Algorithms will push investors into private companies – and family offices will lead the charge

As Family Capital has been saying for some time – the investment push into private companies is one of the big investment themes of the post-financial crisis, and its just getting going.

This view was reinforced by what Robert Soros, the son of one of the great investment gurus of the last 50 years, George Soros, said this week. Speaking about his departure from his father’s hedge fund-cum-family office, Soros Fund Management, Robert told Bloomberg: “So much is driven by algorithms, and the more predictive quantitative models get, the more difficult it is to produce excess returns.”

Robert is setting up Soros Capital, which will concentrate on direct deals in startups and investing in other illiquid assets, he said in the interview. At this end of the investment spectrum, Robert no doubt reckons human decision-making can still make a difference. He might also be aware that trading public stocks, either through buying or selling them, or through hedge fund strategies, isn’t being helped by shrinking public markets.

That shrinkage – coupled with the growing influence of artificial intelligence/algorithms in public markets –  is even affecting the investment patterns of wealth managers. Last week, Family Capital reported on a move by a Swiss private bank to launch its first private equity fund, which will target “living heritage” businesses – small to medium-sized family businesses.  

But the big private company investing will predominantly be driven by the private equity houses, backed by institutional and high net worth money – and, of course, family offices. Just in the last few days, the surge in investing in private companies from family investment groups proves this point.

Deals done this week, or close to being done, include:  L1 Retail, a subsidiary of LetterOne, the family office of Russian billionaire Mikhail Fridman, purchase of UK health-food retail chain Holland & Barrett for $2.3 billion; the $400 million investment into the home improvement startup Houzz led by Iconiq Capital, the closed multi-family office linked to Mark Zuckerberg; and the reported talks to sell the Brazilian flip-flop maker Havaianas to Cambuhy Investimentos, the investment group of the Moreira Salles family.

Family offices and all investors will continue to drive their investment strategy through public markets. But as the role of AI in determining investment strategies within these markets increases, the human side of investing will be directed more towards private market investing. Robert Soros and his ilk still want to use their brains…