Family offices, long associated with conservative investments and a primary focus on wealth preservation, are increasingly venturing into the exciting but high-risk world of venture capital. Their goal? To achieve outsized returns and diversify their portfolios in today’s dynamic market. While direct investment in startups is a viable strategy, many forward-thinking family offices are recognising a less explored yet powerful avenue: investing in emerging venture capital fund managers.
The numbers paint a compelling picture of the potential that emerging managers hold:
Medium-Sized Funds, Big Impact: A stark performance differential exists between medium-sized and large VC funds. Top-decile medium-sized VCs ($100M) generate, on average, a 25% higher IRR than their large counterparts ($250M), 62% higher than extra-large funds ($500M+), and up to 100% higher than the largest VCs. This trend suggests that focus, agility, and a close connection to the startup ecosystem can drive success.
Specialisation Pays Off: Specialist VCs outperform generalist funds by a significant 30% higher IRR. This underscores the power of expertise in specific industries or technological niches, leading to better investment selection and active support for portfolio companies.
Trend of Outperformance: Top-quartile emerging managers have consistently demonstrated a striking 7.5 percentage point outperformance in IRR compared to their non-emerging peers. This pattern speaks to their hunger for results and ability to capitalise on opportunities.
The advantages of emerging managers extend beyond pure performance metrics:
Deep Alignment: Unlike large, established funds which are in billions, emerging managers typically have substantial personal capital and their reputations tied to the fund’s success. This fosters a profound alignment with family offices’ long-term wealth goals, ensuring a relentless pursuit of value creation rather than short-term gains.
Unlocking Exclusive Deals: Such modest funds often secure better allocation into highly competitive investment rounds. This grants family offices indirect access to a curated pool of promising startups, even if they don’t possess the resources or the ability to invest directly in all of them.
Networks and Operational Support: Emerging managers, eager to establish a strong track record, frequently extend operational support to their portfolio companies. Connections to industry experts, mentorship, and strategic guidance prove invaluable for startups – support that family offices might struggle to replicate cost-effectively on their own.
How do emerging managers simplify risk management and deal access for family offices?
Emerging managers, driven to prove themselves in a competitive landscape, often provide solutions that align exceptionally well with the risk management and portfolio expansion needs of family offices:
Measured Allocation, Simplified: Emerging managers, by virtue of their prudent fund sizes, naturally start with fractional allocations per opportunity. This indirectly ensures a more measured initial allocation for family offices, allowing them to build exposure gradually and align investments with their risk tolerance.
Streamlined Due Diligence: Emerging managers, aware of the potential scrutiny, often have carefully curated presentations and data on their investment process and track records readily available. This can streamline the vetting process and provide greater transparency for family offices.
Facilitating Active Partnerships: Many emerging managers welcome co-investment opportunities with family offices. Not only does this provide a mechanism for family offices to gain deeper insight and confidence, but it can also lead to the family office acquiring a direct stake in those startups alongside the manager, further expanding their portfolio.
Building a Collaborative Ecosystem: Savvy emerging managers prioritise building strong relationships and facilitating introductions to relevant players within the startup ecosystem. This can enhance a family office’s network and awareness of potential opportunities, saving them time and effort in their independent investment search.
In many ways, emerging managers act as an extension of the family office’s investment team. They alleviate the challenges of:
- Sourcing quality deals: Emerging managers invest significant time and resources in finding the most promising startups, pre-vetting them for a family office’s consideration.
- Conducting in-depth due diligence: Managers meticulously analyse a startup’s potential, lowering the risk profile for family offices.
- Providing post-investment support: Emerging managers often provide ongoing support, including operational assistance and mentorship to their portfolio companies, helping them maximise their chances of success.
In conclusion, the emergence of medium-sized venture capital funds managed by skilled and dedicated managers presents a compelling opportunity for family offices seeking innovative investment strategies. These managers offer a unique blend of alignment, access, and expertise that can significantly enhance a family office’s portfolio diversification and long-term wealth preservation goals. As the venture capital landscape continues to evolve, collaborating with emerging managers could prove to be a strategic advantage for family offices looking to stay ahead in the dynamic world of startup investing.