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By Alexander Jones, International Banker
A recent report published by investment-data firm Preqin revealed that the global number of family offices surged by more than 21 percent last year to reach 4,592 and had also tripled since 2019. North America led the way with easily the largest share of family offices located across the continent, at 1,682, while also being home to more than half of all the assets held in family offices worldwide. Such trends underline the spectacular boom that the family-office sector is now enjoying. And with private-equity firms clamouring to catch the attention of this once-overlooked segment of the wealth-management industry, that boom could well continue for some time to come.
As the private-investing arms of wealthy individuals and families, family offices worldwide have thrived in recent years for a number of crucial reasons, the most glaring of which being the ballooning personal fortunes and sheer proliferation of high-net-worth individuals (HNWIs) across the world. Indeed, Forbes described 2024 as “a record year” for 10-figure wealth, elevating the billionaire class to register record amounts of riches. “There are now more billionaires than ever: 2,781 in all, 141 more than last year and 26 more than the record set in 2021,” the publication noted when publishing its annual “World’s Billionaires List” for this year. “They’re richer than ever, worth $14.2 trillion in aggregate, up by $2 trillion from 2023 and $1.1 trillion above the previous record, also set in 2021.”
To manage all this wealth, family offices are fast becoming the solution of choice for affluent individuals and families, with some estimates suggesting that this particular structure manages more than $6 trillion in combined assets. And with a key attribute of family offices being succession planning—that is, the process of preparing for transferring wealth to the next generation—wealthy families are keener than ever to use family-office services for this often complex undertaking.
“One phenomenon impacting both the creation of new family offices and their investment strategies is the great wealth transfer, which is expected to make Millennials the richest generation in American history,” according to Alex Murray, Preqin’s head of real assets and research insights. “An aging population means more family offices are transferred to the next generation—and this demographic shift is happening across the world. With this demographic change comes a shift in focus for family offices, from wealth creation to wealth retention.”
Accompanying this astronomical growth, moreover, are family offices’ rapidly evolving investment preferences, largely evidenced by the pronounced interest in alternative assets today, thus marking a clear departure from the simple stocks-and-bonds portfolio model that had previously satisfied investors. Instead, adventurous strategies are being pursued to generate consistently higher returns, suggesting that family offices are more open to alternative illiquid markets such as private equity, venture capital (VC), hedge funds, infrastructure and real estate. For instance, Preqin noted that among institutional investors, the family-office segment has the highest allocation to hedge funds.
J.P. Morgan Private Bank’s “2024 Global Family Office Report”, meanwhile, calculated the average family-office portfolio allocation to alternative assets at a not-insignificant 45 percent. “This represents a shift we are seeing among many family offices, where greater portions of their allocations are able to take illiquidity risk, in order to achieve greater potential long-term returns,” the report noted, citing private equity, real estate, venture capital and hedge funds among the most sought-after alternative investments among family offices. “Despite healthy allocations to alternatives, family offices are still consistently building out core, liquid portfolios with an average public equity allocation of 26 percent, and an average fixed income and cash allocation of 20 percent. Cash allocations still appear relatively high relative to history.”
However, the surging interest in private equity has mostly captured the headlines in the family-office world, recently surpassing public equity as the top asset class for family-office investment. According to Deloitte Private’s 2024 “Family Office Insights Series – Global Edition” report, private equity (including direct, funds and private debt/direct lending) represented some 30 percent of the average family-office portfolio last year, up from 22 percent in 2021, while public equities accounted for 25 percent, down from 34 percent in 2021.
Some of the biggest investment managers in the alternative-asset and private-equity spaces are now courting family offices as an increasingly pivotal source of funds, with the likes of Blackstone, KKR (Kohlberg Kravis Roberts & Co.) and Carlyle all expanding their operations in recent years to serve this segment and increase their investor bases. “The larger private equity managers are trying to compete there by putting in resources and time,” according to Rachel Dabora, research insights analyst at Preqin, who spoke with CNBC on March 11. “Ultra-high-net-worth investors and family offices are really on their radar.”
S&P Global Market Intelligence, for instance, found that KKR had raised around $75 billion from non-institutional private wealth by the end of last year, accounting for 13.6 percent of the firm’s $553 billion assets under management (AUM). California-based wealth manager Align Impact’s chief investment officer, Matthew Weatherley-White, moreover, acknowledged to S&P in early April that the firm’s clients—individuals, families, foundations, institutions and advisers—”continue to express the desire to have increased exposure to private equity and private credit”. KKR’s “2023 Family Capital Survey”, meanwhile, disclosed that family-office chief investment officers largely expected to boost their exposures to alternative assets in 2024, especially private credit, infrastructure and private equity.
What’s more, a recent survey of 189 family offices globally by BNY Mellon Wealth Management found that in the 12 months to June 2024, a comfortable majority of family offices (62 percent) made at least six direct investments into private companies—a growing sign that they prefer to operate as their own private-equity funds and thus directly capture more of the unlisted space themselves. According to the report, this direct investment presents exciting opportunities for family offices to leverage their unique competencies. “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 also noted. “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.”
It should also be acknowledged, however, that not all alternative investments are enjoying the same degrees of interest from family offices. According to William Marr, senior managing director of the wealth management group at hedge fund Welton Investment Partners LLC, asset allocation for several assets under this segment may already have peaked. “What we’re seeing actually is a bit of a shift away from adding more illiquids,” Marr told S&P, adding that while the previous decade saw a big wave of investments in illiquid assets such as private equity, private debt and private real estate, many family offices subsequently reached their allocation limit for these investments in their portfolios. Marr did also note, however, that family-office demand remained buoyant for specific illiquid segments, such as private debt and private-equity secondaries, for which “there’s a tremendous amount of demand, including from family offices”.
This robust demand is reflective of the typical family-office investment strategy of patient capital over longer time horizons. Indeed, assets can be held for decades to ultimately benefit from handsome liquidity premiums being realised in the end. The gradual changes in the valuations of such assets stand in stark contrast to stocks, which tend to exhibit pronounced price swings on a daily basis. “These clients are taking a multi-decade view of their wealth, and they can take the illiquidity,” William Sinclair, head of the U.S. Family Office Practice at J.P. Morgan Private Bank, told CNBC in April. “Many of them are seeing opportunities outside of public markets.”
That’s not to say that short-term opportunities are entirely disregarded. On the contrary, cryptocurrencies have also made a surprising appearance in family-office investment portfolios, with the BNY Mellon report recording a 5-percent allocation for this volatile asset class. “Among family offices who report exploring cryptocurrencies, there are diverse motivations for investing,” according to the report. “Over half mention keeping up with new investment trends and investment opportunities. Thirty percent or more cite interest from current leadership or the next generation of the family office.” Nonetheless, a hefty 38 percent of those surveyed confirmed that they had no interest in crypto, citing such factors as market volatility, the threats of hacking and cybercrime and the lack of regulatory maturity for digital assets.
Looking forward, it appears that the family-office boom will continue throughout this year at least. According to Deloitte, 70 percent of family offices expect to see their AUMs rise in 2024, while 79 percent expect their families’ total wealth to increase. The report surveyed 354 single family offices worldwide between September and December 2023 that oversaw an average of $2.0 billion in AUM, while the associated families possessed an average wealth of $3.8 billion.
Should the global economy experience a “soft landing” this year, the report also noted that family offices are well positioned to withstand economic currents. “With many accustomed to navigating fluctuating economic cycles, family offices aim to hold on to their long-term, yet nimble approach to investing, which—given their patient capital and cash reserves—puts them in a unique position to ride the economic waves while seizing opportunistic deals along the way.”
