Over the last decade Private Equity as an asset class has grown in importance for families. We wanted to examine some of the most important factors behind this trend, whether this is likely to continue and the alternative strategies open to families in accessing this asset class.
We will also share our thoughts on what we are aiming to provide our families.
So why are families increasing their exposure to Private Equity?
Whilst every family is different, we see the following as the most common themes driving this trend:
- Higher returns: in an environment of low interest rates, Private Equity has achieved an average annualised return of 12% to 15% net per annum, or circa 500bps above public equity markets (*)
- Long time horizons. Private investments (PE, VC, distressed securities) were the three best performing asset classes over the past 10 years outperforming all public equity and bond indices (*)
- Shared entrepreneurial spirit: families often identify with the ambition and aspirations of business owners, understanding their needs, concerns and long term goals
- Long term partner: unlike most Private Equity Funds, families invest for the long term and can be more pragmatic regarding exit timetables and growth strategies generally. This makes families an attractive investor class for many business owners and has led to families competing aggressively and successfully for direct private equity investments.
Although much is changing from a global political and economic perspective, we expect the growth in Private Equity investments by Family Offices to continue.
Governments and politicians across the globe are encouraging entrepreneurs, fiscal and tax incentives are pushing capital towards private businesses, advancements in technology are accelerating and people are generally more willing to take greater control of their destiny by starting and creating their own businesses.
These trends strongly suggest the momentum behind Private Equity will continue for the foreseeable future and in such an environment, family money is increasingly attractive.
We therefore anticipate allocations to Private Equity from Family Offices to increase both due to its propensity to provide a higher economic return and because families understand the market and its participants.
How do families expose themselves to Private Equity?
Exposure to Private Equity can be achieved through two main routes.
Historically, the most popular route has been through funds and limited partnerships. The challenge with funds is identifying the best managers, gaining access to those funds that is often difficult without a substantial investment, and gaining attractive co-investment rights. Although a relatively passive approach in nature, it’s perfectly valid and is pursued successfully by many families globally.
Increasingly, however, families are looking to take greater control of their investments by investing directly or in partnership with specialist Private Equity firms. Families are now recruiting some of the best talent in the industry and competing directly with the established Private Equity investors and funds. While this latter approach requires greater effort and commitment, it will appeal to certain families and the rewards may be substantial.
At Cavendish Family Office we appreciate the importance of Private Equity as a distinct investment class and have established strong industry relationships to ensure our clients are given access to both new and established funds as well as proprietary direct investments. We work with respected partners in all areas and pride ourselves on providing a tailored service for each family and every engagement.
How does Cavendish Family Office allocate to Private Equity?
We have developed a process for investing in Private Equity that achieves the following key objectives:
- Provide access to proprietary investments originated or identified by Cavendish
- Assist clients in reviewing and investing in deals that they originate or receive directly
- Assist on allocations to Private Equity funds and limited partnerships
- Ensure the process for investing in deals is robust and the reputational risk to our clients is minimized
Strategy for providing clients with access to Private Equity and Due Diligence
Given Private Equity deals are characterized by high returns but also high risk, we have established a stringent process for looking at Private Equity investments.
On the funds side, we work with our partners to identify funds that provide above average returns and gain access for clients within these fund structures. We aim to identify new, smaller funds where the returns can be higher, carrying out a thorough review of their approach, performance and process.
These individual funds will be used to enhance and compliment our core approach.
On the direct investment side, we will source Private Equity deals from our network and having carried out our own internal due diligence, work with our regulated partners who will arrange funding for the deals from our clients and other investors as required.
On occasions clients will introduce deals to Cavendish both to review and also to help fund.
Strategy for implementing the proposed approach
Cavendish Family Office has appointed Tony Fabrizi as Board Advisor to be responsible for Private Equity activities within the firm. His initial goals are to identify a pool of funds with which the firm’s clients can invest and to implement processes for analysing and reviewing potential Private Equity deals.
Tony will use external specialists to help identify funds and these will then be discussed and reviewed by the Board before finalising the approved list. It is also possible that as this activity matures within the business, the opportunity to launch funds on behalf of clients will emerge.
In terms of individual Private Equity deals, Tony will make an initial assessment of all potential deals to determine whether the deal should be formally considered. At that stage the regulated entity with whom Cavendish will work, will undertake its own due diligence before a final decision is taken whether to move forward.
Once fully committed, Cavendish will work with its families and partners to ensure the funding is raised in the most appropriate manner.
Cavendish will then provide ongoing monitoring of the investment and reporting.
Tony Fabrizi – Private Equity Board Advisor
Tony qualified as a Chartered Accountant with KPMG before joining HSBC Investment Bank. He worked in Corporate Finance and spent 8 years undertaking UK transactions, becoming a Director in 1993.
Tony joined RP&C, a niche US Investment Bank, as a partner in 1998 to help develop its UK business.
In 2002 Tony established his own Regulated corporate finance advisory business, Ghaliston Limited. Over the next 4 years Ghaliston acted as Financial Advisor to 10 companies listing on AIM and raised capital for numerous other private companies.
In May 2006, Ghaliston Limited acquired Merchant Securities Limited, a private client stockbroking business and the enlarged company listed on AIM in November 2006. Tony retired as CEO of that company in June 2008.
Having taken a short break, Tony was appointed as the CEO to Blue Star Capital PLC, an AIM listed investment company with a focus on technology. Over the last three years Tony has advised on a number of private companies to help raise capital.
Tony joined the Advisory Board of Cavendish Family Office in March 2017.
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