Family offices with venture portfolios have an average of 27 investments, according to a new report. And these investments—17 of them, on average, direct and 10 of them funds—are helping family offices reap the rewards of a worldwide rise in venture capital investing.
A January report by Campden Wealth in London and SVB Capital in Palo Alto, Calif., found the average internal rate of return, or IRR, for venture capital portfolios at family offices was 24% in the 12 months before they were surveyed, up from only 14% a year before.
Also, venture-equity investments met or exceeded expectations of 75%-90% of the 139 representatives of wealthy families surveyed from around the globe.
“In the last decade, family offices have become more prominent and sophisticated venture-capital investors,” says Rebecca
Gooch,
senior director of research at Campden Wealth. The report is part of a series the firms are doing on family investing in venture capital.
With US$621 billion in combined venture investments globally in 2021, according to New York-based market intelligence firm CB Insights, up from US$294 billion the year prior, it’s no surprise venture allocations are increasing. In 2021, SVB Capital and Campden Wealth found that families allocated 12% of their portfolios to venture, up from 10% a year ago.
The report found the strongest returns realized by families were in venture capital secondary funds, which are vehicles that invest in previously funded companies versus start-ups. Secondaries have outpaced other venture capital funds with an average IRR of 28%, according to the report. Of those surveyed, 50% said their secondary investments outperformed.
“The considerable growth in the number of privately held companies, along with a deep pool of funding fueling them, has led to a robust secondaries market,” Gooch says.
She adds that secondaries are popular among family offices because they offer exposure to start-ups with high growth potential, but that already have experienced a degree of maturation and scale, reducing investor risk.
The report also found that venture funds with investing strategies focused on having a positive social or environmental impact also are reshaping family office portfolios, with 79% of surveyed family offices investing in them, compared to only 47% in 2020.
“Family offices that invest in venture capital are far more likely to invest in ESG/impact than the average family office, as our research indicates that just 42% of family offices worldwide engage in sustainable investing,” Gooch says.
These three takeaways from the report offer insights into how family offices can get into the venture-capital game, and what strategies are shaping their decisions.
Start Slowly and Build Infrastructure
With interest in venture capital and impact investing having a runway for growth, some family offices are starting from scratch in the asset class.
“You may wish to start with funds or fund-of-funds which are found through reliable sources,” Gooch says of family offices just starting out in venture. Families new to investing in the sector should buy funds that began to deploy investments in different years, and they should make small allocations. The quality of the fund manager also is important, she says.
“Once comfortable, families allocate, on average, 12% of their assets to venture investments, as they aim to ensure that their portfolios are sufficiently diverse,” she says.
Internal infrastructure is also important when doing venture investing. “The average family office only has around 15 members of staff, so allocating resources to VC deal sourcing and due diligence can be tricky for some,” Gooch says. Families with small staffs could consider hiring professionals to help with researching potential investments.
Mitigate Risk With Multiple Vintages
Because venture capital, by nature, is a hit-or-miss asset class, profitability from some deals can outstrip losses from others.
Gooch says that to help mitigate losses, experienced family offices make long-term investment plans that take into account their venture capital investment horizon and likely liquidity needs. These offices invest consistently, with between 75% and 85% of respondents making venture investments regularly between 2018 and the first eight months of 2021. A decade earlier only 40% invested consistently in venture.
Family offices also mitigate risk by diversifying their investments across different direct deals and funds, geographies, sectors, stages, and vintage years.
SVB Capital and Campden Wealth found that family offices mitigate volatility of a given vintage year—that is, the year a fund begins allocating capital—by investing “across an average of eight” years. The highest response rate —17% percent of respondents—have investments in as many as 16 different years.
“They also do their due diligence and reference checks, and work with people they trust, as selecting the right deals and partners is critical,” Gooch says.
Families can also reduce risk by sticking with familiar industries, or, if venturing into unfamiliar territory, co-investing alongside a partner with expertise in that sector.
Generational Wealth Transfer Shapes Investments
“Many family offices include younger family members in the learning process, as VC investing is a magnet for the next generation,” Gooch says. The report’s findings show this up-and-coming generation of investors is already making their mark.
Expanding interest in diversity is one result. Of those surveyed, 58% already invest in ethnically diverse fund managers, and 56% are investing in female managers. Nearly two out of three respondents are interested in increasing their investments in these areas.
“The diversity push is coming from the younger generation,” one respondent told SVB Capital and Campden Wealth. “On the fund side, there might be some merging in the numbers between plans and actual investment.”
On average, those surveyed classify 20% of their venture capital investments as ESG or impact, and within those investments, climate change is the dominant interest area. It was identified by 64% of participants. By contrast, climate change only ranked fifth in 2020, influencing the investment decisions of half of family offices.
“This drive for change has been furthered by the Covid-19 pandemic and the next generation’s commitment to correct the errors of earlier generations,” Gooch says.
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