While COVID-19 has forced many businesses and industries to scale down, the months following the coronavirus outbreak have seen a spate of high profile new hires and ambitious expansion plans among family offices. As discussed in our article published by Private Banker International last week, the crisis has presented a unique moment for family offices to prove their mettle and make competitive changes to the way they are structured and operate.
The public market volatility that immediately followed the COVID-19 outbreak was a shock to the system. In response, many family offices have adjusted their asset allocation in favour of private markets as a safer, less volatile option and to take advantage of additional alpha and enhance yields.
This has been possible because lockdown drove private company valuations down, opening the door for family offices to become direct investors in specific assets. In the past, sky-high valuations have meant that family offices have been mostly unable to directly participate in certain aspects of the private markets, and they were forced to instead put their money into less capital-intensive funds. The present crisis has served to create short-term dislocations and lowered the point of entry for family offices, providing opportunities for attractive risk/return profiles and opening up both private equity and private debt markets to these new investors.
Family offices have much fewer restraints or stringent thresholds when it comes to investing in alternative assets, especially when compared with large institutional LPs who are often restricted by the amounts they can invest in alternatives. This gives them the ability to act quickly and allocate their money as opportunities arise. As such, the crisis has given them an unexpected platform to prove themselves as agile investors.
Family offices also have the flexibility to utilise longer investment horizons. Again, compared to institutional investors, family offices are able to opt for long-term investment strategies that allows them to ride out any market or asset volatility until their investment is able to deliver its potential.
This ‘power of patient capital’ is especially significant in a time where cash is king. Through direct investing, whether via acquiring a small stake in a company or a whole business outright, family offices with strong cash reserves are now able to bring quick, much-needed liquidity to a number of markets that were previously lacking funds. One IQ-EQ client who runs a large PE-focused private family fund commented that a company’s access to liquidity is now “one of the most important things” they look at when deciding to invest. During these uncertain times, family offices need the confidence “to know that a company has the liquidity to meet its financial obligations for the foreseeable future even if revenues dry up for a few months.”
In addition to cash injection, family offices also bring their network of investors and their expertise, be that sectoral or in-house investment expertise. Investment interest is ‘thematic’ and can be reflective of COVID-19’s impact; sectors experiencing a rise in family office investment include health services, technology and education. Due diligence can often be overlooked, but is proving key now, and there is increased sophistication in family offices in this space. Indeed, the family offices that are confident enough to jump into private equity typically have strong sector experience and due diligence abilities, or can at least rely closely on their private equity partners to assist where needed.
While we are still far from understanding what the investment landscape and markets will look like post-pandemic – and indeed when the pandemic will end – the ability of family offices to be flexible with their asset allocation and investment horizons will put them in a strong position to not only leverage the pockets of opportunity within the current disruption, but also provide vital cash flow to the businesses and markets in which they are investing.