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World’s Wealthiest Lower Their Private Equity Expectations

“After economies locked down, family offices’ expectations for returns declined,” UBS said.

As the pandemic was unfolding earlier this year, the world’s wealthiest families began doubting that private equity investments could beat gains from stocks, according to a new report from UBS Group.

The Swiss bank probed global family offices worth an average $1.6 billion during the three weeks from February 19 to March 13 as stocks were plummeting on Covid-19 fears — and again in May as they were rebounding in the pandemic. Fifty-one percent of wealthy families said in May that they expected private equity to outperform public investments, down from 73 percent in early March.

“At the height of the crisis when liquidity was everything, family offices’ immediate reaction was to view private equity with greater caution,” UBS said in the report. “After economies locked down, family offices’ expectations for returns declined.”

Private equity has been a favored alternative investment of family offices, with a majority viewing it as an important driver of returns, according to the survey. Institutional investors such as pensions also have been targeting the asset class, expecting a premium for the illiquidity risk they’re taking in locking up capital for years in private equity funds.

The family offices surveyed by UBS are as sophisticated as institutions and nimbler in tactical investing, Munish Dhall, UBS’s deputy head of global family offices for the Americas, said during a remote media briefing on the bank’s findings. The largest portion of the bank’s clients are worth at least $3 billion to $5 billion, and their biggest fear in the crisis was missing out on gains, Dhall said.

While there were no moves out of private equity and infrastructure between March and May, the survey showed families offices were busy shifting liquid assets to either protect their wealth or capture returns in recovering markets. The biggest moves were into cash and developed market stocks.

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More than three-quarters of family offices are invested in private equity through direct deals and contributions to funds such as those targeting leveraged buyouts, according to UBS. While wealthy families continue to like private equity, the bank’s survey found waning enthusiasm.

In May, 28 percent of family offices told UBS they expected to increase their exposure to direct private equity — well below 49 percent before the crisis, according to the report. 

“That could well reflect the fear of illiquidity that dominated financial markets at the time,” UBS said. “It remains to be seen if they take advantage of any distressed opportunities emerging from a recession.”

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