After from Norges Bank Investment Management on the performance of private equity funds on 4 June 2024, Delano initiated a conversation with the Luxembourg Association of Family Offices to get a better grasp of private asset investments in the family office industry and how FOs navigate to make the most out of their investments.
Due diligence requires the same effort whether it is a €10m or a €1bn deal
, chairman of the board at the Luxembourg Association of Family Offices, explained that the interest for the asset class goes beyond the immediate financial performance of its newly acquired stake or fund.
Are family offices investing directly in private assets?
“Yes, for a small group of FOs… but on simple targets… with small tickets,” stated Rapallino. He noted the interest of some single FOs for “funny money” to finance pet projects and for venture capital investments. Besides, he suggested that FOs may invest directly in club deals, but “finding the relevant targets is not an easy task.”
On individual investments, Rapallino thinks that wealthy families are more prone to invest in venture caps than institutional investors. As the “instit” are getting bigger, it becomes uneconomical to look at small deals. “Due diligence requires the same effort whether it is a €10m or a €1bn deal.”
Besides, Rapallino noted from single FOs an ever-greater interest in technology through investment in medtech, healthtech, biotech, fintech and regtech to support sometimes selfishly, but not only, the agro-business operations of the family, for instance. “They sometimes think as an investor and sometimes as an industrial company” to fix an industrial problem.
Rapallino noted that new generations, not the founders, are seeing these startups and ventures as an opportunity to further diversify their business and their portfolio, an approach that is spreading across FOs.
Value creation for private equity investments is about derisking
At first sight, the concept of derisking is hard to couple with PEs, or at least buyout funds, which were known until the end of the downward interest rates cycle as loading up acquired firms with debt.
Yet diversification in terms of geographical footprint, client type and larger product/services offerings are key elements to derisk to achieve higher Ebitda multiples, according to Rapallino. Beyond common operational improvement, mastering digitalisation, blockchain and AI have become key components when launching new products or when integrating new acquisitions with their IT systems.
Given the economic context and the cost of funding, “il faut habiller la mariée” or “stars must be aligned” to ensure successful company exits. He thinks that it is key for GPs to offer healthy and sustainable businesses, through sales or IPOs.
Repeatedly questioned by Delano, Rapallino could not affirmatively state whether the improvement of operations have become a more prominent factor compared to the financial alchemy taking place when interest rates were lower. Yet he observed that board members are nowadays spending considerable time on ensuring that firms generate organic growth.
Luxembourg real estate: distressed investors looking over
“The real estate market will turn around in Luxembourg. It is a matter of time. It will be complicated in 2024. It is unclear next year, but it is a safer bet beyond 2025,” said Rapallino. He observed that investment funds specialised in turnaround situations are set to acquire projects from real estate promoters with cash flow difficulties at significant discounts.
Rapallino suggested that some structures may yield a return as high as 30% over three years. FOs are interested in the underlying story, but he is unclear whether FOs will favour properties in a or through funds.
Contrary to pension funds, which are expecting regular income streams to match pension benefits, Rapallino thinks that FOs are generally in a better position to patiently await a bumpier capital gain resulting in a higher final return on investment.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .