing options. Nevertheless, of late we’ve seen entrepreneurs venture further, seeking out alternative capital arrangements.
Indeed as some funds dialed back on investments over the course of 2020, the COVID-19 situation has presented founders and entrepreneurs with an undeniably challenging funding environment, even with government support programmes such as CIBLS and the Future Fund, as well as support from the British Business Bank, providing some relief.
One alternative capital source that has been quietly building its status with growth businesses is the family office.
“The family office community is growing rapidly,” says Jon Edirmanasinghe, Partner. “Entrepreneurs more and more are selling businesses, realising liquidity and are looking to deploy it into a number of different options, not just the public markets.”
Evolving with the private markets
Historically, family offices have focused on liquid bond and equity markets, passive alternative investments, such as allocations to hedge fund and private equity managers and direct property investments. But as private markets have evolved, increasingly family offices are favouring direct investment into growth stage businesses. Family office investments into European growth companies has risen five-fold in the last five years.
An interest in particular in impact investing – backing ESG-driven SMEs – seems to be driving this trend. Successful entrepreneurs tend to set up family offices, and many that built their fortunes in tech are often keen to offer their experience and innovative mind-set to help promising, purpose-driven growth businesses.
It’s important to assess one’s options when seeking funding from family offices. Family offices tend to be hard to categorise: some are sector specific, others sector agnostic; some merge their ESG-focused and philanthropic aims, others do not; some invest in early stage companies, others favour more established businesses.
That said, some general patterns are emerging in the sector, not least its increasing professionalisation. As generational wealth transfers grow – according to Campden Wealth data – the 7,300 family offices globally account for $5.9tn in assets held and a technical net wealth of $9.4tn1 – many family offices have been recruiting outside of their normal remit, finding ex-VC or private equity professionals with direct investment expertise. This has provided these family firms with new agility in identifying opportunities to back and guide ambitious private growth businesses.
Investment strategies and their advantages
While family offices do often compete with private equity and VC firms, their investment strategies tend to vary. Again, this is something that founders and entrepreneurs should be aware of when seeking funding. For instance, while private equity funds normally seek a set term investment (say, three to five years), a family office can be more flexible. And this can often be more in line with the natural progress of the company, aligning with founders’ growth plans. As such, an advantage that family offices can offer to entrepreneurs is avoiding that sometimes difficult disconnect between investors requiring a shorter-term exit and founders with a longer-term goal.
Moreover, the more accommodating and flexible nature of family offices is largely due to the fact that their primary aim is the effective handing of wealth from one generation to the next. These offices are not under pressure to generate a more immediate return on investment to any external parties.
It should be noted that while family offices can prove suitable long-term partners, they are equally as agile in shorter-term investment scenarios, too. Many family offices do tend to have a longer-term outlook, but even if they do initially invest planning a four-five-year cycle, they can allow for a changeable timeline to accommodate for changing situations.
A family affair
Family offices’ ability to take a more flexible and collaborative approach to their investments is reflected in the fact that they tend to hold portfolios that are weighted for a more malleable outlook, thus providing the assets they hold with more stability.
This is due to the greater level of security that comes with a family office’s unique situation of being run in the interests of just the singular stakeholder with the objective of the maintenance of wealth through time. This stands in contrast to some fund managers who may pull out of investment (if there is enough liquidity) during setbacks for a company in order to placate the varied voices of those who’s money they manage.
Jamie Blewitt, Head of Alternative Capital, says: “The difference with family offices generally is they invest in assets that they subsequently do not need to liquidate. They can provide a different kind of capital that most institutions cannot.”
The advantages of family offices as a source of growth capital funding are clear. Their presence, not so much. It’s traditionally a discreet sector and as mentioned one with a wide variety of investment strategies. As such it is a difficult investor to target, in order to assess one’s funding options.
We’d encourage founders and entrepreneurs considering targeting family offices for private growth capital to get in touch with our advisers here at Cavendish. As we witness family offices migrate into the mainstream of finance and active ownership, we see this sector as being transformative – potentially providing entrepreneurs not only the growth funding they need, but a partner that aligns with their growth plans.