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As we stand on the threshold of 2024, the landscape of family offices and their investment strategies are undergoing a significant transformation. In this article, we delve deeper into these changes, both on macro trends and challenges and with a specific focus on the growing prominence of private assets, the surge in secondaries investments, and family office engagement with digital assets and sustainable investments.
A major strategic shift
As the dust settles on an extended period of historically low interest rates, family offices are reevaluating their investment strategies to better adapt to the evolving economic terrain. The rationale behind this change is driven by the confluence of factors, including the anticipation of shifting interest rates, the specter of inflation, the uncertainty of asset values (especially in real estate), and the prospects of varying economic growth trajectories. Amidst these changes, one overarching concern looms above all else: geopolitics. It has surged to the forefront of family offices' collective consciousness, displacing inflation as the paramount issue affecting their investment decisions. The intricate interplay of international relations, global conflicts, and diplomatic developments is shaping the strategies and priorities of family offices worldwide.
In this respect, we also see an increasing trend to restructure existing family office structures within the locations they are established, but also logistically relocating and restructuring the family office operations away from the families’ established territories to global centers like Luxembourg, Singapore, or the UK.
What are the drivers of family office restructurings?
The key drivers of these restructurings are twofold: firstly, the escalating political uncertainty, and secondly, the implementation of Base Erosion and Profit Shifting (BEPS) Pillar Two rules (“BEPS Pillar 2”) along with other local fiscal measures.
In respect of the first driver, political uncertainty is a large concern for many families in today’s fragile world. The search for “safe harbors” to establish the restructured or newly set up family office is omnipresent. Amongst the preferred locations, Luxembourg is still considered as one of the best, given its central location in the EU, its strong triple A rating and stable political outlook.
Existing family office structures that are within scope of BEPS Pillar 2 could find it challenging to cope with a 15% incremental tax burden on their global investments, as this will be a significant jump from the 0% tax (i.e., Singapore) that many currently enjoy due to tax incentives. But also, a Luxembourg established, older family office structure may face a challenge, when assessing the 15% minimum tax burden for its group.
It is not obvious, how many of the potentially impacted family offices have already started their assessment or even engaged in active steps, but it remains clear that this topic will not go away and for some needs to be embraced sooner rather than later.
In addition, many of these family offices are also not yet equipped with the right resources or talent to cope with new reporting and compliance requirements.
While these are the two main global factors impacting the trend for 2024, lets change over to some of the more regional insights.
Divergent paths: The current regional dynamics of family offices
Each region brings its unique perspective, investment preferences, and concerns to the table, shaping the way family offices allocate their assets and plan for the future. These regional insights, as presented by the UBS Global Family Office Report 20231 and unpacked in the paragraphs that follow, provide a comprehensive view of how family offices adapt their strategies to align with regional priorities and economic conditions:
In the United States, family offices primarily serve as conduits for intergenerational wealth transfer, with a resounding 76% focusing on this objective. This emphasis on legacy preservation reflects in their strategic allocation, notably favoring real estate (21%) and hedge funds (10%). Interestingly, the prevalent concern here revolves around potential economic recessions, impacting investment strategies and risk management choices.
Latin American family offices stand out with their distinctive investment patterns. They lean towards fixed income investments (30%), in stark contrast to their global counterparts. Real estate holdings form a smaller segment of their portfolios (5%). A notable observation is the hesitance, as 60% of family offices in this region refrain from investing in decentralized payment systems or technologies, illustrating a unique investment landscape.
The Asia-Pacific region is marked by its substantial equity allocation (37%) and a clear penchant for direct private equity investments (31%). Notably, a substantial 77% of their private equity investments are funneled into technology-focused ventures. Investment themes often center around medical devices and health technology, showcasing their forward-looking approach.
In Europe (excluding Switzerland), family offices allocate a significant share of their investments to real estate (11%), with 30% planning to expand these allocations. This region also demonstrates a propensity for internal management of strategic asset allocation. Additionally, a considerable majority firmly believes that illiquidity can enhance returns, a belief that informs their investment strategies.
Swiss family offices chart a unique course with a strong focus on intergenerational wealth transfer (73%). Their investment allocations reflect this focus, favoring real estate (18%), cash holdings (13%), and investments in art and antiques (4%). Notably, hedge fund allocations are relatively lower (4%) compared to other regions.
Embracing private assets
The family office investment landscape in 2024 is marked by a decisive shift toward private markets. According to the Goldman Sachs report2, private equity, for instance, claimed a significant portion of family office portfolios in 2023 – representing 26% of their assets. This keen interest in private equity is further substantiated by the UBS Global Family Office Report, which reveals that a remarkable 86% of family offices are planning tactical overallocations within this asset class over the next 12 months.
