Why family offices need to turn their attention to early-stage tech companies?

The current state of the world has forced us to innovate and accelerate a lot of planned digitisation at a rate we never thought was possible. As brick and mortar businesses navigate the digital world and learn to migrate and operate online, investors also need to think innovatively to allocate their money and be part of the digital transformation and creation of companies in the new world, in a safer way for long term gains.

Raffles Family Office (RFO) is a multi-family office wealth manager that provides their clients with independent, bespoke and complete family office solutions. Traditionally, their asset allocation for clients has been generally skewed towards the highly liquid secondary markets such as fixed income, equities and funds. With the economic outlook becoming more uncertain and volatile, they are open to the idea of adding on high-quality alternative investments into their portfolios.

“Many ill-advised investors who were not properly positioned during the onset of COVID-19 suffered considerable losses, especially if they were undertaking leverage. In light of that, RFO has acknowledged that there is a compelling need to further explore the alternative investments space,” says Kendrick Lee, Managing Partner of Raffles Family Office Singapore.

According to a Cambridge Associates Report, ‘Venture Capital Positively Disrupts Intergenerational Investing’, the three main areas facing wealthy families right now are i) Intergenerational wealth planning, ii) Investing sustainably for future generations and iii) ensuring family unity endures.

Consequently, RFO has always adopted a risk-managed investment approach in the traditional markets with the view of preserving their clients’ wealth. During these trying times, the ability to manage the risks and volatility of their clients’ portfolios is of paramount importance in their larger wealth management strategy.

From cloud computing and artificial intelligence to SaaS companies that are changing the way companies operate, venture capital investing offers otherwise unreachable access to evolving industries from the ground level at a lower ticket size than investing in larger, formed companies.

“Early-stage tech companies have a lower valuation entry point albeit with a higher risk. But if you combine comprehensive due diligence and sufficient diversification, you have a great investment thesis. In addition, though the returns take longer than public and secondary markets, they are largely independent of external factors due to the way in which they can pivot and adapt easily to changes, given how nimble a stage they are at,” added Andrea.

According to RFO, one of the main objectives of their clients is moving from an often-unstructured approach to the management of family wealth, towards a far more structured and planned framework. As a by-product, many families are now beginning to move from a “growth-orientated” model — favoured by the first-generation wealth creators, to a “preservation-orientated” more suited to subsequent generations.

“The major risks of participating in such projects are the requirements of expert knowhow, in-depth knowledge of the targeted industries and of course the unsecured nature of these investments. Therefore, there is an immense value add in organizations such as Antler who are leaders in the industry, with access to the brightest minds and best technologies. With their proficiency in leading these projects to success, what better way than to learn from and to tap into their expertise of the VC space,” added Kendrick.

The survival of the most maneuverable

Early-stage tech companies are maneuverable and more adaptable — this trait is becoming increasingly important in a COVID world where it is getting harder to predict how things are going to unfold- things are constantly changing and moving. These companies can change with the times and become more useful and adaptable to the consumers around them.

“Start-ups are exposed to wider economic risks and are inherently riskier because of their often untested business models, but they can adapt easily as well and change the business model in quick and real time. It takes an average of seven years to sell a tech company, and most of the return comes from a few hyper-successful outliers. Investors should take a diversified portfolio approach to have the best chance of ensuring they get the best from each group of companies,” added Andrea.

The newly minted wealth amongst increasing sophisticated investors here in Asia has resulted in a surge in demand for such services, with there being a total of more than 1500 family offices set up in the region. However, most of these family offices only offer a limited range of services which may not be able to cater to a client’s holistic needs.

“What is particularly attractive are the potential returns, but also its somewhat low correlation with the broad economic landscape as a whole. Many of these early stage Venture Capital (VC) start-ups are typically less affected by market cycles, some even thrive better amongst such conditions. Many of our clients — notably the second, third generation ones have had a keen eye for such investment opportunities. Just as how the first-generation saw entrepreneurship or real estate as a propellant, we see the same budding signs here in VC,” says Kendrick.