Investment

The secondary market has become a primary tool for family offices

As the evolution of private capital grows, family offices have become increasingly involved in the secondary market for private companies. They are using their advantages to gain competitive advantages in the market, says an investment banker who works directly with private investment offices. 

Nader Afshar, managing partner and founder of Bastiat Partners, a Los Angeles-based investment bank serving family offices says secondary transactions in private equity and venture markets are proving popular with family offices. 

By leveraging this information, family offices are able to gain access to high-growth private companies that were not easily accessible directly in the primary markets

“In the illiquid world of private market investing, secondaries have matured into an investable strategy and viable portfolio management tool for many family offices,” says Afshar. 

“In the current period, family offices are gradually getting more involved in investing in later-stage venture capital deals, buyouts and growth equity rounds by using in-house teams to do more direct deals. And participating in secondary deals is all part of this evolution.”

The secondary market in direct private capital has been driven by companies opting to stay private longer and investors pursuing general partner-led secondaries, says Afshar. “For instance, direct VC-backed secondaries have evolved over the years – they started as a minor trend pre-Facebook and they have become a necessary liquidity release valve for the broader ecosystem. Effectively, they act as a sort of shadow economy to the venture world.”

The Covid-19 pandemic will likely accelerate this trend and create some interesting opportunities for family offices, particularly those that are using secondaries as a primary tool in their investment arsenal, adds Afshar. 

Family offices often have a competitive advantage in the secondary market. Afshar says, unlike the rest of the private market, the secondary market is much more challenging to invest since investors have to operate with imperfect, hard-to-find information and very often buyers have to seek consent to invest.  

“Within this environment, family offices should recognize and appreciate the unique advantages they hold and should embrace secondary transactions as a strategic tool to assess and manage risk and optimize return multiple.”

Family offices also often act as limited partners in several different funds. They gain valuable insight into market conditions and receive regular updates on their holdings. “By leveraging this information, family offices are able to gain access to high-growth private companies that were not easily accessible directly in the primary markets,” says Afshar.

He adds: “The lean structure of family offices ensures a more quick and efficient investment process that obviates the need for a formal investment committee approval with several voting members. This allows them to differentiate themselves from other buyers and to compete on something other than price like flexibility, timing, and certainty of closing.” 

But the secondary market remains highly specialized, which raises the bar for external investors and benefits those that have the wherewithal to compete in it.

“A family office needs to have the ability to develop a deep knowledge of companies and its backers, and know how to put a value on a company and its associated share class,” says Afshar. 

“Because these prerequisites require such depth across multiple specialities, the number of new investors have not expanded nearly as much as other areas of the private markets.”

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