A few years ago, family offices didn't appear to be all that keen on venture capital. The situation has changed sharply, a firm which analyses preferences claims.

What a difference half a decade makes. Analysis of 300 European family offices shows these organisations sharply increased exposure to venture capital investment over the past five years, a report said.

When WealthBriefing contacted some family offices firms on the topic of venture capital in 2012, response was notably lukewarm to the question as to whether they were interested in VC. The feedback could be summarised thus: Too much risk, too much work and Europe’s VC market isn’t big enough. (To view that article, click here.)

Fast-forward to the present day and a placement firm and advisor by the name of Cebile Capital says European family offices allocate approximately a quarter of their average portfolio to private equity, mostly in venture capital, compared with an allocation that was under 15 per cent five years ago.

The report analyses the appetite and preferences that family offices have for private equity investments and outlines the steps general partners should take when targeting family offices as investment partners.

“Family offices in Europe are increasing their allocations to private equity and can be a source of consistent capital for many of our clients. They also have the ability to make decisions quickly, which is an attraction for GPs.  Despite this surge, there are a number of issues GPs face when seeking investments from them,” Sunaina Sinha, managing partner, said.

Why?
It might appear odd that family offices have only started to boost VC exposure in recent years, particularly because some of them may have missed a window of opportunity to snap up assets post-2008 when the financial crisis had taken its toll. However, because it has taken time for the IPO market to revive, and with business sentiment cool for some time, offices seem to have taken time to consider dipping their toes deeper into the asset class.

Asked by this publication to pinpoint why family offices are keener on VC, Sinha replied that three forces are at work: a flourishing European VC market, contrasting with a relatively slow one five years ago; family offices' rising cash balances and a consequent need to put these to work to avoid losing ground, and third, a rise in the number of European VC general partners in the market.

"Family offices are seeing record distributions coming from private equity and other parts of their portfolios. Markets have been doing very well. The cash balances of family offices have been going up and they are seeking places to deploy this cash," she said.
Asked if there is a risk of family offices coming to the party too late because valuations are already rising, she said: "There is a danger that they [family offices] are followers rather than leaders in making such asset allocation decisions. They are often not leaders even when they think they might be."

"One has to ask the question as to whether this is the right entry point," said Sinha.

Venture capital, the report said, is the most popular type of private equity fund investment for family offices in Europe, with half (50 per cent) stating a preference for venture funds versus 40 per cent for other European institutions. 
 
Buyout and growth follow in order of preference, with 41 per cent and 35 per cent of family offices respectively stating a preference for these types of funds. There is less demand for mezzanine finance (8 per cent) and resources, which just 6 per cent of family offices said they’d consider investing in.
 
European family offices are more cautious than traditional institutions when it comes to new launches, the report continued. Just 11 per cent would consider investing in first time funds, versus 42 per cent of European institutional investors.
 
There is a clear sector preference amongst family offices for IT, which 24 per cent of European family offices are willing to invest in, as well as healthcare (19 per cent), telecoms and media (18 per cent), both in fund and direct private equity investments.
 
Food and agriculture is the least demanded sector, with just 5 per cent willing to invest in companies of this kind.
 
These family offices prefer to invest in the countries they know, with 66 per cent willing to invest in Europe. Approximately one third would consider investing in North America or Asia, while just 6 per cent would consider Latin America and just 3 per cent Africa.
 
Struggles
Despite family offices increasing their allocation to private equity, GPs continue to struggle with accessing this type of investor.  It can be challenging to assess how private equity fits in the portfolios of investment groups whose overall focus is on capital preservation, rather than returns.
 
The speed of deal execution demanded by family offices can also be demanding for GPs. However, they are unlikely to make a quick decision unless they have established a strong relationship with a general partner. Cebile Capital advises fund managers to form these relationships well before the launch of fundraising, it said.

The firm said it reviewed the 300 family offices it works with on a primary and secondary basis in private equity in the UK and continental Europe. It also used publicly available data from the some of the world’s leading private equity institutions to arrive at its findings.