Family office direct investing model takes a hammering

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.