Robert Evans, Senior Vice President at Partners Group, describes the links between private equity and family offices and the conditions for successful co-investment opportunities.
Can you describe the connections between family offices and the private equity industry?
The principal role of any family office is to preserve and to grow a family’s assets in the long term. This results in a natural alignment with private equity managers, who source target companies with a view to owning them for several years. Attractive target companies demonstrate a proven track record within a resilient industry while exhibiting room for further operational growth. As a result, families – often from an entrepreneurial background – are well placed to understand a private equity owner's strategy. For the same reason (although this is less commonly discussed), family-owned and sponsored businesses have been a sourcing channel for private equity. Consequently, family office LPs are long-term, sophisticated partners of private equity.
“Co-investment opportunities are long awaited in private equity, as investors have focused on increasingly direct portfolios.”
What are the conditions for successful co-investment opportunities?
Co-investment opportunities are long awaited in private equity, as investors (and family offices in particular) have focused on increasingly direct portfolios. While the appeal for investors is clear, choosing a co-investment partner is an important decision for GPs. A common understanding of strategy and vision is crucial: it’s no surprise that fund commitments over several years are valued by GPs when selecting co-investors. Additionally, when co-investment opportunities arise, the window for diligence and transaction approval is usually only a few weeks. GPs therefore need to have a solid understanding of their partners’ capabilities to ensure that they have been able to reach an informed decision – especially given the time horizon of each asset. In this sense, and as I have previously mentioned, the long-term focus and background of family offices often make them successful co-investors.
Beyond traditional closed-end LPs, how can the private equity market be accessed?
We have observed two trends beyond traditional LPs. Firstly, solutions allowing greater flexibility have become more common as investors take an active role in shaping their portfolio. Secondly, investors have become more conscious of their commitment to being 100% drawn (or near enough!). Segregated mandates have benefitted from both trends, allowing investors to mix asset classes. We have observed a preference for blending growth and income assets – for example, private equity with debt or infrastructure. Equally, evergreen structures which offer 100% exposure from day one and those which offer a clear path to 100% have increased in popularity. The link here is reaching – and retaining – a target NAV exposure, which the cash flows of traditional LPs struggle to provide. With this in mind, managers who can offer flexible solutions are well placed to add value to clients’ portfolios.