Investment

Family offices like venture but many get burnt in the process

Venture capital deals backed by family offices are growing in number, as they gain confidence to tackle deals in a buoyant market. 

The number of deals involving family offices in the first eight months of 2021 was 981, an annualised rise of 26% compared to 1,170 in calendar 2020.

A survey of 139 family offices by SVB Capital – a sister organisation to Silicon Valley Bank – says VC inflows including private equity and funds backed by families, were $418 billion in eight months to August, an annualised increase of 88% on 2020. 

The dilution of returns as a result of successive fundraisings can also lead to disappointment which fuels decisions to seek out deals

Records are being set in every sector. For the first time, Asia, renowned for its rate of business formation, has a greater share of deals than the US, following a noteworthy surge from India. Sequoia Capital China is the number one dealsmith in the world, tackling 1.5 deals per business day. 

The family office share of global deals is relatively small compared to its peers. But interest is growing as the population of wealthy investors expands and switches out of funds.

An ambitious generation of family offices, for example, is being created by the VC boom. According to CB Insights, global unicorns with a notional value of $1 billion-plus grew to 847 in Q3, a 60% hike in a year. Takeovers and listings for their ventures add to the cash they have available to invest. Government agencies are using data provided by the likes of Dealroom to facilitate the growth of a new generation of tech-driven champions.  

This has rarely been a better time for celebrities to raise their profile. Since recruiting Prince Harry in March, mental health venture BetterUp has seen its notional value treble to $4.7 billion. Multiverse, run by Euan Blair, son of Tony Blair, the former UK prime minister, has a value of $875 million, against $200 million in January. 

Disruption still excites. But fear of missing out is now the biggest factor behind the VC surge.

The Cambridge Associates VC benchmark return was 50.1% in 2020, against 18.4% from the S&P 500 index, fuelling a three-year return of 28.2%. 

Booming private asset returns mean Washington and Duke universities have delivered returns of 65% and 56%, respectively. Other endowments are likely to try harder, after failing to over-allocate to VC. 

Investors are experiencing a massive dispersion of VC returns, says fintech provider LandyTech. The dilution of returns as a result of successive fundraisings can also lead to disappointment which fuels decisions to seek out deals.

According to SVB, the poor performance of VC providers was cited as a reason not to reinvest in them by 69% of respondents, with 46% criticising strategy drift. 

On average, according to SVB, family offices currently invest in ten funds and 17 direct investments. Its respondents expect to clinch 12 deals in the next two years but invest in no more than six funds. Around 47% of families invest in funds and 53% tackle direct investing.

According to a US family office: “Direct deals from friends and family are a way to get experience. The more deals we made, the better we got at it.” 

Around 24% of family offices tend to source deals through their own network, although this would include VC general partners.

Surprisingly, digital platforms only account for 1% of the family office deals. The conservatism of family offices also means 80% of respondents still rely on Excel spreadsheets to monitor deals, well ahead of Carta with 17%. 

Co-investing is popular, not least because a family office applicant can rely on lead players to do their homework. A US family office said: “If you know a reputable family, you can join the syndicate without having to do a huge amount of due diligence.”  No more than 17% of respondents were concerned by co-investment fees, well below third-party managers. 

Around 39% of next gen respondents, often fascinated by technology, told SVB they are more involved with VC than any other sector, even including philanthropy, where principals used to park their youngsters.

The average family office staff of nine has one VC specialist, with average total compensation of $363,000. Family offices expect to add another VC specialist five years out.

However, SVB warns top talent is in short supply saying that family offices will need to consider paying a generous performance-related carry fee. They may alternatively rely on the expertise of Next Gen or stick with co-investing.

Separating out a pool of VC capital, with a tax-efficient structure, such as the Singapore Variable Capital Company makes sense. 

Sometimes family offices choose to back next-generation family members in their own venture, hoping this will enhance their growth prospects in tech. 

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