Institutional investors have gotten more sophisticated, and so have the asset consultants they look to for advice. But as those consultants push deeper into the lucrative wealth and family office segments, can they keep product conflicts from getting in the way?
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Where family offices are putting their pots of gold to work
Real estate and public and private equity still make up the majority of the portfolio, but family offices are increasingly doing direct deals in the unlisted space rather than getting their exposure through external managers, according to a survey of 189 family offices globally by BNY Mellon Wealth.
The majority of family offices surveyed said they’d done at least six direct deals in the past 12 months, and an even larger number expected to do more over the next 12, drawn by the illiquidity premium on offer and the ability to get involved in running the underlying business by taking management or board positions.
“There is a clearly defined value proposition that sets out where the family office believes its strengths lie – for example, adding operating expertise, or having exceptional access to opportunities by leveraging connections,” the report says. “The process is well-defined, with a strong understanding of what has – and has not – added value in the past, and a strategy for realizing gains and exiting investments.
“The resources required to establish a direct investing program will depend on the complexity of the program. While two-thirds of family offices do their own internal due diligence on direct investments, nearly half will seek input from an investment consultant. Some 42 per cent of family offices cite time constraints as a top challenge. The proportion is higher (almost 50 per cent) among professionals that have so far made less than five direct investments.”
And “true to their entrepreneurial nature”, family offices are moving into new opportunities, with private equity allocations now including a significant place for venture capital investments, while cryptocurrencies account for five per cent of portfolios – an allocation that would have been “unthinkable” a decade ago.
“Among family offices who report exploring cryptocurrencies, there are diverse motivations for investing,” the report says. “Over half mention keeping up with new investment trends and investment opportunities. Thirty per cent or more cite interest from current leadership or the next generation of the family office.”
But it remains unthinkable for a significant chunk of the family offices surveyed, with 38 per cent of those surveyed saying they had no exposure or weren’t interested, citing volatility, the rise of hacking and cybercrime, and the underdeveloped regulatory environment for digital assets as reasons for steering well clear of them.
Meanwhile, half of family offices expect to increase their exposure to public equity in the coming year – making it the most popular choice – and 22 per cent plan on reducing their cash allocations.
“Public markets have been enjoying a strong run, powered by the popularity of technology stocks linked to the emerging area of artificial intelligence (AI) and the continuing resilience of the U.S. consumer,” the report says. “Changing expectations about the timing of interest rate cuts have fuelled macroeconomic uncertainty, making the liquidity of investments in public markets an added attraction.”
