Cap Expand Partners

Category: Raise Capital

Maximize Your Wealth: Leveraging Alternative Investments through Family Offices

Expert Wealth Management

“What should I invest in now?” It’s the million-dollar question – literally, in many cases. It’s also the question we hear wealthy families and business leaders always ask. This question gains urgency when considering alternative investments, a response to the current global context of geopolitical tensions, soaring interest rates, and rampant inflation.

As an ultra-high-net-worth individual (UHNWI) or a business owner sitting atop trapped capital, financial management may seem like a tightrope walk between two skyscrapers – one of capital preservation, the other of wealth growth. Although traditional financial markets have demonstrated long-term reliability, they might not offer sufficient diversification, especially for multi-generational family wealth. Alternative investments such as private equity, real estate, and private debt provide additional options for achieving these objectives.

High-net-worth families and individuals often collaborate with family offices to obtain the specialized expertise and tailored strategies required to navigate this complex financial environment. For further insights into how family offices contribute value, refer to our preceding article.

Let’s explore some of the alternative asset classes that typically resonate with affluent families looking for direct investments, and how these are being affected by current market conditions.

Navigating the Complex and Rewarding World of Private Equity and Venture Capital

Since the summer of 2022, with the onset of interest rate hikes by central banks, the private equity (PE) and venture capital (VC) sectors have encountered substantial obstacles in investment activities, fundraising, and exit strategies. Buyers and sellers are struggling to agree on asset values, and even when they do, financing remains a hurdle.

Private Equity

Private equity performance

Despite these challenges, PE has consistently outperformed public stock markets, achieving an average annual excess return of 5.3% and a total return of 13.4%, according to Bain & Company. This isn’t luck; it’s skill. Great fund managers have a knack for picking companies with promise, and then rolling up their sleeves to improve operations and streamline finances.

The Family Office Connection

Family offices have recognized the potential in PE, shifting from a predominantly passive role in fund-level investing to a more active stance in direct investments. They have emerged as a crucial source of funding for growing companies.

Investment Approaches

There are two primary pathways to engage in PE and VC: pooled funds or direct investments. Both approaches have distinct advantages, and family offices must judiciously choose between fund managers and target companies.

Crafting a Strategic Approach

Family offices need a clear strategy that not only targets financial returns but also accounts for factors like control, diversification, impact, and education—especially for the next generation, or “NexGen.” They must define their role – whether as hands-on operators, active or passive investors, or asset allocators – which will significantly influence their investment strategy and implementation.

Additionally, family offices should tailor a strategy that leverages their distinct strengths, such as operational or industry expertise, a relevant network, or experience in owning and managing a family business. Honest self-evaluation is key to identifying areas where they can add significant value, particularly when aligning with family-owned businesses seeking investment but cautious of external investors.

Venture Capital: A Petri Dish for Innovation

VC is an essential field for those interested in innovation and disruptive growth. With over 40% of US IPOs being venture-backed, according to the National Venture Capital Association, VC stands out as a critical platform for emerging companies.

Historical Importance and Future Promise

VC has been a rewarding yet demanding playground for investors. The long-term nature of the investment, coupled with high risk and the necessity for extensive networks, makes VC a niche investment choice, not suitable for all strategies.

Role of Family Offices in Venture Capital

Family offices have become increasingly important in the VC ecosystem, providing not just funding but also invaluable expertise and support. They often focus their investments in sectors where they can apply their own experience or foster innovation, offering a unique combination of financial and intellectual resources.

Challenges and Intricacies

The complexities of sourcing deals, performing due diligence, and managing illiquid investments make VC a demanding asset class. Family offices must carefully consider these aspects, ensuring they align with their broader wealth management strategies and determining the extent to which VC fits into their portfolio.

Looking Beyond Financial Returns

While VC is known for offering uncorrelated returns and potentially higher long-term gains, its appeal to many family offices extends beyond mere financial metrics. It provides an opportunity to influence sectors they are passionate about, such as healthcare or climate technology.

Developing a Strategic Framework

No one should enter VC on a whim. Engaging in VC requires a carefully crafted strategy that addresses both financial and non-financial objectives. Given the competitive nature of the VC market, family offices also need to assess their access to high-quality investment opportunities.

The Road Ahead

Presently, family offices are focusing their VC investments on rapidly evolving sectors like medical devices, healthcare, gaming, and climate technology. Those new to VC must be prepared for a steep learning curve, best navigated by cultivating networks and accumulating hands-on experience.

