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Horizons: Family Office & Investor Magazine

Alternatives Now Constitute Nearly Half of the Average Family Office Portfolio, but US Family Offices Found to Miss Out on PE Opportunities

Tuesday, November 27, 2018

The Global Family Office Report 2018, published by UBS and Campden Wealth Research, surveyed principals and executives in 311 family offices around the world, with an average size of USD 808 million assets under management.

Investment performance in 2017 has more than doubled as family offices benefit from the bull equity market: Having returned seven percent in 2016, and just 0.3 percent in 2015, the average family office portfolio delivered returns of 15.5 percent last year.

This accelerating performance was driven by family offices’ continued preference for equities in the con- text of a strong bull market. 28 percent of the total average family office portfolio is now comprised of equities.

Improved performance can also be attributed to strength within the private equity space, which com- prises over a fifth (22 percent) of the average portfolio and has delivered returns of 18 percent in 2017.

Reflecting this year’s upward performance levels, almost half (48 percent) of family offices reported that their assets under management increased over the year.

Sara Ferrari, Head of Global Family Office Group, UBS AG, said: “Family offices have delivered their strongest returns since we began measuring their performance five years ago. This reflects the bull market, as well as family offices’ ability to take a long-term approach and embrace illiquidity.

“For the first time since we have been analysing this data, Asia has led the way on performance, benefiting from a relatively high exposure to developing market equities and the high number of private equity deals in the region. Following a path we’ve seen in other regions, we’re also seeing family offices in developing markets becoming increasingly sophisticated and institutionalised. We expect this trend to accelerate in the coming years.”

Dr. Rebecca Gooch, Director of Research, Campden Wealth said: “In addition to the robust average family office portfolio performance of 15.5%, we have witnessed a significant growth and professionalization of the family office space since the turn of the millennium. One-third of all responding family offices now have secondary branches, half have reported that their AUM has increased year-on-year, and three-quarters reported that the wealth of the families they serve has risen over the last 12 months.”

Trend towards riskier, more illiquid investments continues

The year saw a continuation of family offices’ drive towards higher risk, more illiquid investments in their pursuit of yield. As part of this, nearly half (46 percent) of the average family office portfolio is now allocated to alternative investments.

Private equity has maintained its momentum, with allocations having increased over the year to 22 percent. While allocations to hedge funds have continued to slow, real estate has seen a slight rebound in popularity. After a small decline in allocations in 2016, family offices have increased their exposure to real estate direct investments to 17 percent of the average family office portfolio.

When asked about their investment intentions for the coming 12 months, half of family offices reported that they intend to invest more in direct investments, namely private equity. Over a third also noted that they plan to increase their allocations to developing market equities, private equity funds and real estate direct investments.

Family offices increasingly manage their wealth with purpose

Over one third (38 percent) of family offices are now engaged in sustainable investing. As part of this trend, impact investing has experienced a particularly significant increase in participation; the amount of family offices making such investments has increased from one quarter in 2016 to one third in 2017. The most common areas of investment are education; housing and community development; agriculture and food.

More broadly, nearly half (45 percent) plan to in- crease their sustainable investments over the next 12 months while, looking further ahead, 39 percent of family offices projected that when the next generation takes control of their families’ wealth, they will increase their allocation to sustainable investing.

Sara Ferrari said: “Families of great wealth feel a deep-seated obligation to make a positive impaction the world, which is reflected in a consistently high level of philanthropic activity. The family office structure allows them to go further and translate their values into financial returns through impact in- vestment. Yet many are still to be persuaded to cross the line from interest to action. The appetite is there, but more work needs to be done to demonstrate the investment case and create opportunities.”

Dr. Rebecca Gooch said: “Impact investing will be an important space to watch over the coming years. Our research shows that the next generation, and millennials in particular, are driving impact investing within the family office space. This is key as we are on the precipice of a major generational transition set to take place over the coming 10 to 15 years. This could result in the growth and transformation of the impact investing arena.”

Slow progress on preparing for looming wealth transfer

70 percent of family offices expect a generational transfer in the next ten to 15 years. Next-gen family members are taking a more active role within the family office, indicating that the handover is beginning to take place. Amongst the next generation of family members, three in ten (29 percent) now hold management or executive roles, while 23 percent sit on the board.

However, half of all family offices do not have a succession plan in place. Indeed, there has only been a one percentage point increase in succession plans since UBS and Campden Wealth warned of the problem last year.

Sara Ferrari commented: “The next generation are clearly influencing family office direction and investment strategy, particularly on questions of sustain- ability and impact. But all too often, the underlying is- sue is not being addressed: families need to be much more proactive in tackling the issue of succession.”

US family offices found to miss out on private equity opportunities

Despite the trend towards riskier, more illiquid investments and PE now making up around 22% on average of the polled family offices, another study of family offices from Shroder Adveq showed that US family offices would be missing smaller opportunities as well as opportunities outside of their home market.

“Large buyouts clearly command the most attention, but this leads investors to think this is the preferred or even safest place to find attractive opportunities,” said Ethan Vogelhut, Head of Buyout Investments, Americas at Shroder Adveq. “However, in reality, smaller deals make up the vast majority of the opportunity set for investors, but only 25% of capital goes into these types of deals, offering savvy investors access to an often-untapped and less efficient segment of the market.”

According to the study, family offices are also failing to recognize private equity opportunities in emerging markets and in Europe, with only 5% and 6%, respectively, citing these regions as having the most opportunity over the next year. Instead respondents showed a large home-bias towards investing in the US with 75% citing the US as having the most opportunity.

When it comes to expanding the opportunity set, family offices have started to take a closer look at the smaller end of the market in the US. Respondents cited greater buy-and-build opportunities and lower purchase prices as the top two reasons for looking at the middle market.

Being prudent or overcautious?

There are more concerns when it comes to looking at global opportunities. Most respondents said they have looked at deals in emerging markets but 32% were worried about political uncertainties. Fifteen percent were most concerned about the lack of private equity managers with experience or expertise in emerging markets, while 14% worry that there is not enough information available to fully vet potential investments in the region.

“This was surprising to us as we see as strong opportunities in both of these regions,” said Steven Yang, Head of Global VC for Schroder Adveq. “Investments in China and India on the emerging market side are offering competitive returns. Opportunities in the small to mid-segment of the Asian private equity market, in sectors like healthcare for example have demonstrated strong growth potential. In Europe, we are also finding opportunities in small to mid-buy- outs and turnarounds.”

As usual, investing with the right (local) partners will help.

 
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