Family offices are full-service private wealth management services that serve just one or a small number of ultra-high-net-worth families. Typically, family offices create profit by investing in private equity, venture capital opportunities, hedge funds and commercial real estate. Since the COVID-19 pandemic hit, the economy has been greatly affected. In this article, we will discuss family offices’ expectations in financial markets, and their investing behaviors during the pandemic.
According to a study conducted by the international family office portal familyofficehub.io, family offices react differently to the current pandemic. 60% of the participants expected a significantly better situation on financial markets in 12 months, 26.7% expected a slightly better situation. Only 13.3% of the family offices believed that the situation on the markets would remain unchanged. The study reflected that the majority of the family offices in the study were optimistic about the future.
When asking about their projections on which asset classes would experience the heaviest losses through the pandemic, 66.7% of the participants expected that the heaviest financial losses would be on financial markets, followed by 13.3% percent who expected the heaviest losses in venture capital. Some other popular answers were: private equity, high yield bonds, and “we don’t expect any losses”.
As a reaction to the pandemic, most family offices are already exploring investment opportunities, especially direct investments. Although the coronavirus has been an economic crisis for others, to wealthy families it is an opportunity to make money by throwing a financial lifeline to distressed businesses. The stock market may have rebounded quickly, but family offices are betting that the public markets are overvalued, and more predictable and steadier returns are feasible through private investments. According to the UBS Global Family Report 2020, in the turbulent post-COVID-19 environment, family offices are comforted by the greater control they can exercise over direct investments with more than a third (35%) regarding this as a plus, versus 27% before the pandemic hit.
Hence comes the question: how can family offices get started with direct private equity investments in the COVID-19 era? According to an article on Forbes published by Francois Botha, there are three key points for direct investments:
1. Identify areas of interest and opportunity. Prior to the coronavirus, family offices preferred direct investments that could align well with the their interests, values, and expertise. However, under the current circumstances, family offices should pay more attention to which industries and assets will flourish when seeking direct investment opportunities.
2. Consider networking and sourcing deals closer to home. Since the COVID-19 crisis has undoubtedly made traveling and performing due diligence more challenging, family offices could seek direct investment opportunities that are closer to home. It would also be reasonable to focus on outreach and network building with family offices from other geographical areas, as these families may be looking into the same industries for investment deals.
3. Proactively measure and evaluate investments. With their dry powder, family offices are uniquely positioned to take advantage of the direct investment opportunities that arise in the current market. Family offices who can proactively take steps to preserve and expand their wealth will undoubtedly find themselves in a better place as the inevitable recovery occurs in the years to come.