The future of alternative investments for family offices

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Alternative investments continue gaining significant traction in global markets as family offices seek to diversify their portfolios amidst uncertainty and generationally changing investment preferences. A recent JP Morgan report revealed that some family offices now allocate up to 45% of their portfolios to these alternative and private asset classes. In this insight, Simple chats with Cory Shea and Alex Goodman, the founders of Clockwork, about the trends, the challenges and how technology is transforming the future of alternative investments for family offices.

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What you need to know

  • Family offices are increasing allocations to alternative investments to achieve higher risk-weighted returns and insulate from global uncertainty. Generational wealth transfers represent a consistent shift away from conventional portfolios, illuminating a new set of investment preferences.
  • Private markets and alternative assets pose many challenges – from accessing high-quality opportunities, underwriting unique risks, and properly monitoring portfolios with vast information asymmetry and a new mosaic of source data.
  • Innovative software platforms are emerging to streamline the tracking and management of these assets.

 

Investments Updated on November 19, 2024

Nearly a decade ago, while both living in New York, Cory Shea and Alex Goodman started a consulting business for private companies. Finding themselves on the ‘sell-side’ of private markets, the pair helped entrepreneurs in different areas, focusing on finance, business development, and fundraising-oriented efforts.

In 2016, the two pivoted to the ‘buy-side’ of private markets. Realising the dire need for rigorous due diligence in the space, they underwrote and analysed a wide range of investment opportunities on behalf of investors, developing a unique methodology to efficiently assess various components of the businesses in which their clients sought to deploy capital.

As the business grew, Clockwork evolved toward more comprehensive pre- and post-investment monitoring across unique alternative asset portfolios. The platform addressed a crucial gap in the private investment office’s technology universe. At its core, Clockwork was designed to address the growing need for more structured, uniform information management for private investors who are most active in making and managing alternative investments.

“The private markets are truly dynamic, representing a range of underlying asset classes, disparate information sources, and a variety of biases that impact the investment decision-making process. Because of these factors, decisions can be highly personal and emotionally driven. Our clients demanded objectivity, collaboration and normalised data to address these factors, which was the impetus for Clockwork.” Cory Shea, Founding Partner at Clockwork.

 

The evolving landscape of alternative investments

The alternative market landscape is marked by revolving trends within an overall positive expansion over the past several years. Said differently, while the flavour of the moment may change, family offices across the globe are increasing their investments in alternatives both in terms of allocation percentage and capital.

As of late, private credit has been a hot topic, with some investors less willing to invest in illiquid long-term positions, preferring some sights on distributions and return of capital in shorter periods. That said, there are unique and creative structures that also incorporate equity or revenue-based returns into private credit investments. “A lot of what we see in the alternative space has equity aspects. None of it is fully decoupled from what’s happening with interest rates,” says Alex.

Other current trends include the rise of AI, which has been on everyone’s radars in 2024. A few years prior was the crypto boom, cannabis, and CPG. When there is a buzzy theme, everyone wants to see deals and get some exposure to the space. But for small to medium family offices with a lack of bandwidth, where do they actually start?

Falling prey to pressure

In the alternative investment space, family offices often fall into an investment process that’s overly reactive. And they also deal with a lot of reputational risk. Family, friends, and other close contacts are constantly pitching them ideas. So, it becomes important to create a distance for objective investment decision-making. This starts with a real mandate, whether a formal Investment Policy Statement (IPS) or at least methodologies to dictate asset allocation strategies, due diligence processes, and general objectives and constraints.

From this proactive starting point, it becomes easier to maintain a market pulse without getting distracted. The Clockwork co-founders also believe a strong, trusted co-investment network can make a huge positive impact. “I think a lot of family offices or private investors in particular, think in their own world, they’re insulated. And so a lot of times our clients will ask us, what are your other clients doing? What are they thinking? Is this structure normal? What are others offering right now in this environment? So I think some context from other like-minded investors can be helpful,” says Cory.

