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Family office direct investing model takes a hammering

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Risk appetites have largely evaporated as families are starting to question the validity of a direct investing model which saw them paying over-the-odds for investments they are now propping up.

My research suggests economic pessimism and liquidity issues are dominating the family office agenda, as corporate growth and dividend receipts vanish. Simply put, offices are concerned that family and portfolio businesses will run out of cash before recovery takes hold.

Family offices are not generally set up to be traders, although this may not stop them trying

Taking account of current leverage, and demand and supply shocks, family offices now want their corporates to use free cash flow to bolster their balance sheets.  Dividend payments have been written off.

Liquidity preferences have jumped as family offices now perceive their portfolios as overweight in private equity and venture capital.  Broadly speaking those investments are haemorrhaging cash, and family offices short of liquidity have faced a double blow as they felt forced to sell listed equities at a paper loss to inject cash into these struggling companies.  

As Tobias Poensgen, chief executive of Momentum Capital, a direct investment arm of a single-family office, told me: “What SFOs should be thinking about is how to support their portfolio businesses, and their employees, to survive this period.”

Venture capital investment has nearly come to a halt. Private debt is under intense scrutiny with preferred opportunities now being directed towards defensive sectors, precious metals and real assets. Private debt is no longer viewed as a preferred investment, with credit and liquidity risk-taking centre stage.

It is true more liquid family offices are prepared to take measured risks to catch the bottom of the market.  As Roderick Balfour of fiduciary manager Equiom Group says: “Our family office clients have all had liquidity given the over-valuation of US [equities] in particular.  They’re using the 30%, or so, dive in markets to buy quality stocks. Banks are a favourite.”  

In my experience, family offices might view public equities as cheaper following the market decline but not cheap enough to purchase, given the pessimistic demand and credit outlook.

Family offices are not generally set up to be traders, although this may not stop them trying. Those executives who argued market volatility was unimportant due to infinite investment horizons have been shocked to find this philosophy was abandoned as soon as screens went red.

One Comment

  1. Thanks, Keith, couldn‘t agree more. Seems like more and more family offices view themselves as professional direct investors. However, most recent market movements (last 18 months) have shown that many of them accepted way too high valuations burning cash in the second they sign the contract. Making use of properly defined and calculated risk budgets for an investor‘s entire structure and/or portfolios could have helped to avoid such peaks of „high value“ deals, be it in liquid or illiquid markets. We still recognize lots of family offices who do not work with risk overlays or haven‘t even heard of it. This comparibly cheap instrument comes at let’s say 5-6 bps p.a. and may save you the same numbers in % (which is factor 100!). Risk overlays may even help you to get back to market where others wait for the more obvious recovery signals. Your opinion? Best, Jan

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