Venture Capital (VC) confidence and funding have taken a significant hit worldwide, as investors begin to retreat amidst a looming economic recession. As a result, a widening funding gap is emerging at speed, disrupting the prospects of the private sector’s innovation and scale-up trajectory. Despite this challenging landscape, family offices are becoming the preferred route for sourcing capital due to the ability for greater control and flexibility compared to traditional wealth management firms, in addition to a plethora of deep-pocketed ultra-high-net-worth individuals (UHNWIs) with a strong appetite for new opportunities.
The shift to the deep-pocketed investors from private wealth vehicles is set to prevent VC confidence from declining even further. High inflation, central bank liquidity and rising interest rates have arguably compelled family offices to reconsider their investment options. A new report from the Family Office Exchange (FOX) reveals that the family office industry is prioritising private equity (PE), VC, and direct investment – with portfolio allocations to PE up 5% from the same time last year. The same report found that when predicting the future of the economy, 44% of family investors expect the economy to improve, and 61% are confident about the markets in the year ahead. When looking into family investor sentiment and projections, 65% of family offices plan to overweight private equity whilst a further 68% are looking to underweight fixed income – potentially assisting a bounce back in this sector in the upcoming year.
The surge in popularity of family offices comes as no surprise given that their market revenue is expected to grow at a staggering 6.01% compound annual growth rate (CAGR) between 2021-2026. The number of single-family offices has risen by over 40% since 2008, and has combined investable assets of up to several trillion dollars, according to industry experts. The primary reason for this success is largely due to the fact that they often have less constraints than VC or institutional investment firms and are able to pivot quickly in relation to an ever-changing landscape.
In comparison, institutional investors such as banks, labour unions, insurance companies and pensions, require a longer and more protected due diligence process compared to family offices, which offer greater thresholds for longer investment hold times. Prominent VC firms have advised their portfolio companies to start cutting costs and look for ways to cushion their cash position following a brief setback in the last few months. Amidst this retreat, family offices could help aid the current market conditions by stepping in with a potentially attractive pool of capital for funds and private deals.
“It appears family offices could come to the fore to fill investment gaps in the market at a time when valuations are dropping and confidence from some institutional investors is decreasing. This increased activity from a different branch of the investment sphere could provide startups with an injection of much-needed capital which will also help to stimulate the economy during these challenging times.
“Research shows there is a clear focus on private equity investment for family offices – with 65% planning to overweight funding in this area. Within this, it appears that technology is the most common sector, given the continuous desire for digital transformation across the world.”