Common challenges family offices face

What the co-founders also observed about family offices is that many face a common set of problems that boil down to access and the difficulty of staying on top of the investments throughout their lifecycle. As a starter, many family offices have loosely defined mandates when it comes to their alternative buckets.

Parallel with the fact that these offices are routinely solicited to participate directly in the latest high-growth round or new fund offering, it’s easy to see how a family office can become overwhelmed with choice. As such, they can end up executing a much more reactive approach and run the risk of being distracted by the ‘next shiny thing’ that’s simply getting the most attention. Since family offices are prone to family, friends, and associated networks pitching ideas to them, it can be difficult to gauge the market pulse and adhere to best practices.

Monitoring and tracking investments

Beyond access, however, comes investment tracking. The tasks involved with tracking and monitoring become paramount to a positive investment outcome. That is especially true when private investments come with a longer time horizon. The act of keeping tabs on things is complex in alternatives, with a general lack of reporting standards leaving a myriad of information sources spanning qualitative updates and infrequent but valuable inside information.

A robust portfolio can present a multi-faceted set of competencies to properly manage and, ideally, all organised under a cohesive investment policy to guide the process and decision-making. Thus, it’s easy to see why software in a single solution is hard to offer as a comprehensive panacea.

“It quickly becomes a game of organisation that can burden and overwhelm even the most experienced investment teams. From the moment you elect to move forward with an investment evaluation, a lot of data and content should be amassed – from the issuer and from your office’s research and analysis. Such materials ought to form an ongoing, referenceable and retrievable record to be called upon down the road rather than simply reviewed as point-in-time information. Alexander Goodman, Founding Partner at Clockwork.

 

How technology is transforming alternatives

At the moment, two types of technology platforms compete for the modern alternative investor. First, the large incumbent investment platforms are expanding their functionality to make them more relevant for alternative-heavy portfolios. Still, tethered to legacy technologies, they are slower to move and often lack modern, intuitive design.

On the other hand, the last few years have seen a larger number of smaller players emerge with new technologies to tackle specific pain points posed by the nature of alternative investments. While great tools, they can be narrow-focused as ‘point solutions,’ leaving a lot of necessary functionality and support unaddressed for family offices.

Combining their extensive experience in having worked on both sides of the private markets, the Clockwork platform and team provide a comprehensive and complementary solution designed to address the practical needs of their growing private investor client base. The platform offers family offices, along with their teams and advisors, a secure and modern way to manage their alternative investments. Key features include highly customisable portfolio views, performance tracking, document aggregation and sharing, and the ability to discover new investment opportunities.

The future of alternative investments

Looking to the future, both Cory and Alex believe that alternative investments will continue to grow in prominence. As the numbers suggest, publicly listed companies are on a steady decline. At the same time, more companies choose to stay private longer as they’re able to raise larger and larger sums of private capital and remain outside of the public market domain. And it’s not just technology companies.

This shift, alongside modern asset allocation methodologies which point toward higher risk-adjusted returns, positions alternative assets as a more critical component of family office portfolios. And because of the variety reflected in privates, the range of investment structures, and the increased amount of available private capital, these markets offer family offices a tremendous ability to diversify and generate higher returns while making a more direct impact with their investments on the change they wish to see in the world.

 

About Clockwork

Clockwork’s private investment management platform powers investors to centrally track alternatives, and everything else. Our technology and team approach integrates investment content, email and documents alongside transaction data and otherwise siloed private information sources. With a focus on private alternatives as the most challenging investments to monitor, we cover all asset classes to address a large, growing need in global capital markets. Today, Clockwork provides investors with real-time, consolidated views of $6B+ of invested portfolio value across 7,000+ investments and 50,000+ transactions.

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Clockwork offers a robust private investment management platform for family offices and global private investors, to centrally track alternative assets and everything else.

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