Family office VC investment and allocation on the rise, says SVB and Campden Wealth report
SVB Financial Group, the parent company of Silicon Valley Bank, hsa released the “Family Offices Investing in Venture Capital - Global Trends & Insights Report” in partnership with Campden Wealth.
The report looks at family offices’ investment levels, performance, expectations, barriers toward venture investments, and their expectations for how the market will evolve amid Covid-19.
“In the last decade, family offices have emerged as a significant source of capital fuelling innovation globally. They are increasingly more open and active in venture, particularly in early-stage companies through direct investments and funds,” says John China, President of SVB Capital. “Our research with Campden Wealth shows that family offices are seeing favourable returns in the asset class, and they are acting as strategic advisors and champions to the startups they invest in. We expect to see more family office investors in the venture ecosystem, collaborating and syndicating with like-minded investors and providing a differentiated pool of capital to founders.”
“We are facing uncertain times due to Covid-19 and an encroaching global recession. In response, family offices are showing their strength as nimble, responsive, and patient investors, often with cash reserves to carry them through turbulent times,” says Dr Rebecca Gooch, Director of Research at Campden Wealth. “At present, many family offices are taking a cautious approach to weather the storm, both with their VC investments and overall portfolios. Families need time to digest the ramifications Covid-19 will have on financial markets and their portfolios. However, some are bullish given current market conditions and are waiting to capitalise on opportunistic deals, and in the VC realm, lower entry valuations. These families are eyeing early-stage investments and funds that focus on Seed and Series A stage companies, along with placing greater emphasis on quality managers and diversification to reduce risk.”
The report surveyed 110 representatives of ultra high net worth (UHNW) families with experience in venture investing between October 2019 and February 2020. Additional Covid-19-related input was collected in Q2 2020. The responding single-family offices had an average of USD797 million assets under management (AUM) and the responding multi-family offices had an average of USD1.5 billion AUM.
According to the report, over the last decade, family offices have been increasing allocations to venture and building in-house venture investment capabilities, primarily stemming from strong historical returns. On average, venture investments constitute 10 per cent of participants’ overall portfolios, divided between direct investments (54 per cent of the average VC portfolio) and funds (46 per cent).
Co-investing is a favoured route to share infrastructure and expertise, with 92 per cent of family offices co-investing alongside other families and venture funds. Co-investments make up 19 per cent of the average family office venture portfolio.
Family offices’ venture portfolios returned an average of 14 per cent in the 12 months prior to the survey. Fund investments generated 16 per cent returns and direct deals where family offices had minority stakes returned 17 per cent. These returns met or exceeded expectations for more than 85 per cent of respondents.
Sixty-three per cent of family offices said capital allocation to venture will stay the same or increase despite the pandemic. However, family offices may deploy capital more slowly, place greater emphasis on quality managers and move further toward sector diversification.
On average, annual company deal activity included 72 company pitches and three commitments, with an average investment of USD6.1M. For funds, this included 41 pitches and four commitments, with an average investment of USD7.9M.
Ninety-one per cent of family offices reported being most active in early-stage venture investments, which have delivered strong returns. With startups seeking out patient capital and smart money, family offices deliver by providing strategic guidance (72 per cent), participating on the board (70 per cent) and facilitating connections to other investors (70 per cent).
Seventy-six per cent of family offices invest directly in companies, and it is most common for them to source their own opportunities (26 per cent). North America (81 per cent) and Europe (53 per cent) are the hotspots for deals, and there is significant interest in Israel. Prior to Covid-19, family offices reported the main barriers to direct investing were competition for deals (28 per cent) and high valuations (22 per cent).
Eighty per cent of family offices invest in funds, reporting that they are an efficient way to outsource deal flow and due diligence, with sector-focused funds (80 per cent) and sub-USD100m funds (71 per cent) as the most popular. One-third of family offices believe the highest returns in the next decade will come from emerging managers. Prior to Covid-19, the most significant barriers to fund investing were access to compelling managers (23 per cent) and valuation levels (18 per cent).
Nearly half of family offices engage in impact and ESG VC investments (47 per cent), and interest in this sector is growing particularly among the next generation of family office leaders. Among these investors, the most popular areas for impact and ESG investments are healthcare and wellness (65 per cent), agriculture and food (63 per cent), and energy and sustainability (63 per cent). North America is heavily invested in healthcare and wellness (74 per cent versus 59 per cent for rest of world).