The rise of private capital is evident in the numbers. According to RBC Wealth Management and Campden Wealth’s “The North American Family Office Report 2023[1],” family office allocations to private debt, private equity, and venture capital constitute approximately 29.2% of the average portfolio, compared to 28.8% for public equity. Additionally, “dry powder” in private markets—capital that has been committed but not yet deployed—stands at an all-time high of US$4 trillion, according to BlackRock[2].
This article explores the sources of private capital, how it is being deployed, and ways to navigate these trends.
What is private capital?
Private capital is currently experiencing significant growth. According to EY, assets under management (AUM) in private markets reached an unprecedented US$24 trillion in 2023, marking a steady increase over the past decade[3].
For clarity, private capital, as defined by Preqin, includes investments in asset classes such as private equity, venture capital, private debt, real estate, infrastructure, and natural resources[4].
Why is private capital an attractive investment avenue?
The ongoing expansion of private capital has raised questions about whether this growth drives the establishment of family offices or vice versa. The answer lies in a combination of both factors. The formation of investment committees within family offices has led to increased exposure to private markets as a means of prudent portfolio diversification. Simultaneously, private markets have become more attractive investment opportunities than they have been in recent years.
Private markets and family offices often share long-term investment horizons, focusing on sustainable growth and returns. This alignment makes private capital a natural fit for family offices, particularly in an environment where traditional lending mechanisms have become less prevalent. As a result, entry points for private equity and venture capital investments are more accessible, making them appealing options for family offices.
Additionally, the professionalisation and growth of family offices have enabled them to attract top talent from banks and finance institutions. These professionals bring with them expertise in alternative assets and familiarity with private markets, further enhancing the appeal of private capital.
Why is exposure to private capital increasing?
The growing interest in private capital is driven by several factors, including changing interest rates, increased wealth, and a reduction in traditional lending. The desire for impressive returns has always been a fundamental motivation for investors, and private capital has emerged as a preferred option in the current economic climate.
The economic landscape has shifted dramatically over the past decade. The low-interest environment and market stability of the 2010s gave way to a global pandemic and heightened geopolitical tensions in the 2020s. As markets responded to these challenges, including the COVID-19 pandemic and the Russian invasion of Ukraine, central banks implemented aggressive monetary policies to combat inflation, leading to a higher interest rate environment. This shift made bonds less attractive and increased the appeal of holding cash.
Despite these changes, private wealth has continued to grow. UBS’ Global Wealth Report 2023 estimates that global wealth will reach US$629 trillion by 2027, a 38% increase from 2023[5]. While there was a slight decline in net private wealth from 2022 to 2023, this was primarily due to currency fluctuations, with the US dollar appreciating against other currencies. Nonetheless, the overall trend points to a continued accumulation of wealth, with a larger number of ultra-high-net-worth individuals (UHNWIs) seeking to preserve, manage, and grow their assets.
This evolving economic environment has also affected traditional sources of finance. As interest rates have risen and markets have become more volatile, banks have adopted a more risk-averse approach, scaling back lending and revising their criteria. This has created a gap in the market that private capital has been well-positioned to fill.
“The Cayman Islands has become an essential jurisdiction for families and private capital due to its robust yet flexible regulatory framework, which meets the unique needs of private investors. The 2020 Private Fund legislation introduced in Cayman enables family offices and ultra-high-net-worth individuals to deploy capital strategically within a secure and efficient environment. At Ocorian, we see family offices increasingly choosing the Cayman Islands to structure their investments, leveraging the flexibility offered by private funds and benefiting from its sophisticated legal and fiduciary support systems. This approach not only enhances governance but also provides a tailored solution that aligns with family offices’ long-term objectives for wealth growth and preservation.” Annerien Hunter
Who invests in private capital?
The smaller investor
Recent years have seen reduced barriers to entry for investors interested in private capital. Even mainstream money managers now offer collective access to private markets, driven by both demand and the need for diversified portfolios. Portfolio theory has evolved, emphasising the importance of diversification across public and private markets, various currencies, asset classes, and geographies to protect against economic shocks.
For smaller-scale investors, investment managers offer pre-packaged services that facilitate entry into private markets. While significant sums are typically required to invest in private capital, collective investment schemes allow smaller investors to participate in these opportunities.
The traditional family investment
Multi-generational family offices have traditionally adhered to the 60/40 portfolio model, while maintaining an interest in alternative asset classes. However, as younger generations gain influence, alternative investments, such as private equity and venture capital, are becoming more mainstream. With increased awareness and information availability, families are now more comfortable making investment decisions that were previously considered too risky. As a result, risk appetite is increasing, and families are collaborating with investment managers and trustees to seek higher potential returns in private markets.
