Family offices are spreading risk through more manager diversification
Paul Maia, a partner at McKinsey, explains how family offices and pension funds are changing their behaviour towards private equity.
Family offices and pension funds are seeking a mix of managers with exposure to different vintages of private equity.
Paul Maia, a partner for McKinsey based in New York, says novel forms of private equity strategies have provided an assets under management boost for the world's leading private equity players, with traditional limited partners, including family offices, also embracing the added flexibility these products bring.
Maia, who leads McKinsey's "top of the house" service line for private capital markets — working with C-suite figures in family offices, private equity companies and other institutional investors on their private asset needs — says allocations to primary funds have remained stagnant, but alternative sources of capital now represent up to $8tn (£6tn) in market value.
Among family offices — which Maia calls the "original private capital investors", having had direct capabilities to buy stakes in private companies for hundreds of years — many are now looking at the strong results achieved by those relying on new semi-liquid private equity vehicles.
Broadening families' private markets portfolios with these novel strategies can help them diversify into new sectors outside of their core family business, Maia explains, adding that diversifying into private opportunities also moves families away from an overweight in public markets "on very large firms like energy or technology".
"In private capital, you can have a very broad exposure from a central point of view to old industrials, through to technology, through to logistics, real assets, et cetera. And so you're seeing folks use private capital for that diversification purpose as well," he says.
Families might be "very successful" at scaling their own businesses, but could be inexperienced with earlier-stage venture capital opportunities, increasing the likelihood they will want to work with private equity fund managers to source opportunities.
As family offices diversify their portfolios, many are also "realising that it's probably a good idea, even if we're sector and geographically diversified, to be manager diversified", Maia says.
"They'll have an [outsourced chief investment officer] run the manager diversification of private capital on the side," he says, while others can look for "diversified funds with many managers in them – some of them may be open-ended vehicles and evergreens".
"Some of them will say... I'm fine with keeping an OCIO forever, like that's my plan for the next 30 years."
Working with a wider stable of managers also allows families to "diversify the way that people think about investing, and that mitigates risk", he adds.
Many family offices are bringing in external partners — LPs and GPs, OCIOs, institutional investors and other family offices — into their private equity activities to pool risk. In June, Vishal Harishchandra, chief executive of the UK single-family office Valkin, told MandateWire that families and institutional investors often "feel more comfortable when they know there's a family office involved, and they're already investing their own money".
McKinsey's private markets report says that just as retail investors "need higher (and more frequent) liquidity [and] ideally want private market returns with public-market liquidity", pension funds and family offices can benefit from increased liquidity too, which "can play a vital role in overall portfolio construction".
This includes family offices both with strong private market capabilities and those with more traditional public markets portfolios, who are "putting a part of their portfolio to the side to start investing in private capital" with the help of external managers.
"I'm serving five separate families who either had no private capital until recently, or have a little bit and are really looking to scale those programmes," says Maia.