Family Offices’ venture capital investments are on the rise amid the COVID-19 pandemic, according to the latest report of SVB Financial Group, the parent company of Silicon Valley Bank. The Family Offices Investing in Venture Capital – Global Trends & Insights Report, carried out in partnership with Campden Wealth Research, shows that families of great wealth often have diversified and international portfolios, and that Latin America may be a key opportunity for them. This is what Rebecca Gooch, Director of Research at Campden Wealth told LABS.
For this report, 110 representatives of ultra-high net worth families with experience in venture investing were surveyed between October 2019 and February 2020. Later, researchers returned to these surveyed companies to gather additional COVID-19-related input on the report.
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The survey targeted experienced venture capital investors – and a large proportion of them are located in North America, in clusters such as Silicon Valley, and Europe. The Latin American family offices represent only 3.6% of the total surveyed, and they are concentrated in Brazil and Chile. According to Gooch, the report only includes a small proportion of FOs from Latin America because the model, in which a company handles investments of big private fortunes, is still in its “relative infancy” in the region.
According to the report, over the last decade, family offices have been increasing allocations and building in-house venture investment capabilities, primarily stemming from strong historical returns. On average, venture investments constitute 10% of participants’ overall portfolios, divided between direct investments (54% of the average VC portfolio) and funds (46%).
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It also shows that co-investing is a favored route to share infrastructure and expertise, with 92% of family offices co-investing alongside other families and venture funds. Co-investments make up 19% of the average family office venture portfolio.
“We are seeing rapid growth in the family office space in Latin America, and new and innovative companies are emerging there, which could attract their investment. Families of great wealth often have diversified and international portfolios, and Latin America represents a key opportunity for startup and emerging market investment”, says Gooch.
Why are family offices turning to venture capital?
Family offices’ venture portfolio returned an average of 14% in the 12 months before the report. The study points out that fund investments generated 16% in returns while direct deals where family offices had minority stakes reached 17% – these investment returns met or exceeded expectations for more than 85% of respondents. Besides greater gains, family offices are not concerned with the speed of returns. That is why they are more inclined to invest in early-stage startups.
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Even at the beginning of the pandemic, family offices remained optimistic about venture investing: 63% of them said capital allocation to venture will stay the same level as before or increase despite the pandemic. However, infusions may happen at a slower pace and place greater emphasis on quality managers, as they move further toward sector diversification.
It is also interesting to note that in Brazil the interest rate is at its lowest level ever. In August, the Monetary Policy Committee of Brazil’s Central Bank trimmed the country’s benchmark rate to 2%, the ninth consecutive reduction. Thus, investors are also eyeing venture capital, betting on startups for better returns.
Also, according to the SVB report, family offices are most active in direct deals and funds: 76% of them invest directly in companies, and 26% source their own opportunities.
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North America (81%) and Europe (53%) are hotspots for deals, and there is a significant interest in Israel. Before COVID-19, family offices reported that the main barriers to direct investing were competition for deals (28%) and high valuations (22%).
Gooch told LABS that family offices are unique and well-suited for venture capital investment, in Latin America and beyond, for a variety of reasons.
The families often come from successful entrepreneurial backgrounds and bring important know-how on how to set up and run a successful business. They often have pools of capital available for investment, and they are patient investors, which is key for startups
Rebecca Gooch, Director of Research at Campden Wealth
At present, this know-how is bold. According to her, many family offices have the capital to deploy and they are looking for promising investments, particularly as they can benefit from lower valuations due to the COVID-19 crisis and the economic turbulence brought by the pandemic.
“With market disruption comes an opportunity for the birth of new ideas and investments, thus some family offices view this as a moment to capitalize on opportunistic events. In turn, early-stage companies in Latin America may find family offices useful sources of skilled, patient, and well-sourced capital”, she said. One-third of family offices believe the highest returns in the next decade will come from emerging managers.
