How Family Offices Can Lead The Charge To De-Risk Investments

Family offices are uniquely positioned to drive significant societal change by de-risking investments in emerging technologies and solutions addressing global challenges such as the climate crisis. Traditional venture capital often falls short in funding long-term, high-risk projects, leaving a critical gap that family offices can fill.

Family offices can lead the way in securing a sustainable and innovative future by employing a blended finance approach and developing strategic investment theses.

The Importance Of De-Risking Investments

Albert Wenger, a partner at Union Square Ventures, underscores the unique role family offices can play in taking on risks that traditional venture capital firms often shy away from.

Wenger, who also wrote the book World After Capital, points out that family offices have the flexibility and capacity to invest in high-risk, high-reward areas such as fusion energy and geo-engineering research. These areas are crucial for tackling the climate crisis but are typically seen as too uncertain for institutional investors.

To that point, Wenger remarks that the current wealth management practices might be misaligned, “Personal wealth should be taking exactly the risks that other people aren’t willing to take. One of my big misgivings about a lot of personal wealth is that it’s being all handed to managers, and the managers are then immediately being risk-averse again.”

Family offices, therefore, have a unique opportunity to step in and fund projects that might not see the light of day otherwise. By de-risking these investments, they can not only contribute to significant advancements in critical areas but also potentially reap substantial rewards.

Employing a Blended Finance Approach

A blended finance approach allows family offices to combine different types of funding—venture capital, philanthropic efforts, and direct investments—into a cohesive strategy. This approach is essential for addressing complex global challenges that require more than one type of financial support.

Wenger advocates for this holistic method, saying, “It’s much more important to have a thesis-based approach and then say, if this is my thesis, what are the different levers I can actuate?” This means that family offices should not view their investments as separate and unconnected buckets. Instead, they should integrate various forms of capital to address different facets of a problem simultaneously.

For example, the climate crisis requires new technologies to be developed and existing ones to be deployed. Venture capital can help fund the former, while direct investments and philanthropic efforts can support the latter, as well as fund activism and research that might not yield immediate financial returns but are crucial for long-term solutions.

Developing a Solid Investment Thesis

Having a well-defined investment thesis is crucial for guiding family offices in their investment decisions, as this can ensure the alignment of various individual investments. Wenger emphasises the importance of this strategic approach, noting that family offices should see their investments as part of an integrated strategy driven by a central thesis.

“You have to have a thesis, and the thesis connects various investments in interesting ways,” Wenger explains. This approach ensures that all investments are aligned with long-term goals and can drive substantial impact.

For instance, a family office might adopt a thesis focused on combating climate change. This thesis would guide all investment decisions, from funding clean energy startups to supporting geoengineering research. By having a clear, overarching strategy, family offices can ensure that their investments are not only financially sound but also contribute to their broader goals.

Wenger also highlights the importance of being hands-on and willing to do the necessary homework. “If you want to pursue a thesis-driven direct investment strategy, you have to be willing to do your own homework,” he advises. This might involve researching new technologies, understanding the science behind them, and identifying the right people and projects to invest in.

The Unique Opportunity For Family Offices

Family offices have a unique opportunity to lead the charge in de-risking investments and addressing global challenges through a blended finance approach and strategic investment theses. Retail investors aren’t able to have the same impact and other large institutional investors often aren’t able to take on the same amount of risk. By taking on the risks that traditional institutional investors avoid, employing a holistic financing strategy, and developing robust investment theses, family offices can drive meaningful change and secure a sustainable future.

As Wenger succinctly puts it, “The people whose fortune it is ought to decide what they want the money to do and which risks they want to take.” This mindset is key to leveraging the full potential of family offices in today’s complex investment landscape.

By embracing these strategies, family offices can not only enhance their financial returns but also make significant contributions to solving some of the world’s most pressing problems. From addressing the climate crisis to sustaining democratic institutions, the potential for family office impact investing is immense. It is time for family offices to step up and lead the way, using their unique capabilities to drive positive change on a global scale.