The importance of single-family offices (SFOs) to private equity firms continues to grow. According to the authors, SFOs are increasingly interested in allocating client capital to private equity firms. They explain how private equity firms can reach these seemingly diverse investors.
Since the financial crisis, mainstream investors’ interest in private equity funds has slowed. But at the same time, private equity firms continue to attempt to raise new funds. This supply/demand mismatch has caused some private equity firms to look to nontraditional channels for new investors. Single-family offices (SFOs), although not entirely new to private equity, have become an increasingly important investor for private equity firms. The authors present the results of a survey conducted of investment professionals at numerous SFOs in an attempt to define this disparate group of investors as well as to provide assistance to private equity firms interested in reaching out to these investors.
How Is This Research Useful to Practitioners?
Traditional institutional investor interest in private equity firms has diminished over the past few years because of the exuberant overallocation to the asset class in the 2007–08 period as well as the continued locked-up status of their initial capital. But the lack of traditional demand sources has not slowed private equity firms in their attempts to raise capital. SFOs have emerged as an important investor base to help make up the lack of demand from traditional funding sources. The authors refer to a recent survey conducted by their firm of 139 investment professionals from SFOs. This research is a transparent form of marketing by a private equity/SFO service firm, but it nevertheless provides interesting material about the topic. The authors present the survey findings in a manner that is primarily beneficial to private equity firms interested in courting this expanding investor base.
Although SFOs are not entirely new to private equity, because of the growth of SFOs as well as the current availability of investor capital, they have become an increasingly important partner for private equity firms. According to the survey results, nearly 80%—up from 30% in 2009—of the SFOs surveyed said they were looking for greater participation in private equity. Moreover, SFOs are increasingly interested in investing a larger portion of their asset allocation in private equity investments. According to the survey results, more than 17% are interested in allocating more than a quarter of their funds to private equity. In addition, nearly half are interested in placing between 10% and 25% of their assets in private equity. In dollar terms, SFOs invested more than $8 billion in private equity funds as of 2009, and nearly 90% of the offices surveyed are planning to increase their overall dollar commitments to the asset class.
Although the survey results speak to the attractiveness of the investor base, the authors outline a number of things private equity firms must consider to develop meaningful relationships with SFOs. Investment professionals at SFOs tend to invest with seasoned private equity firms with which they have had a positive experience, but they are willing to consider new relationships—a task that the authors argue is the biggest hurdle in raising capital. Referrals and a strong track record are the primary determinants in securing new investor capital. Without a referral, it becomes harder to generate investor interest; according to the survey, fewer than 5% of SFOs typically respond to unsolicited approaches. Outside of referrals, one way a private equity firm can generate interest is to become a thought leader in the industry. Being recognized as an industry leader can help open doors to potential new investors.
Once a meeting with an SFO is achieved, private equity firms should consider a number of broad factors to win over the SFO investors. Appropriateness, investment opportunity set, and most importantly, the private equity firms’ differentiating factors are cited as important considerations for manager selection. Finally, a strong track record is important; more than 75% of participants agreed that the firm’s track record is a major factor.
SFOs have become an increasingly important partner for private equity firms, filling the lost demand from traditional investors. But the opacity of the SFO universe as well as the heterogeneity of the investor base mandate a tailored approach to marketing to this group, a task that may not be feasible for smaller private equity firms that lack resources. Nonetheless, private equity firms that are willing to commit the time and effort necessary to penetrate the SFO market have the potential to tap into a growing and receptive investor base.