It’s time to put your seatbelts on and get ready for a bumpy flight. The last few months have been particularly tricky for investors to navigate. Inflation in the UK is now predicted to top 18% in January and the FTSE and Dow Jones currently resemble thunder and lightning. In such turbulent market conditions, family offices are hunting for security and stability, but the truth is that they can steer through the storm more easily than others.
Alternative assets on autopilot
Taking the traditional asset classes (cash, bonds, equities etc.) into account, it’s hard to see where the genuine inflation protection comes from. With this high market volatility and skyrocketing inflation having no obvious end in sight, the trend of family offices moving away from public markets and into private markets has accelerated. In fact, alternative assets are becoming less ‘alternative’ as they provide investors with structural advantages relative to the public markets and offer a way to protect against – and even benefit from – higher inflation.
This makes alternative assets and family offices a likely coupling. Family offices have more ‘patient capital’ and often invest in assets for 10+ years, and are able to lock up capital in these illiquid assets without having to adhere to other third-party stakeholder demands. Long term, family offices can reap higher returns by investing in a range of alternative assets and geographies, growing their portfolios while mitigating inflationary market impacts.
This year, there have been clear signs that family offices are turning more than ever towards popular illiquid alternative assets. UBS Global Wealth Management’s recent survey revealed that 37% of single-family offices were planning to increase their allocation to real estate, with 27% increasing their investment in private debt offerings, and 74% increasing their private equity allocations in the next year.
As the Great Wealth Transfer is in full swing, new alternative asset classes are being touted as a possible hedge against inflation. Younger generations are increasingly turning towards investing in the energy transition, new tech funds, or dipping toes into the cryptocurrency world. It will be interesting to see whether, like real estate and private equity (which are tried and tested during times of uncertainty), these newer asset classes will also ensure a smooth flight.
And as newer asset classes come to the fore, and the private market boom continues, family offices must consider how they can structure these assets in a way to safely fly through the current inflationary environment. A rising interest in ESG and impact investing has also put more focus on what is behind the investments and led firms like our own to find solutions to assess and measure these factors.
Tools to navigate difficult flight paths
You wouldn’t want to be on a plane with no technology and absolutely no idea where you need to fly next. Similarly, structuring a family office to give it the best chance to fly smoothly in the private markets is essential in the shift to inflation-beating alternative assets.
At their core, family offices are stewards of wealth for the family(ies) that set them up. Created to facilitate the efficient preservation and eventual passing of wealth from one generation to another, they are also responsible for growing the portfolio of investments in line with the family’s risk appetite. At a time where family offices are becoming increasingly sophisticated and operating more like institutional investors, additional complexities are emerging. Now, not only must they have an understanding of where to invest in the private markets, but family offices need to take into account specific tax rules, regulatory and compliance obligations and succession laws to mitigate risks, help ensure appropriate returns, the longevity of the family office and indeed the family wealth.
Globalisation has meant that family offices have worldwide assets in everything from art to vintage cars, to real estate, to government bonds – the list goes on. The reporting of each and every asset can cause real headaches, thus increasing the importance of technology to simplify the reporting process for family offices. Just one example is consolidated platforms that provide family offices with a real-time view of their assets, easily accessed from a mobile device. This has greatly improved reporting processes, offering transparency into private market investments, similar to their public counterparts, and giving family offices the comfort of understanding how their investments are performing.
That said, there are not many platforms that bring together the full range of assets, from traditional cash and public securities to alternatives like RE, PE, VC and luxury assets – let alone efficiently link to booking and financial statements. But there are some, and likely more in the future given the demand, especially from family offices. (Spoiler alert: IQ-EQ’s Cosmos offering is one such platform!)
Heading towards turbulent air?
While family offices can drive their portfolios and investments away from assets that may be heavily impacted by inflation, such as those in the public markets, family offices need to place the same amount of attention on ensuring that their public and private market investments are appropriately structured, administered and monitored.
In the end, as family offices become more institutional in their governance and disciplines, with assets spanning different countries, public and private markets, their structures and reporting will become increasingly difficult, and significant resources will need to be dedicated to back office operations. The two options are clear for family offices: take it on themselves, or turn towards third-party specialist providers to be their trusted pilot and navigate them through the turbulent air. The trend is definitely the latter, especially where family office portfolios include alternative assets – which, again, will only increase further in this inflationary environment.