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Why venture funds for family offices can often make a lot more sense than a direct approach

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The love affair between family offices and venture capital shows no sign of waning, as technology continues to disrupt the corporate scene.

“It’s going to keep going that way for a while. Eventually, those little privates become big listed,” said one family office representative.

According to a recent survey by the French Association of Family Offices (AFFO), 60% of respondents want to boost their commitment to private assets while 33% wanted to sell their liquid equities.

One of the cheapest ways to access some smart deals is through asset manager Baillie Gifford and its investment trust Scottish Mortgage, which invests in tech-driven venture capital opportunities, alongside large growth stocks, like Amazon

Recent returns have been mouthwatering but venture capital investing is not straightforward: ten years ago, its returns were uninspiring.

If you want to invest in funds these days, you pay a base fee of 2% and 20% slice of performance. After other costs, including intermediary fees, you can be saddled with 3% and 30%. Tax-efficient venture capital trusts can be even more expensive.

If you decide to invest directly you can often spend an awful lot of time nurturing the smallest of ventures.

This is great if the deals are a labour of love and disruption continues. But lovers can part, cycles can change and family office investment managers cannot devote all, or a great deal of their time to a single deal.

Only the biggest family offices are tooled up to thrive in the world of private assets, including Pritzker Private Capital and F-Prime Capital Partners, run by the Johnson family, the owners of Fidelity Investments.

AFFO members are split between opting for private funds, and direct investment, although funds have the edge.

One of the cheapest ways, at least in the UK,  to access some smart deals is through asset manager Baillie Gifford and its investment trust Scottish Mortgage, which invests in tech-driven venture capital opportunities, alongside large growth stocks, like Amazon. Its ongoing charge is just 37 basis points.

Thought leadership is provided by James Anderson, co-manager of Scottish Mortgage, whose share price has sported a capital gain of 629% over ten years up until this April, according to Morningstar, double the S&P 500’s 318% in the same period.

If you add in dividends, its compound return is 746%. Warren Buffett’s Berkshire Hathaway, only chose to invest limited sums in tech, and ended the same decade with a less-impressive 232% price gain.

As an investment trust, Scottish Mortgage can draw on permanent capital.  In contrast, UK fund manager Neil Woodford had to cut the exposure of biotech investments in his open-ended hybrid fund for regulatory reasons, after his listed investments fell in value.

Baillie Gifford’s US Growth trust has become another backer of tech venture, often investing alongside Scottish Mortgage. Both invested in Lyft, the on-demand taxi services, whose market value is around $26 billion following a recent IPO.

Baillie Gifford’s newest investment is in Affirm, a tech-driven lending group run by PayPal co-founder Max Levchin, which saw the Scottish asset manager, once again, rubbing shoulders with the rich and famous from Silicon Valley.

James Anderson, co-manager of Scottish Mortgage, says it is tough to find entrepreneurs prepared to use the stock market to finance their early growth phase. The ready availability of funds from rival sources, including family offices, is a big factor.

He says: “Ambitious and capital-hungry companies find the funds, the patience and the supportiveness they need in much greater supply in private markets than early quotation.”

Family office backers are discreet and look to the long term. But stock markets are volatile, as traders, hedge funds and stock pickers compete to push prices up and down.

The intrusive nature of life on the stock market can be gauged by frequent criticism of Elon Musk, arguably the most talented tech entrepreneur in the US.  

This directly results from the public listing of his electric car company Tesla, a perennial target of short sellers. Anderson remains a huge fan, noting that the private status of Musk’s Space X is a “more constructive model”.

Anderson is not short of opportunities because entrepreneurs view his trust as a safe, long-term investor. He is keen to participate in fresh funding rounds, where possible.

Thanks to his passion, Baillie Gifford has become a successful investor on the Silicon Valley funding scene. Since June 2010, unquoted investments at Scottish Mortgage boasted a rise of 419% against its overall gain of 344% and a 163% rise for the FTSE All-World index. ????

Alibaba of China was one of its early unquoted investments on the technology scene, and its founder Jack Ma readily provided Scottish Mortgage with an opportunity to back its offshoot Ant Financial, a massive operator in mobile payment systems and money market funds. Its fundraising this year valued Ant at $150 billion – or double the market value of Goldman Sachs.

The author is an investor in Scottish Mortgage

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