Family offices drive growth and innovation in private markets

Despite challenges, family offices are reshaping private markets through their long-term vision, entrepreneurial spirit and focus on innovative sectors.

Family offices are emerging as a key growth driver for private markets, with demand set to grow further. This trend is fuelled by steady creation of new family offices following significant liquidity events worldwide.

“The family office sector is one of the fastest-growing areas of our business, driven by recycling of wealth from the sale of large operating businesses into more diversified portfolios,” notes Will Lawrence, private client partner at Cambridge Associates, a US-based investment firm.

Unlike institutional investors constrained by short-term performance metrics, family offices, which manage wealth of the richest families, enjoy freedom to focus on long-term opportunities.

Their entrepreneurial outlook resonates with private equity, an asset class that matches their appetite for risk and drive for high returns.

“Family offices often prioritise preservation of generational wealth, enabling patient and strategic capital deployment. Many managers see the family office sector as a crucial area for expanding their LP [limited partner] bases,” notes Mr Lawrence.

Private markets’ bespoke nature also suits the preferences of family offices, which tend to embrace illiquidity and innovation, favouring niche areas that may be overlooked by larger, more risk-averse institutional investors.

Military spending boom

Healthcare and biotech stand out as particularly promising areas for family office investment, says Keith Bloomfield, CEO of multi-family office FFT, which manages $40bn in assets on behalf of more than 300 families across both Europe and the US. Advances in imaging technology, cancer treatments and precision medicine offer compelling opportunities for families seeking both financial returns and positive societal impact.

AI is an emerging focus across industries, offering groundbreaking opportunities in a wide range of fields. While still in its early stages, the sector is drawing significant interest. “AI presents a compelling investment opportunity, and we are starting to explore the space,” says New York-based Mr Bloomfield.

Families value the firm’s prudent approach but are also eager to explore “cutting edge” opportunities. “We aim to balance performance and volatility with a conservative approach, which is why we are moving cautiously into AI,” he says. “With many new players in this uncharted territory, our focus remains on thorough diligence and strategic selection.”

Private credit has also gained traction for FFT’s clients, amid rising interest rates and tighter bank lending offering a chance to earn attractive returns.

Defence and utilities are highlighted by Paul Karger, managing partner at US-based multi-family office TwinFocus, as sectors with significant growth potential. “The defence sector is benefiting from increased global military budgets and a growing reliance on smaller, innovative companies for research and development,” he says.

Similarly, “insatiable demand for energy”, fuelled by technological adoption and decarbonisation efforts, make utilities an attractive investment, particularly for infrastructure improvements.

Exit slowdown

Private equity has gained prominence in family office portfolios, increasing from 22 per cent in 2021 to 30 per cent in 2023, according to Deloitte. However, the landscape remains tough. High valuations and costly debt are making it harder for investors to deliver the strong returns they anticipate.

“A distribution crisis has emerged," explains Mr Karger, pointing to a slowdown in exits via IPOs or M&A, which has delayed capital returns. “We've been reticent to make new commitments to private equity because we haven't seen a return of capital,” he adds.

Elevated private market valuations, surging debt costs and economic uncertainty are making private equity managers cautious, as these factors complicate accurately forecasting future returns.

Yet, opportunities remain for cautious and selective investors. Mr Karger highlights the need to focus on niches, where supply-demand imbalances persist and where capital scarcity creates unique openings for growth.

Over the past two decades, private equity has evolved from a niche market to a crowded arena. The influx of new funds and capital has led to oversaturation, compressing returns and increasing competition for opportunities. “Successful investments are often vintage-dependent,” Mr Karger notes, highlighting how macroeconomic conditions shape returns. For instance, investments in biotech during the undercapitalised years of 2009-2010 delivered outsized gains. Conversely, investing in popular asset classes with excessive capital inflows typically results in “suboptimal” outcomes.

The growing participation of retail investors adds another layer of complexity. While their entry creates opportunities for partnerships and semi-liquid structures, it also introduces risks. Retail investors often chase past performance rather than anticipating future trends, potentially misaligning their strategies with the realities of the market.

The sales-driven approach by banks compounds these concerns. Reflecting on his brokerage days, Mr Karger observes that banks are in the business of “moving assets, not storing them”.

“They always must sell what's hot, but that doesn’t always align with the best interests of investors,” he explains.