In 2023, family offices have shown a growing appetite for private debt as a component of their investment portfolios. The BlackRock Global Family Office Survey, which included 185 family offices globally, highlighted that despite a challenging economic outlook, less than a quarter of these offices intend to make material changes to their asset allocation, largely due to a long-term investment horizon. However, there has been a noted shift in investor sentiment towards private debt. Historically, allocations to private debt have been low, with 87% of family offices allocating less than 10%, but two-thirds now indicate their intent to increase their exposure, drawn by the potential returns from dislocated markets3.
This strategic shift underscores family offices' belief in the potential of private equity markets to deliver superior returns, both via investing in private equity firms, but also the direct investment in companies in the mid-market segment. Indeed, family offices have been increasingly investing directly in companies – over the past decade, there's been a noted rise in such direct investments due to factors like asset accumulation, talent acquisition, robust networks, and the desire for greater control and decision-making ability. Campden Wealth and FINTRX reports highlight that 76% of family offices invest directly in companies, with 83% of single family offices worldwide considering direct investments4. The willingness to take on more risk reflects their confidence in identifying pockets of value within the private equity landscape. As family offices pivot toward private equity, they are positioning themselves for long-term growth and the preservation of generational wealth.
The surge in secondaries investments: Seizing opportunities
While private equity takes center stage, family offices are also recognizing the value of secondaries investments. The UBS Report5 highlights a notable trend: nearly half of surveyed family offices (45%) plan to over-allocate their portfolios to secondaries. This surge in interest can be attributed to the narrowing valuation gap between public and private markets.
As public markets rebounded, secondary markets became increasingly attractive. The ability to transact LP interests in this environment has encouraged higher deal volumes. Secondaries funds raised a staggering $34.66 billion in 2023, surpassing the previous year's total and on track to exceed 2021's record. Some alternatives fund managers, such as Morgan Stanley Alternative Investment Partners7 and Blackstone8, have raised capital for secondaries strategies in 2023.
The momentum in the secondaries market indicates family offices' astute approach to seizing opportunities created by market dislocations and evolving valuations.
Digital assets and sustainable investments: Balancing risk and responsibility
In addition to traditional investments, family offices are actively engaging with digital assets and sustainable investments in 2024. Despite the crypto market's well-documented volatility, family offices have demonstrated resilience. As per the European Family Office Report from Campden Wealth9, 28% of European family offices are invested in cryptocurrencies. This resilience is accompanied by a cautious approach, with crypto typically representing a minor fraction of their total assets (1%).
The family office's interest in digital assets extends beyond cryptocurrencies. Blockchain technology and the metaverse have also captured their attention, reflecting a forward-looking perspective that embraces nascent technologies with long-term potential.
Sustainable investing is another significant facet of family office strategies in 2024. Climate change mitigation, health and social care, and water management top the list of sustainability-focused themes. More than just a financial endeavor, this movement reflects family offices' recognition of their responsibility to make a positive impact on society.
Moreover, the next generation of family office members, who will feel the impacts of climate change more acutely, are becoming key drivers in steering these investments towards sustainability. This generational shift is expected to further amplify the role of sustainable investments in family offices globally. Sustainable investments, which accounted for an average of 36% of their portfolios, are expected to grow to 43% within the next five years10.
Conclusion – 2024: Navigating the future with resilience and responsibility?
As we conclude this exploration of family office investments in 2024, it becomes evident that these institutions are entering the year with a resolute "Risk-On" mindset. Their strategic pivot toward private assets, coupled with a keen interest in secondaries, digital assets, and sustainable investments, underscores their adaptability and readiness to capitalize on evolving opportunities. Moreover, the reorientation of their structures and strategies reaffirms their readiness to capitalize on evolving opportunities while mitigating emerging risks inherent in the current geopolitical and economic climate.
While the financial world remains fraught with challenges and uncertainties, family offices are positioned to navigate these waters with confidence and responsibility. Their role as pivotal players in both public and private markets continues to evolve, making 2024 a transformative year for family office investment strategies.
Amidst the complexities of the financial landscape, one thing is clear: family offices are poised to embrace the future with resilience and a commitment to positive change.
1Global Family Office Report 2023, UBS
2Family Office Investment Insights Report: Eyes on the Horizon, Goldman Sachs
3Family offices increasingly attracted to private debt, Private Debt Investor
4The Rise of Family Offices Co-Investing, FINTRX
5Global Family Office Report 2023, UBS
6Private equity secondaries emerge as family office overallocation focus, UBS &Preqin
7Morgan Stanley's $2.5B fund keeps secondaries momentum rolling, Pitchbook
8Blackstone raises over $22B for world's biggest secondaries fund, Pitchbook
9The European Family Office Report, Campden Wealth
10The European Family Office Report, Campden Wealth
Summary
As we stand on the threshold of 2024, the landscape of family offices and their investment strategies are undergoing a significant transformation. In this article, we delve deeper into these changes, both on macro trends and challenges and with a specific focus on the growing prominence of private assets, the surge in secondaries investments, and family office engagement with digital assets and sustainable investments.