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Venture capital, angel investing increasingly part of ultra-high-net-worth portfolios

Turn to alternative strategies as stock and bond markets get increasingly expensive

Canadian family offices have become increasingly venturesome in recent years with their investment portfolios.

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Much as institutional investors have been doing for nearly two decades, allocating more capital away from public markets into private equity and debt deals, ultra-high-net-worth Canadian families – the family offices that manage their financial affairs – are expanding their investment universe into the private realm, particularly when it comes to early-stage investing.

“The general theme over the last decade has been more toward alternative strategies, especially as stock and bond markets get increasingly expensive,” says Rob Van Wielingen, president and chief executive of Calgary-based Viewpoint Investment Partners (VIP), which manages money for Canadian family offices, including that of the Van Wielingen family.

Today’s investment portfolios for family offices now include strategies such as quantitative investing for core public holdings, run by artificial intelligence software, and more active, hands-on management in private debt and equity deals, he adds.

With respect to the private markets, family offices are increasingly looking to venture capital (VC) funds or even more hands-on angel investing in fledgling enterprises with promising innovative products and services.

“Interest has exploded, but we’re really 10 to 15 years behind the U.S,” says Van Wielingen, a CFA (chartered financial analyst) charter-holder, whose family generated much of its wealth in the province’s energy sector.

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In the United States, family offices have been more involved in angel investing since the 2008-2009 market crash, says Hall T. Martin, founder and CEO of TEN Capital Network, an Austin, Tex.-based online portal offering curated investment opportunities in early-stage companies.

The web-based deal-finder for angel investors launched in 2017, after running for more than a decade as the Texas Entrepreneurs’ Network, in large part because of growing demand from investors across North America.

Traditionally, he notes, most angel investing occurred face-to-face at wine-and-dine deal pitches.

“But over the last 10 years, and certainly in the last 10 months of the pandemic, [angel investing] has moved online.”

As well, family offices now make up an increasingly sizeable chunk of TEN Capital’s members, and they are typically looking to invest more capital in early-stage companies than the average angel investor.

“The average cheque I see with a family office is $250,000, whereas with a traditional angel it’s about $25,000,” Martin says.

Family offices are also often more active angel investors, often representing families that are entrepreneurial by nature and, in turn, have the penchant to help young enterprises, says Patrick O’Connor, managing partner at Blackwood Family Enterprise Services in Winnipeg.

“They generally like to take a position on the board and not just support the company financially, but to help the startup get going.”

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Of course, no two family offices are alike, including when it comes to private investment. Some prefer leaving deal management to venture capital funds, O’Connor adds.

Yet others prefer angel investing, including those whose money is managed by VIP, because of its perceived advantages over venture capital funds.

“We don’t want to pay that 2 and 20,” says Van Wielingen, referring to VC funds’ fee structure of 2 per cent on assets under management annually, and 20 per cent of the return over the previous high watermark.

Nor are “we comfortable with VC funds’ illiquidity and someone else managing our money.”

As well, VIP’s alternative investment focus has shifted in recent years from investing in private oil-and-gas deals to early-stage Alberta companies developing new technologies that could have a big impact on many industries.

Among the two dozen or so startups it has an equity stake in is a firm with technology to digitize documents for the paper-heavy legal industry. “That has a truly global application so there’s that scale, using cloud-based technology,” he says.

As well, VIP has invested in a Calgary company creating smart insoles for diabetics, using artificial intelligence to communicate data to patients and care providers regarding circulation to prevent infections that can lead to more serious problems like limb amputations.

Family offices have the advantage of agility, Van Wielingen says. “We … don’t do the same level of diligence as a VC fund, but that’s to our advantage as a family office because we can move very quickly.” He adds that their timeline can be much shorter or longer than VC funds, which typically exit an investment in a company within eight to 10 years.

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Having more control over choosing investments is also important. Although families with tens of millions of dollars, or more, in assets have the capacity to take on risk, they typically prefer their family office to manage those risks more closely than they could through a fund, Martin says.

One reflection of this is that many family offices tend to invest in more established, early-stage companies that generate revenue, he says.

Another trend, however, is looking for early-stage firms that can have an impact – not just on the bottom line, but for society.

“COVID gave us a whole new set of things to care about, so there is a growing interest in a start-up cycle involving new technologies with robotics in manufacturing and reshoring, and in health care,” Martin says.

Given family office clients may have built their wealth in logistics, for example, they can feel like “a fish out of water” when it comes to technology investing, he adds. That’s where TEN Capital steps in to help find not just potentially profitable firms; it also now looks for companies with products and services that make an impact.

This positive effect goes beyond the typical impact investing focus on ESG (environmental, social and governance), Van Wielingen says. It is about having a positive impact on diversifying the local economy and creating new job opportunities.

“Think of it as ‘venture philanthropy’ because while we’re investing for profit in these early-stage companies, they are creating hundreds, if not thousands, of new economic opportunities.”