GCC Family Offices perspective on Venture Fund allocations
Understanding the family office perspective on venture fund investing:
Having covered the emerging venture landscape for many years now, it’s abundantly clear that family office capital remains the dominant capital source for emerging venture funds — in my network in 2021 I spoke with over 100 first time venture funds, an average of 70% of capital closed came from family offices (the exceptions are spin-out managers, which often attract institutional LP capital at Fund 1).
The challenge many managers have with acquiring family office capital is the opaque nature of the network, from the fundamental aspect of finding family offices that are actively allocating to venture to deciphering the decidedly bespoke decision making processes.
GCC Family offices whose wealth came outside of the tech sector, and/or those not located in a tech bubble like Silicon Valley, the core initial focus has universally been that of fund investing with allocation sizes ranging commonly in the $3MM-$10MM range.
Decision making is markedly different across GCC family offices, and I have not see a consistent theme to decision making other than I found that family member principals are typically very involved on private investing, even with family offices of scale ($1B+); this may not always be transparent to a venture fund manager, but it was clear that having a family member relationship considerably accelerates allocation probability and speed (one CIO told me that a strong family member recommendation rarely will get rejected unless it poses some type of significant financial or representational risk).
The majority of the family offices I speak with in the Gulf voiced higher interest in investing in new emerging fund types. The reasons ranged from co-investment ability, better mathematics of small funds, and difficult in accessing the top 15–20 venture firms (premium fee and carry economics are a major pet peeve for family offices).
Many local UAE family offices for example communicate that they are increasingly aligning fund and direct investments in areas that are strategic to family operations or historical business (i.e. real estate, retail, automotive etc.). The belief is that this offers benefits such as higher quality/less adverse deal flow, benefit to core wealth generating asset (the actual business of family), and ability to invest directly into companies through tangible value of expertise and network. Access to co-investment opportunities continues to be a major driver of fund allocation decisions in the Middle East. Unsurprisingly, local family offices prefer investing directly onto cap tables of company, but voiced amenability to SPV’s.
Families that are active in investing in SPV’s, are generally in favour of opportunity funds (but typically near or concurrent with a Fund III offering). Finally, many families locally acknowledged that logo investing has become rampant, often driven by the psychology of being invested in a unicorn.
One common struggle that UAE family offices have with respect to venture investing is appropriate portfolio strategy and construction. Thematically, many seem to gravitate toward a starting strategy of 5–10 of sector specific thematic funds with preference for seed/series A funds that truly lead rounds. Another strategy is to use an emerging manager focused fund of funds as a scout prior to making direct allocations into emerging funds (having a single K-1 is quite appealing to many!)
Illiquidity continues to be major pain in the GCC (to which the cycle continues to elongate) & many wonder aloud if they are really getting any alpha relative to other private strategies (i.e. 2nd-4th quartile venture funds offer sub-optimal performance when illiquidity and risk are factored). Secondary strategies are very interesting to most family offices I have spoke to.
Late stage valuations provide significant concern, and very few family offices I speak with had any interest in investing in late stage venture fund investing.