Family offices increasingly shifting to private investments

Alternatives to traditional holdings are growing survey finds

Family offices increasingly shifting to private investments
Steve Randall

Family offices are increasingly allocating funds to private investments including according to an industry survey.

The shift away from traditional allocations such as equities and fixed income – with a third of the overall portfolio allocated to Private Equity (17%) and Real Assets (16%) - has led to increased overall portfolio performance

The 2019 FOX Global Investment Survey included participants with family offices headquartered in Canada, Australia, Belgium, the Caribbean, Chile, Mexico, Saudi Arabia, Spain, the UK, and the US.

“Over a longer period of time, it is interesting to evaluate family offices’ performance relative to industry benchmarks, with family offices investing broadly across asset classes and along the liquidity spectrum,” said Kristi Kuechler, Managing Director of the Investor Market at Family Office Exchange. “Even after a tough 2018, family office returns handily exceeded the strong five-year returns generated from a US-focused stock/bond portfolio."

Despite an average overall portfolio return of -0.2%, almost half of respondents stated that they were either "Very Satisfied” (18%) or “Somewhat Satisfied” (30%) with their 2018 investment performance; 41% said "Neither Satisfied nor Dissatisfied" and only 11% said they were "Very Dissatisfied".

The average investable asset base of those completing the survey was U$586 million, with 17% of respondents overseeing more than $1 billion of investable assets.

Just under half continue to have ownership of the original business that generated the family’s wealth (44%).

Double-digit returns for PE

Returns for private equity (both direct and funds) generated expected double digit returns in 2018 (11.1% Private Equity Funds and 16.8% Private Equity Direct) and

This compares to low or negative returns for traditional asset classes and those families that had meaningfully higher allocations to Private Equity and Real Estate saw the highest returns.

Of the 84% of families who make direct investments, 88% invest directly in real estate. Almost three quarters (71%) invest in operating businesses—outside of the core business, if there is one.

Other findings:

  • Family offices continue to move away from a traditional "top down" asset allocation approach. In this year's survey, almost three-fourths (72%) of respondents said that they combine "top down" asset allocation with a "bottom up" (more opportunistic) method. That is up significantly from 54% who responded that they combine "top down" and bottom up" last year. This trend is likely driven by the increasing allocation to direct investments.
  • Another significant trend across the average allocations of the past four years is a continuing reduction in allocations to hedge funds (down from 12% in 2014, to less than 6% at the end of 2018).
  • Non-U.S. families generated significantly higher returns than U.S. families in 2018, +4.6% vs. -1.3%. The non-U.S. families had much lower allocations to Public Equity (42% for U.S. families vs 25% to non-U.S. families) and higher allocations to Private Equity (26% non-U.S. vs 15% for U.S. families).