Key takeaways: 

• Family offices are increasing their exposure to private equity — via both direct and fund investing.
• Private equity’s long-term investment horizons, the potential for outperformance versus other asset classes and diversification benefits are primary attractions for family offices.
• Many private market firms are developing platforms dedicated to the needs of family offices.

As their numbers continue to expand, family offices are becoming an increasingly influential investor type. Since 2019, the number of family offices has tripled to 4,592, according to Preqin.¹ Some put the figure even higher, at around 10,000.² At the same time, family offices are becoming a more and more important force in private market investments.

These investment arms of wealthy families have always had an association with private equity, but recent surveys show that their appetite for the asset class is growing. In a Deloitte survey of family offices³, 30% of respondents’ investments were in private equity in 2023, up from 22% in 2021. The study also found that their private equity exposure now surpasses that of public equities, which shrank from 34% in 2021 to 25% in 2023.

This is a trend that looks set to run over the next few years. Nearly two-fifths (39%) of respondents to a 2024 UBS family office survey⁴ said they planned to increase their direct investments in private equity in the coming five years, 34% said the same of private equity fund or fund-of-funds investing, while 29% are planning a rise in private debt exposure.

The rise of direct investments

From an investment point of view, family offices clearly value the diversification and GP expertise that fund- and fund-of-funds investing can bring them, with 62% of family office exposure to private equity currently allocated to these access points. 

However, figures also demonstrate a clear move among many family office investors towards increasing direct private equity investment. This is perhaps unsurprising, given that the wealth they manage usually stems from business success.

“In our experience, many family offices have an intuitive attraction to private investments. Many business owners are entrepreneurs and are familiar with both the workings of venture and private equity style transactions, as well as the attractions of owning private businesses,” says Mike O’Sullivan, Moonfare’s Chief Economist. 

Investors targeting companies directly often require more resources to source and monitor portfolio companies than those investing solely via funds. However, the UBS survey finds many family offices are getting round this by investing alongside GPs. Over a quarter of the 38% that currently allocate to direct private equity is going to co-investments.⁵

Either way, this route provides family offices with a means to boost returns (since direct investments do not incur management fees or carried interest) and to target specific opportunities or sectors.

Why private markets?

Family offices and private markets — private equity in particular — seem to be a good match. A key factor in this are the long-term investment horizons most family offices have: 69% of respondents to a JP Morgan survey of family offices⁶ said their objective was succession planning and preparing for the next generation. 

Private markets’ potential for strong performance is another draw for family offices. The average target return for family office portfolios is 11%, with 34% of respondents targeting between 10% and 20%, according to the JP Morgan survey. The survey also finds a clear link between return expectations and private markets as family offices with higher target returns also have higher alternatives exposure.

With a typical fund life of 10 years, private equity’s long-term nature and the potential it offers investors for an illiquidity premium are clear factors in their popularity among family offices. 

Indeed, 71% of respondents to the UBS survey believed that private equity’s long-term returns were likely to be better than in public equities. And it’s a view that Hamilton Lane research supports⁷ — it finds that private equity’s 10-year rolling returns consistently outperform the MSCI World Index.

Diversification is equally important for respondents, according to surveys. This is especially pertinent at a time when the number of publicly listed companies are in decline and exposure to the asset class is becoming more concentrated in a handful of large stocks. The number of listed companies in the US has halved since the mid-1990s peak⁸, while the weighting of the top 10 stocks on the S&P 500 nearly doubled in the decade to 2023.⁹

By contrast, private equity has been growing over the same period, with the number of companies the industry backs more than doubling between 2006 and 2020.¹⁰ There were over 62,000 private equity and venture capital investee companies in the US alone in 2023.¹¹ 

Private equity offers family offices a vast array of opportunities spanning different sectors and investment stages, which is critical to the majority family offices. Many also seek out direct investments in areas where they have specific expertise and can offer more than capital, such as support for building out a business.

With their focus on future generations, it is unsurprising that many also eye impact investing or sustainability, areas that are particularly well suited to private equity’s active management approach. 

In this way private equity and venture capital investing can also offer family offices the opportunity to gain early access to new technologies and business models, giving them the potential for significant upside. 

“In our experience, speaking with family offices, many of them come into contact with frontier technologies. Recent examples that have been put to us are the use of robots in surgery, secure data management systems and the increasing use of drones in building management. As such the one avenue through which family offices can access these new technologies is true growth private equity and venture,” says O’Sullivan.

Indeed, a PwC analysis of the deals completed by family offices in 2023 found that 63% by number were in start-ups.¹² Further, significant proportions of family offices in UBS’s study are looking to technology investments in the next two to three years, with 78% likely to invest in artificial intelligence, 70% in health-tech and 67% in automation and robotics.

Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.