Against a backdrop of low yields from bonds and other traditional assets, family offices are adapting to this environment by diversifying their investment portfolios and are increasingly turning to experts for assistance. In this article, published originally by Managers of Wealth, I take a detailed look at how family offices are adapting and why expert assistance is proving essential.
The evolution of the global wealth industry over the past decade is evidenced by the emergence, relevance and impact of family offices worldwide. This evolution is particularly apparent in an asset management context, where family offices are moving away from a heavy reliance on banks and traditional service providers and are instead employing their own specialist advisers and investment professionals – including former bankers and private equity deal-makers. They're also partnering with specialist outsourced service providers, such as IQ-EQ, to cover other important areas of family wealth management and preservation, such as trust administration, reporting, risk, compliance, legal, ESG, philanthropy, executive incentivisation and concierge services.
The UBS and Campden Research 2019 Global Family Office Report reveals that the current market environment of low yields from bonds and other traditional assets, coupled with a lack of visibility on when such returns will improve, has had a notable impact on the way family offices invest. As the search for yield and predictable rates of return intensifies amid more volatile market conditions, family offices have diversified their focus and are now among the fastest growing and leading investors globally in non-traditional asset classes, such as private equity and real estate.
Reinforcing this trend, PwC’s Private Equity Trend Report 2019 notes that when private equity managers were asked about significant contributors to their next fund, 73% of respondents mentioned family offices as potential investors.
Time for alternatives
Alternatives are representing an increasing portion of a family office’s portfolio. The UBS report reveals that over 40% of the average family office portfolio is invested in alternative investments, with private equity constituting 19%.
What's important to note is that, although alternatives typically offer the potential for higher returns as well as lower or no correlation to traditional asset classes, they also come with challenges such as less liquidity and greater exposure to risk. This leads family offices to rely increasingly on professional advice from fund managers regarding the long-term strategy required for such illiquid asset classes.
In this context, it is significant that family offices are spending more on family professional services, with the average spend per family office reaching US$1 million in 2019, according to the UBS report. This covers spend on family governance and succession planning, family counselling, concierge services and security, support for new family businesses, and the management of high-value physical assets. Family offices also allocated slightly more to general advisory services in 2019 (US$1.5 million on average) owing to heightened spend on trust management and financial and estate planning – additionally highlighting the particular importance of how these assets are passed on.
The siren call of sustainable investing
In addition, more and more family offices are discovering the appeal of new investment trends such as sustainable investing, for which external expertise might be required.
As the Deloitte Private 2020 paper on family business issues and opportunities notes, “successful family businesses tend to have one quality in common: a sense of purpose beyond being profitable… Whether it’s a commitment to giving back to their community, becoming environmentally sustainable, or producing a perfectly crafted product, purpose informs everything they do.” Thus, guided by a compelling sense of purpose, family offices may be more likely to feel the pull of sustainable investing than other private enterprises, or at least have the wherewithal to act upon their desire to make an impact in their communities.
The UBS report highlights the impressive rise in investment interest that sustainable investing has attracted in recent years, with US$31 trillion of assets being managed under sustainable investment strategies globally. One in three family offices are now engaged in sustainable investing, with the most commonly adopted approaches being ‘thematic investing’ into sectors such as clean energy, gender equality, healthcare and water (62% of surveyed family offices) and the ‘integration of ESG factors into analysis and valuation’ (46%).
Organising for change
Given the expectation of low yields, family offices are increasingly reorganising to make their operations more efficient. They are keeping running costs low, focusing on asset management while outsourcing other specialised services (e.g. trusteeship, compliance, risk monitoring, reporting). Family offices are also continuing to expand connectivity beyond their regional peers to develop a global network. This enables them to understand what other family offices are doing, adopt global best practices, and invest alongside peers in markets that might be unfamiliar but may have the potential to offer higher returns.
Unsurprisingly, Deloitte’s 2019 report on Family Office Trends asserts that global mobility is becoming an important criterion for today’s family office as “the accelerating pace of change, combined with political tensions and the potential for significant rebalancing in some previously settled jurisdictions” is causing family offices to question their current locations and to evaluate new ones.
The globalisation of family members and their assets has also increased the need for properly designed asset holding structures (such as trusts, foundations and private funds) to protect against the added complexity, compliance burdens and risks arising from global exposure to different inheritance laws, taxation policies, marital regimes and other types of legislation.
Beyond designing and administering such structures, professional advisers and specialist providers are further relevant in that they are often integrated into the holding structures alongside the family members themselves, for example via investment advisory roles on committees and/or boards, or as trustees. This professional involvement is crucial to the creation of a broader, well-designed and balanced governance framework.
Towards a sustainable future
As Deloitte’s Family Office Trends report notes, family offices are unusual in that they often have multiple centres of power and decision-making: the family members, the family office executives and the executive management of the family operating companies and/or private equity interests.
As such, the search for higher returns, paired with the need for an optimum jurisdiction of operation and fulfilment of a unique sense of purpose, is making it tougher than ever for family offices to arrive at the ‘perfect’ decision – one that meets with the approval of all relevant centres of power. Thus, turning to a trusted partner for guidance may make all of the difference in future-proofing and sustainably preserving the legacy of the family office for the long term.