Family Offices currently invest approximately 23% of their assets in private equity. And this is likely to increase over the next decade. It is estimated that private equity currently has $5.25 trillion of dry powder (uninvested but committed capital). Estimates suggest that dry powder will grow to $8 trillion and AUM will be approximately $12 trillion by 2032. So what does that mean for Family Offices? More direct investments into private equity, bypassing the large funds, where they can take advantage of their greatest asset — patient capital. And the timing is ideal to increase their exposure to private equity.
Historically, out of 9 recessions since 1961, interest rate increases have led to a recession 8 times. With the US Fed increasing rates by the largest amount in 22 years, and many more central banks following suit, it’s no wonder that people are worried about a repeat of the past.
Private markets, however, can provide resiliency in downturns. They are not as vulnerable to the same interest rate volatility as public markets, and they offer opportunities for investors to make money when others are losing it.
When the economy takes a turn for the worse, private equity investors can take solace in the fact that their investments have historically outperformed public equities during downturns.
This was borne out during the dot-com bubble of the early 2000s and the Great Financial Crisis of 2007-2009. Private equity funds fared better than public markets in both cases, with a less significant drawdown and quicker recovery.
But now Family Offices are starting to compete directly with the massive private equity funds. Why? Because many of them can. They have one huge advantage over the large PE funds — the benefit of having patient capital. This is the single greatest advantage they have over private equity funds, which are incented to turn companies over every 3 to 5 years, irrespective of market conditions.
A long time horizon comes closer than any other factor to being a “magic bullet.” Thinking long term gives you an “arbitrage” advantage because almost no one else thinks long term. Family Offices do.
“If everything you do needs to work on a three-year time horizon, than you’re competing against alot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could not otherwise pursue.”
Jeff Bezos
Einstein famously called compound interest the eighth wonder of the world. Warren Buffet said that compound interest was one of the top three factors that led to his success.
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Pankaj Pramanik
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