The family office landscape is undergoing a profound transformation, fueled by the imminent transfer of generational wealth. Over the next 25 years, an estimated $100 trillion will be handed down to younger generations, with much of that capital flowing through family offices as millennials and Generation Z take the reins.
As the torch passes between generations, it is not only the heirs that are poised to see an influx of capital, but also the venture capital world.
Family offices have historically accounted for a small share of overall VC commitments. However, their participation in the asset class has grown significantly over the past decade as they sought more portfolio diversification. VCs, meanwhile, have been keen to tap new sources of capital amid a competitive fundraising environment.
According to a 2022 report by Campden Wealth, family offices accounted for 14.4% of global VC investment that year compared to just 6% in 2012—although family offices have slowed their investment pace with the VC downturn.
A large number of family offices are preparing to go further with their allocations to VC, with a Campden Wealth survey finding that 33% of European and 32% of North American family offices intend to increase their exposure.
It is clear that appetite for VC already exists among family offices, but the transfer of wealth to the next generation is expected to fuel even more growth in such investments.
“We’re seeing an increased desire from the next generation to support innovation,” James Shaw, partner at law firm Withersworldwide, said. “A lot of these younger members have mixed in the same circles as future entrepreneurs and brought that knowledge and enthusiasm back to their family offices.”
High risk, high reward
As younger generations ascend to positions of influence within family offices—a transition expected to take place over the next decade—Fieldfisher partner Robin Spender believes that there will be a palpable shift toward embracing riskier, yet potentially more rewarding, investment strategies. In fact, the shift has already begun.
“We’ve seen a change in the guard, as it were, from what was previously a passive approach to investments,” Spender said. “As the generations are changing, investment preferences are changing. They want the higher returns and more control over where and how their capital is being spent.”
Having been raised in an era defined by the dawn of the internet, millennials and Gen Z recognize that significant wealth-creation opportunities lie in new technologies and business models.
The desire to be more active in their investments is also likely to change the way family offices approach VC.
Traditionally, they have gained access to the asset class through funds, which allow them to be exposed to a wider variety of startups, hedging their risk.
But, according to Tim Bird, partner at Fieldfisher, younger generations from high-net-worth families tend to be more sophisticated when it comes to the financial markets. Many spend time working for investment banks or consultancies before rejoining the family business.
This means there’s less need to outsource deal flow or due diligence because these heirs often have the financial expertise to evaluate investment opportunities themselves without sacrificing carry and management fees. Being more digitally native, they are also in a better position to assess the validity and importance of a startup’s technology.
Branching out
Because of their experiences outside of their family businesses, the next generations also don’t just target investment opportunities within the sector where their original wealth came from.
“It used to be that family offices would stick to the sector where they made their money, but I don’t think that’s a driving force anymore,” Bird said. “The new generation coming in is much more flexible and open to looking at different areas, because they’ve had more exposure to sectors outside of the family business.”
Climate tech is likely to benefit from increased attention as a result of this wealth transfer, according to Shaw. Millennials and Gen Z are often more socially and environmentally conscious than previous generations and seek investment opportunities that align with their values. That may draw them to startups that offer opportunities to invest in technologies addressing global challenges, such as renewable energy, health-care access and education, in search of a positive impact as well as financial returns.
Artificial intelligence is another area where next-gen family offices are expected to focus more attention, according to Bird, and one where they may be able to better compete with traditional VCs.
Family offices typically have a more flexible approach to capital deployment. They are often characterized as having “patient capital”, meaning that they have longer investment horizons and a willingness to tolerate lower liquidity. For capital-intensive industries like AI or deep tech in general, not being tied to a fixed fund lifespan can make family offices more attractive to startups as these investors can afford to be more patient and take bigger risks over a longer investment horizon.
VC funds focusing on these new technologies will also benefit from increased family office investment. In the past two years, GPs have been looking for additional sources of capital, particularly as the fall in public market valuations has left institutional investors overallocated to private markets. With more competition for LP capital, family offices looking to increase their exposure to VC will become highly sought after.
As we’ve seen over the past decade, venture capital is no passing trend for family offices. As younger heirs assume control and change priorities within these investors, the VC market should be prepared for an influx of capital and competition.
Featured image by Jenna O’Malley/PitchBook News
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