For Family Offices, Private Equity Became Collateral for Cash in the Coronavirus Crisis
Ultra-wealthy families used their increased allocations to private equity to obtain loans in the crisis, according to UBS Group.
Family offices stepped up borrowing against their private equity investments in the first quarter, moves made to increase their cash in the coronavirus crisis, according to UBS Group.
Demand for financing that uses private equity funds and co-investments as collateral rose as family offices sought to defend their portfolios in the market turmoil, Chris Baxter, the U.S. head of fund financing and investment at UBS, said in a phone interview. The loans typically ranged from $50 million to $250 million but some were significantly larger, he said.
UBS’s family office clients are large and behave like institutional investors, managing assets ranging from $500 million to billions of dollars. They moved more quickly in the pandemic to increase their cash cushions compared with the 2008 financial crisis, partly because they have expanded their professional staffs since then, according to Baxter.
Some family offices took out loans against their private equity investments to have cash ready to buy cheaper assets or companies that had come up for sale, he said. While UBS has long provided its ultra-wealthy clients loans against their alternative assets, private equity has recently become a larger source of collateral than hedge funds, according to Baxter.
That shift reflects the larger allocations family offices have been making to private equity over the past few years, he explained.
In a September report, UBS said that “family offices have doubts about hedge funds’ ability to protect wealth during economic downturns.” The report, which was based on a survey of family offices globally, found that private equity, including direct investments, represented their second-biggest allocation after stocks.
The family offices had reported that private equity was their best-performing asset class over the past year, and expected it to be biggest beneficiary of planned allocation increases in 2020.