Investing in Private Debt: High Yields in a High-Interest World

In the current climate of economic fluctuation and modest growth, private debt emerges as a highly attractive asset class.

Past and Present: The Appeal of Private Debt

Private debt has demonstrated an impressive average annual return of 8.3% over the past decade, according to Preqin. Its robust performance and resilience amidst market shifts have made it a preferred choice for many investors.

Advantages of Private Debt

For lenders, private debt presents attractive risk-adjusted returns and acts as a buffer against inflation and rising interest rates. Borrowers favor private debt for its expedited process, simplicity, and the potential for fewer lending parties – aspects particularly valuable in today’s unpredictable economic climate.

Emergence of Family Offices in Private Debt

Recently, family offices have begun to tap into the potential of private debt, recognizing its role in providing stability and higher yields in the current high-interest-rate scenario. These offices are increasingly pivotal in offering direct private credit solutions, with greater loan structuring flexibility compared to traditional financial institutions.

Global Expansion of Private Debt

Although the US is a major player in private debt, opportunities are abundant globally. Family offices are expanding their horizons, seeking diversified lending opportunities, especially in Gulf countries.

Future Prospects of Private Debt

Given its attractive features and strong historical performance, private debt is poised to remain a significant asset class. For family offices, it represents a chance to balance risk and return while leveraging their distinct capabilities in loan structuring and capital provision.

Real Assets, Real Opportunities: The Enduring Appeal of Real Estate Investments

The Timeless Attraction of Real Estate in Investment Portfolios

Real estate has long been a staple in diversified investment portfolios, prized for its balance of risk-adjusted returns and potential for capital preservation. This asset class holds a unique allure for family offices, but what factors contribute to its irresistible charm?

Steady Performance: A History of Strong Returns

Data from Benefit Street Partners reveal that private real estate has delivered an impressive average annual return of 8.7% over the last twenty years. This robust performance underscores real estate’s reliability and profitability as an investment choice.

Diverse Investment Spectrum in Real Estate

Real estate investment is not a monolith. It encompasses a dizzying array of segments, from residential and commercial properties to industrial spaces and undeveloped land. Recently, non-traditional sectors like student housing, medical facilities, and assisted living communities have attracted significant attention from family offices.

Why Family Offices Love Bricks and Mortar

Family offices have a diverse approach to real estate, influenced largely by the origins of their wealth and their investment objectives. Some have amassed their fortunes through real estate, naturally gravitating towards further investments in the sector. Others seek real estate for diversification or unique opportunities absent in public markets.

Complexities of Direct Real Estate Investment

Direct investment in real estate is intricate yet potentially lucrative, demanding considerable expertise. Family offices face challenges in identifying investment opportunities, formulating business strategies, arranging financing, and performing due diligence. A critical decision involves choosing between self-managing properties or employing external management.

Real Estate and Social Impact

Increasingly, family offices are considering the social impact of their real estate investments. By funding projects like low-income housing or specialized accommodations, they can make a tangible difference in society.

Measuring Real Estate Investment Success

The measure of a successful real estate investment often boils down to its equity multiple. For those considering direct investments, the key question is: “What would the financial outcome be if the property were sold for the same price at which it was acquired?”

Infrastructure: The Bedrock of Tomorrow

The Essential Role of Infrastructure

In an era marked by rapid technological advancements and economic growth, infrastructure is the cornerstone of modern society. Key sectors such as transportation, energy, utilities, and telecommunications are not just facilitators of societal advancement but also attractive avenues for financial investment, noted for their resilience and low volatility.

Infrastructure: A Market Poised for Expansion

2023 highlights the robustness of the infrastructure sector, even amidst economic fluctuations. According to McKinsey & Company, global infrastructure investments are projected to soar to an astonishing $49 trillion by 2030, indicating significant growth prospects.

Adapting to Global Shifts: Embracing Sustainable Investments

With a global shift towards sustainable energy, infrastructure investments are aligning with this trend. The renewables and natural gas sectors are becoming prime investment targets, especially for family offices.

The Synergy of Family Offices and Infrastructure

Family offices, with their extended investment horizons and adaptable capital structures, are ideally suited for infrastructure investment. These characteristics make them apt investors for projects that might be less appealing to traditional firms due to their scale, complexity, or long-term nature.

The Importance of ESG in Investment Decisions

Family offices are increasingly prioritizing environmental, social, and governance (ESG) considerations in their investments. In infrastructure, this translates to ensuring that projects are sustainable, ethically managed, and beneficial to local communities.

