After a two-year investment hiatus, family offices are returning to the market with a renewed belief in technology. Confidence among family offices took a significant hit following the highs of 2021, particularly within riskier portfolio categories such as private equity and venture capital. However, as public markets rebound, positivity is growing to a two-year high. With dry powder soaring to an unprecedented $2.5T in 2023, many family offices are expecting an increase in investment pace, as reported by a recent Deloitte study.
This revival is occurring amidst economic volatility, compelling family offices to continuously adapt their investment strategies to the evolving economic landscape. Almost one-third of the total capital invested in startups globally in 2022 came from family offices, and we expect to see them actively investing again in 2024, albeit with more caution and a different deployment strategy.
Family Offices in the Future of Tech Investment
Looking ahead, family offices are likely to show a preference for participating in club deals and co-investments, and a shift towards smaller deals ranging from $1M to $10M. There is also a growing interest in investing at later stages to achieve quicker liquidity and reduced risk. Co-investing alongside specialized funds is another expected trend, along with an increased focus on more in-depth investment themes.
Four Key Insights on Family Office Investments in 2024
- Increasing Number of Internal Rounds
While 2021 was the peak year for investments, 2023 showed an increasing number of internal rounds with a surge of under-the-radar funding. There was an increase of between 35% and 45% in the portion of bridge rounds in US startups in Q4 2023, demonstrating investors’ confidence as they doubled down on their leading startups’ investments despite market challenges. We would expect that in 2024, the market will shift back to more traditional investment patterns with a mix of external and internal investment rounds.
- Focus on Leading Tech Investment Areas
SaaS, fintech, and AI/ML are expected to continue being the leading tech investment areas for family offices. According to a PwC survey , 80% of family offices hold investments in key areas such as fintech, SaaS, and generative AI. UBS data reveals that 78% of family offices surveyed plan to invest in generative AI within the next 2-3 years. The excitement surrounding AI presents significant opportunities in vertical applications such as fintech investments, particularly leveraging AI’s utility within the space.
- Leveraging Industry Expertise for Competitive Advantage
Family offices are harnessing their inherent knowledge of their industries or areas of expertise to gain a competitive edge. This approach enhances decision-making and provides access to valuable network deal-flow. Family offices value direct investments and often invest in venture capital funds to access co-investment opportunities that align with their areas of expertise. This can present in formats such as ‘Industry vertical’, where a family understands an industry such as banking they will be more inclined to invest in banking technology, or ‘PE vertical’, wherein families can utilize emerging innovative technologies such as Gen AI to cover tasks such as market research and DDQs.
- Increasing Allocation to Secondaries
The demand for secondary markets has surged, with family offices showing a growing preference for these investments. As public markets rebounded, family offices increased their allocation to secondaries from 42% in 2022 to 52% in 2023, according to a KKR survey . UBS highlights that 45% of surveyed family offices plan to over-allocate their portfolios to secondaries, driven by the narrowing valuation gap between private and public markets that will persist as long as valuations are ‘sane’.
In conclusion, the resurgence of family offices presents immense opportunities, particularly in AI, fintech and SaaS, driven by increased investments and strategic diversification. As they navigate the complexities of the current economic landscape, their strategic focus on technology and leveraging industry expertise will be crucial. The insights shared here underscore the dynamic and adaptive nature of family office investments, positioning them to capitalize on future growth opportunities.
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References:
‘Deloitte Private Family Office Insights | Deloitte’ (www.deloitte.com) <https://www.deloitte.com/global/en/about/press-room/deloitte-private-inaugural-family-office-insights-series.html> accessed 18 June 2024
PwC, ‘PwC’s Global Family Office Deals Study 2023’ (2023)
<https://www.pwc.com/gx/en/services/entrepreneurial-private-business/assets/pwc-2023-global-family-office-deals-study.pdf> accessed 18 June 2024
UBS, ‘Global Family Office Report 2024’ (2024)
<https://www.ubs.com/content/dam/assets/wm/global/uhnw/doc/ubs-gfo-report-2024-single-pages.pdf?campID=UC:E:601227:601239:1120983078:0:1576027902:1576054473:en:0:::> accessed 18 June 2024
KKR, ‘Loud and Clear KKR 2023 Family Capital Survey’ (2024) <https://www.kkr.com/content/dam/kkr/insights/pdf/loud-and-clear-kkr-2023-family-capital-survey.pdf> accessed 18 June 2024
UBS, ‘Global Family Office Report’ (2023) <https://advisors.ubs.com/mediahandler/media/563297/ubs-gfo-report-2023.pdf> accessed 18 June 2024