GP performance a key part of family offices’ secondaries strategy

Family offices are twice as likely as institutional investors to sell private equity stakes due to poor manager performance.

Family offices are more likely to sell on the secondaries market due to the poor performance of a general partner than high pricing for fund stakes, according to a survey by Montana Capital Partners.

Manager performance was the second most important reason to undertake active portfolio management via the secondaries market, cited by 22 percent of family offices and foundations, according to the secondaries firm’s Annual Investor Survey.

For family offices and foundations, the most important reason to tap the market was long-term strategic reasons, selected by 39 percent of respondents. The attractive pricing environment was cited by 17 percent of respondents, while only 8 percent cited a need for liquidity.

By contrast, half of institutional investors cited long-term strategic reasons, 20 percent current attractive pricing and 10 percent manager performance as the most important reasons to tap the secondaries market.

“That is contrary to what we would have predicted, as family offices are usually assumed to be the stickier LPs,” said an investor at a single-family office in the DACH region, quoted in the report.

Family offices and institutional investors are united in prioritising allocations to complex secondaries over more vanilla deal types. Roughly half of them cited complex secondaries as an allocation priority over the next 12 months.

Family offices appear to have a greater appetite for directs secondaries than institutional investors (38 percent versus 25 percent), while GP-led transactions are more favoured by institutional investors than family offices (35 percent versus 24 percent).

“This seems plausible if considering that family offices are oftentimes reported to have an affinity towards single businesses and direct investments, having built in many cases their own wealth around the ownership of one or more businesses,” the report noted. GP-leds allow institutional investors to put large amounts of capital to work in a more diversified way, the report noted.

Foundations and endowments accounted for 19 percent of secondaries sales by number of sellers in the first half of 2018, according to data from advisor Greenhill.

The survey was based on the views of 108 respondents collected between August and September. Family offices accounted for 30 percent, insurance companies 21 percent and pension funds 15 percent, with the remainder comprising foundations, asset managers, banks and sovereign wealth funds.