How the role of family offices is shifting

The trends in family office global deals activity are nuanced, but revealing. On the one hand, the volume and value of transactions have now dropped below the levels seen in the first half of 2020 during the initial stages of the COVID-19 pandemic. Despite the overall decline in deal volume, however, notable shifts are occurring among asset classes. For example, family offices have increasingly been moving their investments away from real estate towards start-ups. Simultaneously, the percentage of family office deals allocated to direct investments has been rising steadily for several years now, reaching a new pinnacle in the first half of 2023.

Family Office investment volume by asset class, January 2013 to June 2023

While start-up investments have taken centre stage in terms of family offices’ deal volume, it’s a different story when it comes to the value of these transactions. Direct investments represent the largest share of capital flows, while start-ups are closing the gap in terms of deal value.  From 2013 to 2020, family offices predominantly allocated their capital to companies through direct investments/M&A, followed by investments in real estate. However, the latter part of 2020 marked a turning point, as start-ups gained favour. They are now in second place behind direct investments in terms of deal value.

Family Office investment value by asset class, January 2013 to June 2023

Accompanying the recent decline in both the volume and value of family offices’ direct transactions is a discernible shift towards smaller deals as opposed to large and mega-deals. The percentage of small deals ‒ those worth below USD 25 million ‒ reached an unprecedented high in the first half months of 2023, constituting just over half of the total deal volume for family offices for the first time ever. Simultaneously, the proportion of direct investments classified as large or mega-deals reached all-time lows. Medium-sized deals ‒ worth between USD 25 million and USD 100 million ‒ comprised 24% of family offices’ direct investments. 

This recent decline in global deal value and volume suggests that family offices are tending to steer clear of larger deals, and instead are seeking to increase their flexibility and strategically mitigate risk by engaging in smaller deals.

Popularity of club deals also suggests greater risk aversion

In the first half of 2023, family offices increasingly turned to club deals ‒ a form of private equity investment that reduces the risks by enabling each investor in the “club” to take a smaller stake ‒ for direct investments. The share of club deals by family offices has more than tripled in the last ten years. Over 80% of family office investments in start-ups are executed through structures of this kind.

The combined trends of a preference for smaller direct deals and a shift towards club deal structures for direct investments suggest a growing inclination among family offices to mitigate and share risk. This reflects a generally higher level of sophistication in the approach of family offices, which are becoming more institutional in their teams, in the way they assess opportunity vis-a-vis risk, as well as in their approach to governance and process discipline.

Direct investment targets: software and services…

When it comes to sectors targeted by family offices, software and services lead the way by a considerable margin in terms of total deal value for direct investments by family offices. Software and services also stands out as the sector with the highest proportion of overall deal value for family office direct investments.

The leading sectors for family office direct/M&A investments, July 2022 to June 2023

...and a preference for the US

Over 58% of family office deals by volume in the first half of 2023 were concentrated in the Americas, with over 50% of that portion allocated to the US, followed by Canada and Brazil. Although the US remains the primary target market, there is a noticeable revival in family offices’ direct investments within the Asia-Pacific region, with India and Australia surpassing China as the main destinations in the region. Europe’s share has remained stable over the last few quarters.

Family Offices also play a significant role in M&A and direct investments in Switzerland too. Due to their long-term investment horizon and vast resources, family offices are often able to invest in high-risk and/or high-return investments that other investors may shy away from, such as early-stage startups or niche industries. For example, we see very attractive “best in class” companies that direct competitors cannot afford or which may be less attractive from a classic private equity perspective (e.g. limited growth potential or the exit case is not so obvious). There are also situations in which the long investment horizon of a family office alone is a key recipe for success, compared to alternative PE investors (who intend to sell the business again within the next 5-7 years) or a trade sale to a direct competitor.

On the other hand, it is also essential for family offices to use professional investment teams or at least investment structures, as otherwise they will not be able to prevail against their competitors in M&A processes or even receive suitable deal flow.

Switzerland has a long history of private wealth management, making it an attractive location for family offices looking to manage their assets. There are some (multi-)family offices in Switzerland which have a wealth of experience in M&A activity and can provide strategic guidance to companies looking to grow through acquisitions; however, they are still a niche player in the local M&A market.

Overall, family offices in Switzerland are a valuable asset to the investment eco-system, and can play a critical role in supporting economic growth and development.

Key takeaways

• Sophistication, professionalism and risk orientation:Family offices are becoming increasingly professional, and their governance continues to improve. They are also getting smarter when it comes to deciding on investments and balancing potential risks and returns.
• Direct investments/M&A: To gain a better control and visibility of risks, family offices are rebalancing the mix from direct investments to start-up transactions, and are going for smaller direct deals and increasing their use of club deal structures.
• Real estate: Family offices are investing less in real estate, but at the same time are taking an adaptive and opportunistic approach to tap specific pools of value, increasingly combining smaller deals with strategic large and mega-deals.
• Start-ups: Family offices are becoming more selective in targeting opportunities, are investing more in each deal and are sharing risks. They are also targeting high-potential sectors such as SaaS, AI and machine learning. Europe is becoming less popular as a target for start-up investments.