The desire for greater control over their investment portfolios and higher returns has led family offices, private equity investors to funnel more funds directly into private companies. Private investment firms are enticing private equity talent by allowing them to manage their expanding portfolios. This has qualified private equity professionals, who at one time were chained to a fast-paced job that offered little to no space for family life, the opportunity to enjoy an improved work-life balance. We further explore Family Office Private Equity in this article.
COVID-19’s Impact on Investment Professionals
The COVID-19 pandemic has spurred a change in priorities for investment professionals. Many have moved out of larger cities, considered the hubs of finance, and now live in smaller towns. Since their expenses have dropped drastically, private equity professionals are now more inclined to seek out opportunities at family offices that are not located in significant investment hubs.
Reassessing Traditional Approaches to Asset Allocation
Family offices are continuing to shift toward direct investments. This is a shift in approach to asset allocation, and they are turning away from conventional techniques for portfolio construction.
The rate at which financially savvy and wealthy families are turning toward direct investment opportunities is steadily increasing. This change allows them to utilize many advantages permitted by immediate investment opportunities, like having more control over investments and saving fees typically paid to intermediaries. This represents a meteoric shift from private equity fund allocations toward direct investments.
Find out more about our family office financial services
The Difference between Family Offices and Private Equity Firms
The primary difference between hedge funds and equity firms with a family office private equity firm is that family offices don’t raise capital from outside investors. This means that they don’t raise money from limited partners.
A family office is going to invest the assets of one family or sometimes multiple families or individuals. Family offices can operate using a variety of structures. Some function like hedge funds, and there are also smaller offices that invest in funds but don’t do direct investing.
Multi-family offices will typically function as a hedge fund, and this is because each family on its own does not have enough resources to open its own office. For this reason, recruiting for the job and then carrying out the job is similar to asset management.
Single-family offices typically have the resources to create larger direct investment teams. Established single-family offices will hire talent from private equity firms and investment banks. The more money a family has, the more ability it to poach talent from high-end traditional finance firms.
Families Want More Control over Their Finances
Family office private equity investors are looking for private equity talent because they want to deploy more capital into private companies instead of using funds that an outside firm manages. As a result, in 2019, family investment offices carried out more than 9,000 deals.
In fact, in 2019, close to 50 percent of family offices in North America engaged in direct investments. This includes family offices that are managing less than $1 billion in assets. These families are in a talent hunt to find investment professionals who can help them make sound direct investments.
Some families have watched with frustration as their asset levels have gone down. They want to bring their investment capability in-house, and they want more control over their finances and the investments they are making.
Many families have been turned off by the two and 20 fee structure of traditional hedge funds. In recent years, they feel like hedge fund performance does not merit the two percent management fee they charge. These families want to pay but only for performance.
More and more families want to be directly involved in their money and the investment process. They feel they turned off from the idea of paying other people to manage their money.
Attracting the Private Equity Firm Talent Pool
Many family offices have been poaching partners from established firms by offering them a better work-life balance and the possibility of higher compensation if their investments perform well. They are also enticing investment talent from established firms by providing them the opportunity to work in a lightly regulated environment.
Private equity firms offer their talent good pay but uncertainty when it comes to their long-term career path. However, if investment professionals build up a family office private equity team, they get in on the ground floor. This can support their career and help them build a career that will last for many years.
Competitive compensation is critical to hiring private equity talent that has deep operational experience. Many family offices are offering a base salary plus a bonus and carried interest. However, if family offices want to continue attracting and retaining high-quality talent, they need to do more.
Competitive compensation could include forgivable loans, carried interest, co-investments, and long-term investment plans. As more family offices build complex portfolios from direct deals, they will have to offer these incentives to their staff. If not, they will find themselves losing out on talent either to other family offices or traditional hedge funds and private equity firms.
Working with a Supportive Partner
Fusion CPA is a supportive partner that helps families and family offices transition through complex financial processes. We are a team of expert outsource controllers who use the best accounting software integration to help you grow your business the smart way.
Our outsourced controllers are with you every step of the way, stabilizing your company’s finances with accounting services and software integration. Learn more about how our team can help your business experience mindful growth through business advisory by clicking the discovery button below.
Contact Us
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
