Direct private investing
Direct investing in private businesses more than any investment theme has been the story of family offices for most of the 2010s. Will this theme continue for the rest of the decade? No one really knows, but here’s Family Capital’s prediction based on the trends over the last few years.
Despite record valuations of private businesses that are being pushed up by a huge wave of capital chasing these companies, family offices will continue to be a big driver of direct private investment in the year ahead. OK, higher valuations will squeeze returns on these businesses from a typical private equity fund perspective, but that won’t deter family office enthusiasm. Because, for the most part, family offices will be looking at long-term commitments to the businesses they buy into, rather than short-term gains from selling them.
And maybe there’s a less appreciated behavioural side when it comes to investing directly in businesses that is also fueling this investment binge by family offices. This is the fact that most principals of family offices like to be actively involved in the direction of the assets they buy. After all, many principals made their fortunes from running businesses, or at least their predecessors did.
So they like to be hands-on when it comes to their investments - and this might drive them more than necessarily the returns on these investments. Of course, principals will believe their expertise will bring better returns, but sometimes the emotional side will drive their investment decisions as much, or even more, than returns.
Emerging market family offices
One thing that became obvious in the family office world in the last year is the sizable activity of Indian single-family offices, particularly in the venture space. That activity has given rise to a healthy family office eco-system in the country - and led to the greater professionalisation of the sector. Family offices like PremjiInvest and RNT Associates have provided excellent benchmarks for others to follow.
And these two family offices along with a growing list of others from India are not just exerting their investment muscle in their home country but also abroad. Given these developments, there’s no reason to suggest the sector in India won’t gain even more influence and profile in the year ahead.
Nevertheless, family offices in many other emerging markets will continue to lag developments in the more developed markets. This will be most noticeable in China, where, despite the enormous personal wealth being generated, the family office sector is underdeveloped. Of course, successful family offices exist in China, both on the mainland (Wu Capital) and in Hong Kong (Blue Pool Capital) - and even abroad (Seven Valleys).
But the sector is still too weak to say that it has evolved to a level anything like that in India, let alone what exists in North America and Europe. That’s largely to do with the vulnerability of personal wealth in China, which leads many entrepreneurs to take a very short-term perspective on wealth creation - and few reckon that wealth preservation through a family office is worthwhile.
Might that begin to change in 2018? Maybe, but there is no indication the authorities will lessen their involvement - directly and indirectly - in the economy. And that won’t inspire confidence among those with substantial wealth to set up family offices in the second biggest economy in the world.
Cryptocurrencies, initial coin offerings, and the blockchain
Family Capital ran an interview with Thomas Krenik, founder of Nextvest, about cryptocurrencies and initial coin offerings a month ago. This laid out many of the issues for family offices in these areas - and his thoughts remain pertinent for the year ahead.
But to add to those thoughts, Family Capital reckons family offices will take a more sanguine view of cryptos and ICOs in the year ahead. Some commentators (most notably George Kikvadze from the BitFury Group) have suggested many family offices were buying into ICOs and cryptos in 2017, but Family Capital found few saying they were investing. Instead, most said they were sitting on the fence with these investments, concerned about the paucity of regulation and the potential of fraud in the sector.
But, stealing from Krenik’s thoughts, anything that is capable of capturing the popular imagination the way cryptos have indicate that something fundamental is occurring - and that’s going to attract investors like family offices.
Perhaps the more regulated parts of cryptos and ICOs will attract family office investors. Or investors will look at the potential value of the underlying blockchain technology. And that’s where family office investment might be more directed - into the technology, rather than directly into cryptos. Whatever, expect more activity from family offices in these investments during 2018, compared with 2017.