According to the Monetary Authority of Singapore (MAS), the number of Single Family Offices (SFOs) set up in Singapore—lured by favourable tax incentives promoted by the MAS—had climbed significantly to 1,650 by the end of August 2024, from 400 by the end of 2020.1
Consequently, wealth management assets under management (AUM) in Singapore recorded growth of more than 8% in 2023,1 continuing the trend of growth seen in recent years. Overall, the five-year compounded annual growth rate of wealth management AUM reached approximately 10%.1 Unsurprisingly, there has been increased interest among these families in investing in private equity (PE) or venture capital.1
Global Trends: Rising Interest in Private Equity
On a global scale, PE investment has overtaken public equity as the leading asset class for family office investments: In 2023, PE (including direct investments, funds, and private debt/direct lending) comprised 30% of the average family office portfolio, an increase from 22% in 2021.2 In contrast, public equities accounted for 25% of the portfolio, down from 34% in 2021.2 In 2024, notable portfolio reallocations were observed from cash to fixed income, as well as to public equity and PE, with 43% of family offices increasing their exposure to PE after 38% did so the previous year.3,4
Within the Asia–Pacific (APAC) region, family offices were the most bullish among those in the Middle East and Africa toward direct PE (49%) and PE funds (48%).5 Nearly half of APAC family offices intend to increase their asset allocation to the APAC region over the next five years, positioning it as a leading global investment hotspot, according to a UBS report.6 Over this period, APAC family offices also plan to diversify their portfolios by adding fixed income and equities from developed markets, as well as PE and hedge funds.6
More Confidence in Private Equity Investments
Even though concerns remain about a potential slowdown in realisations and exit activity over the next year, family offices continue to demonstrate confidence in the returns of PE. On average, 71% of family offices investing in PE do so to diversify their investment portfolios, and the same percentage believes that long-term returns will likely surpass those of public markets, as reported by UBS.7
Why Private Equity Fits Family Offices
Based on the aforementioned trends, the Aura PE team has seen increasing interest and enquiries from family offices regarding PE investments. Below are our insights on why PE investing is suitable for family offices:
1. Long-Term Focus
Alignment with Time Horizons: Family offices often manage intergenerational wealth and are not constrained by the short-term performance metrics faced by institutional investors. PE’s long-term investment cycles fit well with their wealth planning goals. By investing in private companies, family offices can participate in the growth and success of these businesses. As private companies grow and increase in value, the value of the PE investment can appreciate, providing significant capital gains.
Legacy Building: Investments in PE can create opportunities for families to support innovative businesses or sectors aligned with the family's values and long-term objectives, ensuring that the investments reflect their principles, vision, and legacy.
2. Higher Returns Potential
PE has historically outperformed public markets over the last 25 years,8 offering higher potential returns over extended periods. This outperformance is due to PE managers’ ability to actively create value in their portfolio companies through corporate governance, operational improvements, strategic initiatives, mergers and acquisitions (M&A), and financial engineering.
Access to Growth Opportunities: Investing in private companies, especially early-stage or high-growth firms, allows family offices to capture significant value creation.
3. Diversification
Portfolio Expansion: PE provides an asset class that is less correlated with traditional investments like public equities and bonds, helping to diversify portfolios and provide stability during times of market stress. This diversification reduces overall portfolio risk and improves the risk-adjusted return profile for families.
Sector-Specific Expertise: Since family offices are typically founded by entrepreneurs who started their own companies, they often prefer targeting investments in sectors or niches they understand well and have experience in. This approach mitigates risks while capitalising on their expertise.
4. Greater Control and Influence
Active Involvement: Direct PE investments enable family offices to gain greater control and influence over investment decisions. Through board participation or close partnerships with management teams, family offices can be actively involved in the decision-making processes of the companies they invest in.
Tailored Investment Structures: Unlike public markets, PE investments allow flexibility in structuring deals to suit specific family needs and goals.
5. Access to Unique Opportunities
Co-Investment Deals: Many PE firms offer family offices co-investment opportunities, enabling them to invest alongside institutional investors without paying typical management fees.
Proprietary Deals: Family offices, through their networks, often have access to off-market opportunities or exclusive deals.
6. Wealth Preservation in Inflationary Environments
Hedge Against Inflation: PE investments in real assets, infrastructure, and businesses with pricing power can help preserve wealth during inflationary periods.
Real Asset Exposure: Many PE strategies focus on tangible assets or businesses with significant intrinsic value.
7. Changing Market Dynamics
Decline in Public Markets Opportunities: With fewer companies going public and many high-growth firms staying private longer, family offices increasingly turn to PE to access these growth opportunities.9
Attractive Valuations: Private companies may offer better value than publicly traded counterparts, especially in volatile or overvalued public markets.
Navigating Challenges in Private Equity
While interest in PE is growing, family offices need to be mindful of the following challenges:
Illiquidity: PE investments require capital to be committed for long durations.
Risk: PE investments carry different risks to traditional investments including opacity, illiquidity and potentially leverage.
Operational Expertise Required: Direct PE investments may demand extensive due diligence, specialised expertise, and active portfolio management oversight.
Privacy: Family offices prioritise their privacy and often strive to remain out of the public eye. However, this lack of visibility can result in exclusion from deal opportunities or communications, potentially causing them to miss valuable investment prospects.
In conclusion, family offices are drawn to PE investments due to the diversification benefits, flexibility, access to exclusive deal opportunities, and longer investment horizons. These attributes make PE an appealing strategy for achieving higher financial returns and preserving intergenerational wealth. The Aura PE team has seen more interest and investment support from family offices in its proprietary-sourced PE deals and will strive to remain at the forefront of the PE industry.
Sources:
1. Building a Stronger Tomorrow: Family Offices in our Flourishing Wealth Management Landscape, The Monetary Authority of Singapore (MAS), 16 September 2024
2. Private Top 10 Family Office Trends, Global Deloitte Report, 17 May 2024, page 12
3. Global Family Office Survey 2024 Insights, Citi Private Bank Report, 19 September 2024, page 5
4. Global Family Office Survey 2024 Insights, Citi Private Bank Report, 19 September 2024, page 15
5. Global Family Office Survey 2024 Insights, Citi Private Bank Report, 19 September 2024, page 27
6. Global Family Office Report 2024, UBS, 22 May 2024
7. Global Family Office Report 2024, UBS, 22 May 2024, page 41
8. Private Equity's Historical Outperformance Through Boom and Bust September 2024, Schroders Capital, page 5
9. How Risky are Private Equity Investments Versus Other Investments by Melissa Horton, Investopedia, 17 October 2024
