Family offices around the world have become increasingly active and sophisticated in their investments into innovations over the years. Various fascinating themes have surfaced, but two, in particular, are clear and will be evidently at in play in 2021 and beyond.
One is impact and sustainability innovation – which is an increasingly interesting and necessary area of focus for entrepreneurs, although the pace of change is to some extent being hampered by the source of capital.
The other key theme is the meteoric rise of the “new money” family office and the latest generations of more established family offices, which are seeking to make a difference through investments and becoming more influential within their families.
From economic return to impact investment
The increase in popularity of venture capital investing in the mid-80s led to the creation of tax-efficient investment structures, which incorporate entities such as limited-partnership funds. These are structures which, by their design, are intended to have a relatively short life and deliver the potential for high internal rate of return (IRR).
However, a focus on IRR does not always sit well with a business aspiring to achieve impact or even a triple bottom line (profit, people and planet). This is a source of historic conflict for investors. One fund which has done well to dispel this theory is the Environmental Technologies Fund (ETF) in the United Kingdom – which takes pride in helping younger European companies deliver sustainability through innovation.
As a broad observation, the closer one is to the source of capital, the greater the empathy, which is where family offices can make a real difference, either through direct investments alone or via syndicates of like-minded sources of capital.
The decision to invest directly as a lead in a syndicate with others, or invest into a focused fund like an ETF, may depend on the internal infrastructure of the family office and whether it has the skills to source, perform due diligence and make direct investments.
Whether a family office chooses to invest directly or through a focused fund, we believe this source of capital has the potential to unlock the rapid growth in this sector and drive change.
Nowhere is this more true than in the developing markets of South-east Asia, where vast amounts of wealth are concentrated in the hands of a small number of powerful business families.
In Indonesia, the largest economy in South-east Asia, private wealth has been responsible for funding and producing some of the largest and most prominent technology businesses such as Gojek, Tokopedia and Traveloka, and in shaping much of the country’s technology landscape.
Family offices are also often more agile in decision making, with investment strategies sitting closer to the hearts of founders and their family members who, increasingly, are moving away from wealth creation and preservation to philanthropy.
The decade of purpose
“We are emerging from a decade of convenience and entering the decade of purpose,” said Stephane Kurgan, former chief operating officer (COO) of King.com (who recently joined Index Ventures as a venture partner).
The next decade is when the United States will see the largest transfer of generational wealth in its history. This view is espoused by people such as John Seeg, managing director and the global head of strategy and investor relations for BlackRock Private Equity Partners.
It is this next generation of investors who are much more aligned with the existing generation of entrepreneurs.
Statistics support these views. The Global Impact Investing Network’s 2019 Report on Sizing the Impact Investing Market states that the impact-investing sector has doubled in size over the last two years, and that impact investing allocations will continue to grow.
From a private capital perspective, the 2019 Global Family Office Report found that more than 25 per cent of family foundations are actively engaged in sustainable investing, with climate change, clean water and health issues as predominant concerns.
A background of chaos
In the study of population dynamics, chaos is built into the very fabric of our existence – the non-linear unpredictability of society. The Covid-19 pandemic is, by definition, a chaotic event. As always, there will be a path through this, and this is where we can turn to the entrepreneurs. When entrepreneurs and founders see problems, they do not panic – they act and find solutions.
We just need to look to the last global financial crisis of 2008-2013, when many large names in the global banking world suddenly vanished, thousands of people lost their jobs and homes, and many previously flourishing economies went into free fall. The outlook was very bleak.
But we saw the emergence of the fintech revolution, which began to thrive on the disruption, the availability of highly-skilled individuals, and the practical and now rather obvious inefficiencies in the banking and financial services sectors.
Twelve years on and these fintech startups are now dominating the financial services landscape, many becoming household brands: Ant, Revolut, Transferwise, Raisin, Klarna, Grab Pay, and Starling Bank, to name a few. These companies have completely disrupted the traditional banking sector (particularly in developing and under-banked markets like Indonesia and Myanmar) and, in many cases, driven significant change in the way we do business.
To put this in perspective, the total value of investment offered to fintech companies rose exponentially from just under US$1 billion in 2008 to an estimated US$35 billion in 2018, fintech company Kantox’s research showed.
It is reasonable, therefore, to believe that this pandemic is going to have a similar, if not greater, level of disruption across many other sectors. However, perhaps one key difference between 2008 and now, is that any innovation is much more likely to have impact and sustainability woven into its core.
And so we are at an inflexion point: tech innovation with impact and sustainability at its core is moving at pace and needs access to highly aligned capital to be moving at the same speed. When this truly happens, we will begin to see a huge change in the rate at which we begin to adopt impact innovation. We believe family office capital (and founder funds) can fill this gap, and perhaps be that bridge between philanthropy and asset management.
This article was first published in The Business Times here.