The boom in single-family investment offices is being fueled not only by the tremendous worldwide increase in private wealth, but also by the desire of families to acquire independence and have more say in the decision-making than they currently have.
Different ‘flavors’ of family investment offices exist today – some are ‘single-family’ offices investing on behalf of one wealthy household and its descendants, while others might aggregate the wealth of ‘multi-family’ clients. These structures are typically set up to manage inter-generational wealth creation and management, with some more legally elaborate and structured than others that rely on the decision of (typically) one principal.
Within these family offices, venture capital should be an important part of alternative investment allocations for several reasons. First, venture capital is a large, visible market with the unmatched potential for outsized returns. What other asset class offers the chance to make 100x+ your investment?
Second, venture capital offers insights into future public market leaders. Just look at the returns of Amazon over the last 20 years versus traditional retailers'.
Finally, venture capital offers the opportunity for strong next-generation engagement within the family. What’s more exciting to the next generation: a chance to invest the next Uber or researching an investment in a strip mall or IBM?
Yes, venture capital can be risky, and navigating the ecosystem can be opaque. But with a consistent and focused strategy, venture capital can provide meaningful returns. Endowments have long known this, and most currently allocate 5% of their portfolio to venture capital. Family offices have similar long investment time horizons, and diversification needs should take a similar approach.
Originally published in the January 2018 LVAM Newsletter.