In recent years, family offices have transformed into pivotal players in the global investment landscape. This shift marks a significant departure from their traditional roles. Historically, family offices primarily focused on wealth preservation and conventional asset classes. Family offices now seek opportunities that promise higher returns, leading them to venture into alternative investments and emerging fund managers.
Growth and Diversification of Family Office Investing Strategies
In their pursuit of alpha, many family offices have expanded beyond the confines of traditional investments like stocks, bonds, and real estate. They increasingly embrace private equity, venture capital, hedge funds, and direct investments in startups and emerging companies. This strategic shift aligns with their long-term investment horizons and capacity to assume higher risk for potentially greater rewards.
For emerging managers, this trend signifies a golden opportunity. Family offices are not just seeking to diversify, they actively seek fresh and innovative investment ideas. They favor managers who can offer unique perspectives and strategies that stand out from the mainstream offerings.
Increased Appetite for Alternatives and Emerging Manager Allocations
One of the most notable trends in family office investing is the growing interest in allocating capital to emerging managers. These family offices recognize that emerging managers often exhibit higher agility, innovation, and drive, which can translate into exceptional investment opportunities. This increased appetite stems from several factors:
1. Desire for Personalized Investment Opportunities: Family offices appreciate the personalized approach that emerging managers often provide. This aligns with their desire for bespoke investment solutions tailored to their needs and risk appetites.
2. Access to Niche Markets: Emerging managers frequently operate in niche markets or specialize in innovative strategies, offering family offices access to sectors and ideas that are not readily available through traditional investment channels. Many emerging managers have strategies that are not scaleable for a large investment fund or global bank.
For example, an emerging manager focused on real estate in Portugal equities in Nordic countries would likely have opportunities to generate alpha due to many global funds and banks not having dedicated operations in those countries.
3. Alignment of Interests: Emerging managers are often more aligned with their investors, willing to offer more favorable terms, and deeply invested in the success of their strategies. This alignment is desirable to family offices, which prefer investment partners who share their commitment to long-term success.
For example, a clean energy fund manager should target climate- and impact-related family offices. In contrast, a private equity manager focused on consumer goods would be better served by targeting family offices in Chicago and the Midwest.
4. Performance Potential: Emerging managers, unburdened by large, unwieldy structures, often outperform more extensive, more established funds, especially in innovative or rapidly changing sectors. Their lean operations allow for quicker decision-making and adaptation to market changes.
Building Successful Partnerships
For emerging managers, attracting capital from family offices requires more than presenting compelling investment opportunities. It demands a deep understanding of these investors' unique characteristics and needs. Successful partnerships are built on trust, transparency, and a clear demonstration of value alignment.
1. Understanding Family Office Priorities: Each family office has distinct goals, risk tolerances, and investment preferences. Emerging managers must do their homework, understanding these nuances to tailor their pitches and strategies accordingly.
2. Long-term Relationship Building: Family offices value relationships. Emerging managers must focus on building long-term relationships rather than just securing immediate funding. This involves regular communication, transparency, and commitment to the family office’s long-term goals.
3. Offering Customized Solutions: Flexibility and customization are key. Emerging managers should be prepared to tailor their strategies and terms to meet the specific needs of family offices.
4. Demonstrating Track Record and Expertise: While being an emerging manager implies a shorter track record, it's crucial to highlight any previous successes, expertise in specific sectors, and the team's strength. Family offices look for confidence and competence.
5. Transparency and Reporting: Regular, detailed reporting and transparency in operations and performance are non-negotiable for family offices. They expect clear communication and visibility into their investments. It is essential to highlight having good back office controls and processes and using a reputable fund administrator and compliance service provider.
The Rise of Family Ofices
The rise of family offices as significant investors in alternative assets and their growing interest in emerging managers presents a remarkable opportunity. For emerging managers, understanding and aligning with the unique needs of family offices is crucial. Emerging managers can unlock significant capital and support from these powerful entities by building trust, demonstrating value, and offering tailored investment solutions.