The advised Family Office
The professionalisation of family offices has contributed to the rise in private capital. The use of investment committees allows advised family offices to stay connected to industry trends and best practices, facilitating sophisticated diversification strategies that include private markets. These family offices often have more capital to invest, providing them with greater flexibility to pursue significant investments aligned with their objectives.
The entrepreneur
Entrepreneurs, who often generate their wealth through their own ventures, are familiar with private markets and are comfortable with the speculative nature of certain asset classes, such as venture capital. Entrepreneurs possess an “entrepreneurial spirit” that drives them to identify and invest in opportunities that align with their vision, even if these investments may not always align with traditional investment advice. Their willingness to take risks, combined with their substantial wealth, often leads them to make bold investment decisions in private markets.
The importance of governance
Regardless of the type of investor, sound governance is crucial when investing in private capital. Engaging in joint ventures, acquiring stakes in businesses, or supporting growth initiatives requires thorough due diligence and compliance with regulatory and legal frameworks. While private capital can be deployed more flexibly than traditional investments, it is essential to maintain robust governance practices to ensure long-term success.
How can private capital be structured?
Various structures are available for ultra-high-net-worth individuals (UHNWIs) around the world to invest in private capital. These structures vary by jurisdiction and offer different advantages depending on the investor’s needs.
Cayman Islands structures
Following the 2008 financial crisis, certain families have accumulated sufficient wealth to invest in more agile ways than traditional finance providers, making them more attractive, even within a fund. Since the Cayman Islands introduced Private Fund legislation on 7 February 2020, certain closed-ended investment funds domiciled in the Cayman Islands are required to be regulated by the Cayman Islands Monetary Authority (CIMA). Such private funds allow families to pool their wealth for private capital projects, supported by the legal and fiduciary infrastructure developed by the institutional fund sector in Cayman. However, private funds with a single investor are exempt from registration under the Act if the fund’s constitution specifies that it is intended to have only one investor.
African structures
In Africa, many ultra-high-net-worth individuals (UHNWIs) and families use GP or LP structures to invest in private markets, often as part of a broader institutional portfolio that may include traditional investments like stocks and bonds. There is also growing interest in setting up family foundations for estate and succession planning. These foundations allow older generations to instil family values in the younger generation, who may become council members and influence future family investments.
Channel Islands structures
In the Channel Islands, investing in private markets is well-established. Protected Cell Company (PCC) and Incorporated Cell Company (ICC) structures are gaining popularity. A PCC is a single legal entity divided into separate cells with segregated assets and liabilities. An ICC is similar but comprises multiple incorporated cells, each a separate legal entity, allowing cells to contract with one another. These structures are flexible alternatives for holding assets, structuring investment products, and engaging in securitisation transactions. Jersey and Guernsey also offer private investment funds (PIFs) and Jersey Private Funds (JPFs), providing additional options for private capital deployment.
Middle Eastern structures
In the Middle East, clients often invest internationally, frequently utilising structures in jurisdictions like Jersey and Guernsey. However, there is also growing interest in local structures, such as UAE Foundations. The DIFC Foundations Law No. 3 of 2018 and the ADGM Foundation Regulations of 2017 have led to a significant increase in the number of foundations in the UAE. These structures offer flexibility, asset protection, privacy, and effective succession planning, making them attractive for holding real estate, company shares, financial assets, and luxury assets.
APAC structures
In the Asia-Pacific region, the Reserved Powers Trust structure has gained popularity among Chinese families since the 2019 China tax reform. Families prefer to retain ultimate decision-making powers on how their private capital is deployed through the trust structure. Singapore and Hong Kong single-family offices (SFOs) are also popular for consolidating assets and investments, leveraging tax exemption schemes, and accessing double-tax agreement treaties.
[1] https://www.campdenwealth.com/report/north-america-family-office-report-2023
[2] https://d1e00ek4ebabms.cloudfront.net/production/uploaded-files/2024-private-markets-outlook-stamped-1cd88888-b1a5-4f47-b307-b47d658cacc5.pdf
[3] https://www.ey.com/en_gl/insights/private-business/are-you-harnessing-the-growth-and-resilience-of-private-capital
[4] https://www.preqin.com/academy/lesson-2-private-capital/what-is-private-capital
[5] https://www.ubs.com/global/en/family-office-uhnw/reports/global-wealth-report-2023.html
