An introduction to family office investments

Investing in the future

Family offices have transformed significantly over the past couple of decades, becoming more sophisticated, organised and dynamic. As the sector has grown and become more established, there is also increasing diversity across family offices, reflecting the unique values, priorities and needs of the ultra-rich families that they serve. However, the objective of preserving and protecting wealth for generations to come is a core strategic objective for the vast majority of modern family offices and has been so since the first family offices emerged during the Industrial Revolution. Before family offices started to expand their service offerings, they were essentially wealth managers and, to this day, wealth management remains the most important reason for their existence.

Family office asset allocation trends

Family offices have traditionally channelled their investments into liquid bond and equity markets, fixed income, passive alternative investments and direct real estate investments. However, in the past few years, investment strategies have begun to lean more heavily towards direct investment deals with both private equity and venture capital investments becoming more popular, at the expense of low-yielding fixed income investments.

Currently, about a third of family office wealth is invested in equities. Cash accounts for approximately 10% and real estate is relatively stable at 12%. Private equity investment has grown significantly to about 21%, whilst fixed income investments have declined to about 15% of total family office investment.

Technology investment is also on the rise as family offices seek opportunities to profit from the digital revolution.  Performance is not the only driver though. With a more socially responsible and purpose-driven approach, family offices are allocating more funds to assets that make a positive impact on the world around them.

Private equity and venture capital deals on the rise

Research points to a consistent year-on-year increase in family office allocation to direct, private equity deals. Approximately 80% of family offices are invested in private equity, with about a third exclusively invested in this asset class. Globally, private equity investment now accounts for over 20% of total family office allocation. This trend is expected to continue as family offices embrace a longer-term, less risk-averse mindset that prioritises returns over liquidity. Additionally, private equity allows family offices the opportunity to be more actively involved in the investment decision and to potentially participate in the strategic management of the businesses in which they invest. With family offices seeking more control over decision-making and more privacy in their dealings, private equity is becoming an increasingly attractive option.

Venture investments are also becoming more popular amongst family offices. Although early-stage start-up investments are riskier, they do tend to deliver stronger returns, which is why most family offices have invested in this space, either through venture funds or direct investments. The upside for start-ups is that family offices tend to provide more than just patient seed capital, often adding value through their operating businesses and network of connections as well as providing strategic guidance.

Investing into new technologies and digital assets

We live in the age of digital disruption and accelerating technological advancement. New industries have rapidly emerged, built on innovative platforms that have rendered established businesses and industries obsolete. Transformative technologies have been the primary source of wealth for the newcomers to the global billionaires club and this is a trend that is likely to become more entrenched in years to come. Family offices are therefore actively seeking investment opportunities in the tech space and the number of options in the deal pipeline is growing.  In fact, the technology sector has become the most popular sector for private equity investment, with over 80% of family offices invested. Blockchain, crypto and digital assets are also increasingly on the investment radar as family offices look to back the future leaders of the digital revolution.

Investing with purpose

Whilst family offices remain primarily focused on wealth preservation, they are directing more attention to how that wealth is employed and how their investments support—and align to—an overarching purpose. In recent years, the global shift towards social and environmental consciousness has heavily influenced family office asset allocation, a trend that has been accelerated by next-gen leadership. Approximately half of all family offices invest sustainably reflecting a greater focus on harm reduction and an increasing emphasis on employing capital to achieve a positive societal impact. An investment strategy that is built around purpose not only rallies the family and family office around a greater cause but also helps to attract and retain the best talent and create an environment where people are engaged and inspired. Purpose-driven family offices tend to invest in what they are passionate about, the most popular being education, climate change and healthcare.

Leveraging new technology to analyse wealth-data

The challenge of accessing, integrating and consolidating real-time data has made performance reporting and decision-making a challenging job for family offices. To counter this, family offices have invested in fam-tech platforms that track wealth and performance across complex and diversified portfolios. New technologies have allowed family offices to do away with outdated manual processes and replace them with real-time performance dashboards. With readily accessible data, decision-making and risk-assessment processes are greatly enhanced. Artificial intelligence and machine learning are also attracting more attention from family offices. These technologies can analyse enormous amounts of data and can potentially predict trends, identify opportunities and highlight risks. When the right tools are employed correctly, they certainly provide a family office with a distinct advantage.