As many businesses and industries scale down in the wake of coronavirus, for some family offices the last few months have seen a spate of high profile new hires and ambitious expansion plans. The crisis has presented a unique juncture for family offices to prove their mettle and make competitive changes to the way they are structured and operate. Jennifer Le Chevalier and Emmanuelle Dotezac write
The public market volatility that immediately followed the COVID-19 outbreak has seen many family offices adjust their asset allocation in favour of private markets as a safer, less volatile option and to take advantage of additional alpha and enhance yields.
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This has been possible because lockdown has driven private company valuations down, opening the door for family offices to become direct investors. In the past, family offices have been mostly unable to directly participate in certain aspects of the private markets due to sky-high valuations, forced to instead put their money into less capital-intensive funds. The present crisis has served to create short term dislocations and a lower point of entry for family offices, which has provided opportunities for attractive risk/return profiles, opening up both private equity and private debt markets.
Moreover, when compared with large institutional LPs who are often restricted by the amounts they can invest in alternative assets, family offices have much fewer restraints or stringent thresholds. This allows them 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 harness longer investment horizons. Again, compared to institutional investors, family offices’ ability to opt for long-term investment strategies allows them to ride out 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. They are placing a huge emphasis on a company’s access to liquidity, which is now considered as “one of the most important things” that family offices are looking at when deciding where 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.”
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By GlobalDataAlongside 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 reflective of COVID-19’s impact; sectors experiencing a rise in family office investment include health services, technology and education. Due diligence is also proving key 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.
We are still far from understanding what the investment landscape will look like post-pandemic; however, the ability of family offices to be flexible with their asset allocation and investment horizons will stand them in good stead 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.
Jennifer Le Chevalier is the head of private wealth (Jersey) and Emmanuelle Dotezac, director, funds and private wealth at IQ-EQ.
