Family offices boost private equity holdings

Family offices have boosted their private equity holdings by 2.3 percentage points over the last 12 months, with private equity now making up over 22% of the average family office’s holdings. At the same time, family offices have reduced hedge fund holdings by 0.9 percentage points to make up just 8.1% of their average holdings, according to a survey of 242 family offices globally.

Over the last four years family offices have gradually increased their exposure to private equity as part of a “search for yield”, according to Philip Higson, vice chairman of UBS’s Global Family Office Group. The rise in allocations to the asset class comes as private equity continues to outperform fixed income, equities and hedge fund investments and commodities amid a strong exit environment for assets.

In 2015, the estimated benchmark performance of private equity portfolios was 5.9%, based on Cambridge Associates‘ data for US investments, compared to -3.6% for hedge funds based on the HFRXGL Global HF index. The relative returns of private equity and real estate are particularly holding up well compared to bond markets’ “ever-lower yields”, according to Higson.

“We’ve had a multi-year track of more and more money being allocated to private equity and that was continuing in the calendar year 2015,” said Higson. “People are allocating more to things that have done well and taking money away from things that have done less well.”

The family offices surveyed decreased their allocations to direct private equity investments, where they actively participate in a deal rather than investing through a fund. Some 3.3% of the average family office portfolio was allocated to co-investments during 2016, while 9.6% of family office capital was allocated to direct private equity and venture capital investments during the period.

But as competition for direct investments continues to grow, Higson said family offices may not be able to increase their direct private equity investing as “there are limits to how many people you can employ and effectively deploy your strategy across multiple sectors as a family office”.

“The fact is the family office is less likely to have enough bandwidth across enough sectors to have a broad base portfolio of private equity,” Higson added. “This thing about ability to step in and rescue situations when companies go off the rails is what the private equity firms say is potentially lacking in the family offices.”

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