Family offices biggest LP contributors to PE and VC funds

Family offices role in backing private equity and venture capital funds, as well as private and distressed debt, and real estate funds is underlined by a recent report that shows them as the single biggest contributor to emerging manager funds in these private markets. 

The annual Emerging Manager Report from Buyouts Insider said family offices contributed 18% of capital for emerging managers, higher than all other investor categories, which included public pensions, corporate pensions and insurance companies. Wealthy investors, which presumably are private investors using no institutional framework to invest as limited partners, comprised 11% of capital raised by emerging managers. Family offices in the survey are defined as both single and multi. 

Although family offices represent the biggest single contributor to emerging managers’ capital, the contribution is down from last year’s survey, which was at 20.1%. 

Interestingly, the report found that emerging managers are enticing investors by offering benefits like contractual co-investment rights to LPs. This allows LPs to gain direct access to deals, while still leaving the burden of managing the investments to their General Partners, the report said.  

“Co-investments also give LPs a closer view into how a GP works an investment,” said the report. “They are seen overall as a sort of fee break –  an equity stake in a company that comes without fees or carried interest.”

Other popular incentives emerging managers are giving LPs are discounted management fees based on commitment size – anchor investors are given the biggest discounts –  and investor participation in the limited partner advisory committee, said the report. 

Two-thirds of emerging managers use intermediaries, or placement agents, to raise funds, according to the report. This underlines the important role intermediaries play in the allocation of capital. There was no breakdown of the use of placement agents by family offices in reaching emerging managers. 

The report is interesting from the perspective of the direct investment boom in private markets by family offices. Despite this, many family offices are still using the indirect LP route into private markets, albeit less than they have in the immediate past. And that fall off might be explained by the rising popularity of direct investment among family offices.