More than 10,000 family offices are quietly shaking up the private equity and venture capital industries. And their numbers are growing.According to FamilyOfficeDeals.com related surveys, “private family capital is larger than private equity and venture capital combined.” This growth has been fueled by globalization and increased
wealth concentration among affluent families. And many of the at least 10,000 single-family offices in the world were created in the past 15 years.While they are a relatively new market and still fragmented, family offices will continue shaking up private equity and venture capital in the coming years similar to how private equity and venture
capital shook up the public markets in the early 1980s.PROMOTEDThe 1980s And The Promise Of Alignment Between Managers And Investors One of the reasons PE and VC shook things up in the public markets in the ’80s was the promise of aligned interests between fund
managers and investors. The typical VC and PE model included a flat 2% management fee to cover their overhead; they only made money beyond that after the investors made money.However, over time, many PE and VC firms turned to an asset under management strategy. They realized they could keep their overhead relatively flat while increasing their AUM. And 2% on a larger
AUM equaled a higher payout. So, for example, a $500 million fund could 4X its management fee—regardless of performance—by raising a $2 billion fund, and much of the increase would flow straight to its own bottom line.Aligned interests between fund managers and investors were no longer as strong.Family Offices Recover Alignment Family offices will shake up the private capital markets because of the large amount of capital they manage and the genuine alignment of interests with the investments
they make.If you’re a founder building an early- or late-stage company and you’ve received an investment from a VC or PE firm, you need to be able to grow over time. But the venture fund must turn its money
over every three to five years, so achieving an exit is its end goal.The video player is currently playing an ad. For the founder, this means that at some point, you’ll have to shift your focus away from growing and running your company, to focus on fundraising, reporting
to a board, managing earnings and making decisions that align with the time-limited interests of your venture fund investors—not necessarily maximizing long-term profitability for the company.Unlike venture capital and private equity firms, single-family offices are designed to protect and grow wealth for future generations. They possess several attributes that align with the companies
they invest in:
wealth concentration among affluent families. And many of the at least 10,000 single-family offices in the world were created in the past 15 years.While they are a relatively new market and still fragmented, family offices will continue shaking up private equity and venture capital in the coming years similar to how private equity and venture
capital shook up the public markets in the early 1980s.PROMOTEDThe 1980s And The Promise Of Alignment Between Managers And Investors One of the reasons PE and VC shook things up in the public markets in the ’80s was the promise of aligned interests between fund
managers and investors. The typical VC and PE model included a flat 2% management fee to cover their overhead; they only made money beyond that after the investors made money.However, over time, many PE and VC firms turned to an asset under management strategy. They realized they could keep their overhead relatively flat while increasing their AUM. And 2% on a larger
AUM equaled a higher payout. So, for example, a $500 million fund could 4X its management fee—regardless of performance—by raising a $2 billion fund, and much of the increase would flow straight to its own bottom line.Aligned interests between fund managers and investors were no longer as strong.Family Offices Recover Alignment Family offices will shake up the private capital markets because of the large amount of capital they manage and the genuine alignment of interests with the investments
they make.If you’re a founder building an early- or late-stage company and you’ve received an investment from a VC or PE firm, you need to be able to grow over time. But the venture fund must turn its money
over every three to five years, so achieving an exit is its end goal.The video player is currently playing an ad. For the founder, this means that at some point, you’ll have to shift your focus away from growing and running your company, to focus on fundraising, reporting
to a board, managing earnings and making decisions that align with the time-limited interests of your venture fund investors—not necessarily maximizing long-term profitability for the company.Unlike venture capital and private equity firms, single-family offices are designed to protect and grow wealth for future generations. They possess several attributes that align with the companies
they invest in:
- Because of their long investment time horizon, they aren’t constrained by investing cycles and accelerated liquidity plays, enabling them to remain a stable investor for a growing venture.
- Family offices recognize that building scalable category winners takes capital and networks.
- In addition, the family itself may have business experience that can further benefit its portfolio companies.
- When the founder of a venture investment achieves their initial growth goals, family offices can add new networks and additional capital for scale. And when things are not going as planned, the families can often bring transactional, risk mitigation and operational experience to the table, as well as their networks—and keep their capital in longer.
Family offices have an incredible amount of patient capital; they have niche expertise and operational experience within one or a few sectors; they’re increasingly doing deals with other SFOs; and
they have complete control of their overhead costs. Their interests could be nicely aligned with the companies they invest in—and with other family offices that wish to co-invest in a deal.However, working with a family office has its potential drawbacks, too:
they have complete control of their overhead costs. Their interests could be nicely aligned with the companies they invest in—and with other family offices that wish to co-invest in a deal.However, working with a family office has its potential drawbacks, too:
- Some families may desire more personal involvement, which may not always align with the company’s goals and objectives.
- A family that created its wealth building a company within an industry that’s still thirsty for innovation—such as a brick-and-mortar consumer, insurance or manufacturing company—doesn’t necessarily translate into expertise in venture investing in a modern tech-driven, e-commerce or deep tech company compared to a tech- or industry-focused venture firm.
- There may be potential for less access to follow-on funding rounds if the family office insists on being the primary (or only) investor and does not have an extensive investor network or ready access to pool capital.
A Changing Landscape As family offices continue to grow and institutionalize, the alignment between single-family offices and company founders could change the landscape of wealth management and
private capital markets. As more family offices become efficient and less siloed, they’ll more easily co-invest with other family offices and compete on deals with the Sequoias and BlackRocks of the world.
private capital markets. As more family offices become efficient and less siloed, they’ll more easily co-invest with other family offices and compete on deals with the Sequoias and BlackRocks of the world.