Moreover, navigating private equity’s complexities requires careful planning, particularly in managing illiquidity. Family offices must balance allocations to mitigate the “denominator effect”, where falling public equity values inflate the relative weight of illiquid assets in a portfolio. “If stocks drop while you have significant private equity commitments, it can create a mismatch.” Typically, when equities decline, private equity managers are calling capital, when they see opportunities. “You don’t want to be forced into selling stocks at low prices to meet those calls.”

Secondary opportunities

Slowing distributions and fundraising challenges signal industry “indigestion,” as exits via IPOs and M&A stall, states Cambridge Associates’ Mr Lawrence. However, “buoyant” public markets may revive IPO activity, and buyer-seller expectations could realign.

Meanwhile, secondary transactions and continuation vehicles are growing as alternative exit routes. These approaches allow GPs (general partners) to extend the holding period for assets, a trend Mr Lawrence predicts will continue growing as an alternative exit route in 2025, partially offsetting the slowdown in traditional exits.

Skipping vintages can erode long-term portfolio performance. To close these gaps, families are increasingly leveraging the secondary market to maintain steady exposure across investment cycles. Secondaries have become a compelling strategy in an environment of limited distributions, he says. This dynamic allows secondary managers to bid on LP assets or structure GP-led deals at “reasonable values”, with a favourable supply-demand balance benefiting investors.

Despite challenges, private markets offer a “significantly broader opportunity set” than public markets, believes Mr Lawrence. Over the last 25 years, the number of privately held companies has grown and the number of public companies has dropped. In the US, at the end of 2023, there were 2.5 times more companies backed by private equity (11,409) compared to public companies, (4,572), according to Pitchbook.

Moreover, despite growing concerns in recent years that too much capital is chasing too few opportunities, the private equity market remains remarkably broad, according to private equity firm HarbourVest. While there are nearly 25 times more private equity-backed companies than public market counterparts, the total capitalisation of private equity and venture capital accounts for just 12 per cent of public equity markets (see charts). As a result, companies currently backed by private capital represent part of a broad and growing opportunity set.

Agile shareholders

Private equity provides potential for above-average returns through operational improvements and targeted expansion, benefiting from a smaller, more agile group of shareholders, explains Mr Lawrence. Also, innovation is often driven by private companies, as larger public firms struggle to adapt and frequently acquire innovation from smaller ventures, particularly in areas like AI, fintech and biotech.

Public markets often serve as the exit route for private investments, with many large-cap companies, such as Apple, Meta, and Nvidia, starting as small, venture-backed enterprises. This cycle of innovation and disruption, says Mr Lawrence, highlights the value of investing across the spectrum to capture early-stage growth and long-term potential.

While large-cap investments often lack premiums, with valuations high relative to public markets, the smaller-cap market offers better opportunities, with lower valuations, higher organic growth and greater scope for operational improvements, including product expansion, M&A and professionalisation. These strategies remain core to generating returns without relying on financial engineering.

Mr Lawrence identifies the US mid-market as "prime within the universe”, offering better value, higher growth and lower leverage. Growth equity is another area of focus, particularly minority investments in fast-growing technology companies. The recent global correction in tech valuations has created attractive entry points, while innovations such as AI applications offer significant potential for margin enhancement and sustained growth.

Sweet spot

FFT’s Mr Bloomfield echoes this sentiment, believing private equity, particularly the US market, will continue to provide attractive opportunities for family offices. Relaxed regulations and lower taxes during a second Donald Trump presidency are likely to spur increased mergers and acquisitions (M&A) activity, driving more transactions and potentially boosting M&A volumes significantly. This environment could unlock value in existing portfolios, creating new opportunities for investment and fostering confidence among stakeholders. “Historically, the US has always outperformed the rest of the world, and I don't think that's changing anytime soon,” says Mr Bloomfield.

Family offices have “no trouble” accessing major bulge-bracket managers. However, as these managers grow larger, it becomes increasingly challenging for them to identify good investments. Their focus shifts to large-scale deals, often at the expense of innovative, high-growth opportunities.

The firm’s aim is therefore providing families access to niche managers in the "sweet spot" of $1bn-$3.5bn fund sizes, often founded by “rock star investors” from larger firms, seeking to apply expertise in a smaller, more agile environment.

Early relationships and continued re-investment ensure access to these managers as they grow, rewarding clients with preferred terms and opportunities such as co-investments.

Despite a challenging environment, says Mr Bloomfield, with their patient capital and strategic focus, family offices are poised to remain pivotal drivers of growth and innovation in the private investment landscape.