Leading the Way into the Future

The significance of infrastructure as an investment class continues to grow. With their ability to invest over the long term and their focus on ESG factors, family offices are well-positioned to make a profound impact, contributing significantly to the development of foundational projects that will shape future economies and societies.

Cap Expand Partners: Facilitating the Synergy with Family Offices

In the intricate world of alternative investments, navigating the complexities presents a formidable challenge. Cap Expand Partners meets this challenge head-on, fostering strong collaborations with family offices. These partnerships are crucial in uncovering insights and benefits across a diverse array of alternative asset classes.

Expertise and careful judgment are essential to successfully maneuver through this complex environment, characterized by high interest rates and economic uncertainty. In such a fluctuating landscape, there is no replacement for the specialized guidance provided by seasoned financial professionals. They are instrumental in guiding UHNWI and families toward a future marked by financial success.

Cap Expand Partners leverages its expansive network of family offices to assist business leaders in securing the necessary capital to achieve new levels of efficiency, profitability, and market innovation. For those eager to explore the possibilities within alternative investments, we invite you to reach out to us. Your prosperous tomorrow starts with the choices you make today.

How Private Markets Help Business Owners Fund Their Growth Ambitions

Alternatives to Traditional Equity Financing When Raising Capital 

While publicly-traded equity makes up the lion’s share in the financial landscape, most mid-sized companies don’t rely on IPOs or other public offerings to raise capital. For decades and beyond, business owners have been taking advantage of private capital sources in order to grow.

If you’re a business owner considering raising funds, private investment can offer a variety of financing solutions for your company. Family offices in particular have become more significant players in this investment field, and form attractive financial partners for many businesses.

With private markets evolving at a rapid pace, let’s take a look at what this means for business owners and how this affects their prospects.

A Brief History of the Private Equity Market

Private investment arguably became all the rage with leveraged buy-out (LBO) transactions in the 1980s. A mainstay of Hollywood thrillers set on Wall Street, an LBO simply meant buying a company with mostly borrowed money — maybe 80-90% bank financing. The goal was to acquire companies at a discount, and flip them for a quick profit fueled by high leverage.

If that sounds unappealing to you as a business owner proud of what you created, we don’t blame you. It rightfully earned a reputation as a predatory practice. It didn’t have to be, but it often was. 

According to Pantheon, the number of private-equity backed companies in the US and Europe has grown by 5% over the past decade, while public ones declined 2%. Fortunately, LBO funds maximizing returns solely through “financial engineering” declined in popularity since then.

LBOs are also still around, but we see more reasonable leverage levels. The focus is not on stripping companies for parts, but on committing for the long haul to add value to the marketplace — in other words, making structural business improvements. 

Globally, unallocated capital (“dry powder”) in private equity has grown nearly 17% annually since 2015, reaching a new record of $1.8 trillion in 2022. That’s a lot of money looking for homes. As a business owner though, adding other sources to your capital raise could open the door to more opportunities faster, with more fulfilling outcomes.

Beyond Private Equity Funding

Sometimes referred to interchangeably as the “alternative” investment space, private investment essentially involves securities or ownership interests which are not publicly traded — an alternative to typical listed stocks and bonds. If it’s on a public exchange, by definition it is not private.

While its total size is hard to ascertain due to the assets being, well, private, Goldman Sachs’ co-president of Asset Management Alternatives Mike Koester estimates that the value of the private market has doubled from $5 trillion to $10 trillion in the last five years — still limited compared to the public equity market cap of $60 trillion with another $60 trillion in public credit, but increasing significantly nonetheless.

The public markets have been a traditional place to invest or grow your business, but this may not be true for all anymore. Private markets offer an opportunity for investors who want to diversify their portfolios or have access into exciting new growth industries. It’s no surprise that they continue to attract capital.

As companies turn away from traditional funding methods and toward private investment, the number of listed companies has been declining. Ironically, more money is being invested into the public markets which are now far less populated than they used to be. This has important implications for the growth profile of public investments.

According to Pantheon, companies that remain on stock markets are typically older and larger with slower growth rates than private companies. They also suggest the potential for increased volatility, making the prospect of going public even less appealing in favor of private funding.

When we look at the entire alternative investment space, private equity dominates by holding roughly two-thirds of the market. This includes LBO funds, venture capital, and growth equity. Behind private equity are real assets. Real estate forms a substantial piece of the pie including its development and / or long-term ownership. Infrastructure (e.g. roads, ports, airports, toll roads, etc.) and natural resources also fall into this category.

