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 European family offices, the private investment houses of the super
rich, nearly doubled their direct investments in companies between
2008 and 2014 to nine percent of total portfolios as low interest
rates hurt returns elsewhere, according to a report by Campden
Research and bank UBS.
That may not seem like a lot, but with average assets under
management of $890 million, each European family office has around
$80 million to play with for direct investments.
Many are using the cash to bet on tech, stepping in where venture
capital is reluctant to tread.
"The sector is very important for them," said James Innes, a partner
at London corporate finance house Chrystal Capital who consults over
300 family offices on early-stage tech investments.
"When families do their allocations on direct investing, they have
accepted it is on the riskier side of life. They want things that
potentially give you significant multiples on your cash. That's
tech."
START-UPS BENEFIT
Pairing up with a rich benefactor brings advantages for the
start-ups. As investors, they have far longer time frames than
private equity houses or venture capitalists, can make investment
decisions more quickly and bring proven business acumen to the
management of nascent companies.
"With a family office you don't have a time horizon. We like the
long-term focus. It's great to have an investor who doesn't view
going public as an exit opportunity, but rather a chance to buy more
stock," said Pere Valles, Chief Executive of Spanish electoral
technology company Scytl.
It is not just European family money.
Scytl received a $40 million cash injection from Vulcan Capital, the
direct investment wing of Microsoft <MSFT.O> co-founder Paul Allen's
personal holding company.
"We were approached by private equity groups initially, but when
Vulcan Capital approached us we stopped right away," Valles said.
Start-ups now actively seek-out family wealth operations, according
to Peter Newton, a portfolio manager at Campden Wealth who organizes
meetings between early stage media and sports tech companies and
potential investors.
"When you speak to the companies, they'll say 'I really want to find
a family office to invest in me... that'll help us grow far better
than a venture capitalist who wants to come in, make his money in
four years then disappear,'" he said.
Family money comes with another perk: those who manage it don't have
to dedicate a portion of their time hunting around for new
investors, and can spend more hours on the businesses they invest
in.
"They amount of time they dedicate to us is unbelievably impressive.
It's way above anything I've seen," said Ed Bussey, founder and
chief executive of London-based content creator Quill Content, which
last year received a 5 million pounds ($7.7 million) investment from
Smedvig Capital, the direct investment outfit of the Norwegian
family oil dynasty of that name.
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FUNDING GAP
Old wealth is also plugging a venture capital funding gap that has
long plagued European companies trying to make their way from tiny
start-up to the big time.
Last year Europe-focused venture capital raised only 300 million
euros in late stage funds for such companies, compared to the $3.7
billion in the United States, according to data firm Preqin.
Family wealth is helping fill the hole, said Tim Hames, director
general of the British Private Equity and Venture Capital
Association.
"It's a huge development across the piece. It's a bit like the
impact shale is having in oil and gas. It's a completely new sort of
supply," Hames said.
While potential return on investment is a big draw for investing in
tech start-ups, family dynasties can have other ideas in mind when
investing in the sector.
Industry players told Reuters the motivations include giving their
millennial heirs greater scope to choose investments in an area that
they know, infusing their traditional businesses with the latest
tech, or simply having something to jazz up dinner party
conversation.
"They like small tech companies that they can follow closely on a
day-to-day basis", said private equity lawyer James Grimwood, whose
firm CMS Cameron McKenna increasingly offers family wealth legal
services.
"It’s a hobby," he added.
(Additional reporting by Freya Berry; Editing by Keith Weir)
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