The dramatic events of 2022 – everything from the financial markets’ decline and the war in Ukraine to the crypto meltdown and the lingering impact of the pandemic – have significantly affected the way family offices are thinking about investments. A survey of 188 principals and executives at family offices in 32 countries, conducted by the Dentons Family Office, offers key insights into the prevailing mindset at family offices. For anyone who works with ultra-high-net-worth clients, the survey’s findings provide a roadmap of the concerns and priorities that will have to be addressed throughout the year ahead.
1. Inflation is a major economic concern.
More than two-thirds of the survey respondents – 68% — said they were very concerned about inflation and are buying assets that can benefit from it. Perhaps not surprisingly, the largest single-family offices (SFOs) and family enterprises (FEs) with over $1 billion in assets feel better positioned to withstand inflation, with a slightly lower amount of them expressing concern about it (62%). Among the smaller SFOs and FEs with less than $250 million in assets, the level of concern was higher (73%).
2. Market volatility has made most family offices more cautious.
The market declines experienced in 2022 are causing family offices to take a cautious approach, with 70% saying they are being patient and waiting for lower valuations before adding risk to their portfolios. That is an indication that they expect more downside volatility in 2023. Close to two-thirds of the survey respondents – 64% — said that avoiding losses is now a key objective.
Again, there was a disparity between small and large family offices. More of the smaller offices were feeling the need to take a wait-and-see approach, while the larger offices felt less of a need to exercise caution. Interestingly, there was also a key difference in perspective between family members themselves and their investment staffs. Family members had a greater desire to proceed carefully and wait for lower valuations before increasing risk exposure. Those on the investment staff were willing to be bolder about pursuing returns in the current market environment of inflationary risk and a potential recession.
3. A majority see the best opportunities in private equity.
Globally, 60% of family offices believe the best investment opportunities available currently are in private equity. In North America, the percentage is even higher – 72%. Close to two-thirds of the global family offices – 63% — are making direct investments, and another 22% who don’t currently are still interested in doing so. Of those with direct investments, the average allocation of their total assets under management to private equity is 37%.
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4. Many family offices are grappling with the challenges direct investing brings.
Family offices are fully cognizant of the extra challenges direct investing presents. The prospect of taking on too much operational risk is a concern for 45% of them. The difficulties of finding high-quality deal flow worries 43%. Having control of their exit options ranks as an issue for 42%. Time constraints and the challenge of finding enough time to conduct proper due diligence is a concern for 41%. When the survey respondents were asked what their primary needs for 2023 are, improved deal flow ranked as number one. The top three sectors that family offices want to invest directly in over the next five years are healthcare (cited by 65%), disruptive technologies and digital tech (noted by 61%) and commercial property (mentioned by 58%).
5. Most family members prefer to be involved in investment decision-making.
Only a small percentage of family offices – 8% — defer investment decisions entirely to their family office staff. Among 30% of the respondents, decisions are made in a close collaboration between family members and family office staff. Only 29% of the ultra-high-net-worth family offices have key family members making investment decisions on their own.
6. Investment factors are viewed as a key source of diversification.
Spreading risk through diversification remains a top priority for family offices, and the use of factors, such as the size, quality or value of companies’ equity, is the most favored approach to achieve it, cited by 85% of respondents overall. Varying holdings by geography was another popular diversification strategy, as 74% of the respondents use this approach. With their private equity holdings, 69% of the respondents look to diversify across different fund vintages.
7. A split view about cryptocurrencies and digital assets.
After 2022 saw a steep decline in the value of many cryptocurrencies and the bankruptcies of notable crypto exchanges, family offices now seem to be in two distinct camps about digital assets. Close to half of the survey respondents – 47% — do not intend to invest in cryptocurrencies or digital assets. Not all family offices have lost faith in crypto, however. Nearly one-in-four (23%) of families invest in the asset class, and another 30% are planning either to invest in cryptocurrencies and digital assets over the next 12 months or to take a wait-and-see approach.
8. Family offices still look to external partners for a range of services.
While 80% of family offices have in-house investment capabilities, 77% outsource legal services and 62% get external support with accounting and tax compliance. A high percentage of North American family offices – 68% — have in-house philanthropic capabilities, an indication of the importance they give to their charitable efforts. The large family offices that manage assets of $1 billion or more rely on internal staff at much higher levels, with 95% of them managing direct investments internally. But even among this group, 40% still depend on external vendors partially or fully for support with information technology and cybersecurity.
When they select external partners, 65% of the respondents said deep expertise in a specialized area is their top priority. A recommendation of an outside partner from a trusted contact and that partner’s experience working with family offices ranked high among 39%. A third of the family offices (34%) also cited the importance of a partner’s ability to provide strategic advice. Rounding out the top priorities were alignment with their family office’s culture and values, cited by 32%, and the reasonability of fees, noted by 31%. Smaller offices, as could be expected, were even more fee conscious, with 52% of them ranking fees as an important consideration when selecting partners.
A recognized need for support
For those who work with family offices, the most promising takeaway from the survey is that many ultra-high-net-worth families recognize the value of external support, and they’re willing to work with partners who can deliver the expertise they need.