The smallest yet fastest growing segment is private credit or debt. This space originally emerged as a new frontier for investors in their search for yield, and has increased tenfold in the past decade. With a value of $1.2 trillion, the private debt market continues its growth in the US and has gained momentum across Europe.

Alternative debt providers have been shown to be more accessible and flexible than traditional banks. Although they typically charge higher interest rates, they can provide financial resources with minimal share dilution and limited valuation discussions. Term loans, business lines of credit and invoice financing are just some examples that alternative debt providers offer businesses. Other financial products have debt obligations combined with equity characteristics such as mezzanine or convertible debt.

Private markets have a proven track record of outperforming their listed counterparts, even when measured on a risk-adjusted basis. Despite economic headwinds and geopolitical uncertainty, this sector continues to grow in business finance.

The Democratization of the Private Markets

The private financial markets used to comprise primarily of institutional investors. Nowadays, you don’t have to be an institution anymore to pursue the outsized gains available in this sector.

Private individuals and investment groups play an increasing role due to easing of regulations which started in Europe, followed by the US, and elsewhere. Analysts estimate that 20-30% of private funds originates from retail investors, compared to 5-10% in the past. According to Koester from Goldman Sachs, going forward this group will overtake institutional investors.

High-net-worth investors could simply be one person (or team) with deep pockets, who has a skill set, network, or significant distribution platform. By contrast, family offices are independent companies that high-net-worth families use to outsource their financial growth.

More than one family may own one family office, but they can’t solicit new investors like a fund can. Because they represent the financial interests of a small and limited number of people, family offices face a lower regulatory burden compared to funds (see our article on the subject for in-depth reading on family offices).

The private space has seen increasing involvement from family offices, an investor class with anywhere from tens of millions to tens of billions of dollars in capital to deploy. According to some estimates, there are ten times as many family offices in the game now compared to ten years ago.

The Benefits of Family Offices for Business Owners

Not only are we seeing the scale tip from public to private financial markets, and institutional to non-institutional investors, but also from traditional investment vehicles to direct investments. For business owners looking to raise capital, these are just some of the dynamics that should be taken into account.

Family offices have many advantages as investment partners for businesses because they don’t have the same exit pressure that fund managers have. They are in a position to be patient and flexible with the ability to offer alternative financing solutions (equity and / or debt).

Family offices increasingly prefer direct investment over placing capital in a private equity fund to avoid paying fees. This also carries potential benefits for business owners, especially those who have shied away from private equity investors, perceiving them as beholden to profit and unsympathetic to the company’s original purpose.

These investor groups tend to be more personally engaged in their investments. They may also be as interested in the value they can add to the company as the impact they can make — not just yield for the sake of yield. High-net-worth families have often built businesses of their own. They may have unique skill sets to contribute to the companies they invest in — the ability to serve as an asset to the company other than just a source of capital.

Likewise, independent sponsors are a natural evolution of the direct investment space. They act like private equity funds, except they source deals before the capital is raised, relying on a network of family offices (and an increasing number of private equity firms) to fund the deal. They provide capital to businesses that might not otherwise be available, and generate value through their involvement and expertise (see our article for a deep dive on independent sponsors).

Key Considerations When Selecting a Financing Partner

As a business owner it may be tempting to accept much-needed capital from whatever available source … but be careful: a misalignment can have disastrous consequences.. The money isn’t enough — the strategic contribution and the intention matters just as much, if not more.

Before you pick your funding source, consider:

  • Where are you in the life cycle? Are you in the ideation phase, launch and traction, scaling and growing, the breakout phase, or the “established” phase? Different funding sources are better for different phases.
  • What’s your endgame? Are you looking for disruptor status and a billion-dollar valuation at exit? Self-sustaining middle-market status? A valuation boost? Different funding sources and structures are better suited for different outcomes as well.
  • How much control are you willing to give up? How much equity are you offering, or do you prefer not to dilute? Different investors and structures leave you, the owner, with more control. Others will allow the investor broad decision-making power, whichisn’t necessarily a bad thing.
  • What’s your time horizon? Are you too young to retire and looking to cash in some of your chips while remaining on board? Do you anticipate a quick boost and cash-out, or does your private investment partner have to sit tight for a three-year plan to play out? Or five years? Or ten years? Different investors have different capacities for patience.

Cap Expand Partners helps match promising companies with the right sources of capital and financing structures. If it’s time for funding and you need guidance, don’t hesitate to reach out to us. You have nothing to lose by having the conversation. Let’s get the ball rolling on the next phase … or your exit strategy.