Private and public equity allocations drove strong returns for family offices over the past three years, according to a new report released by Northern Trust Global Family Office and Private Investment Offices Group and the Wharton Global Family Alliance. Year-over-year, capital allocations to public equity and private equity have increased, while allocations to fixed income and hedge funds declined.
During the period studied, private equity principal investments by family offices have increased steadily. Within these investments, 42 percent of families participated in an exclusive “club deal” in which they co-invest with one or more families, without involving a private equity firm. Increasingly, family offices also are investing alongside a private equity firm in which it is already a partner on a deal-by-deal basis. Looking ahead, respondents predicted private equity will be a significant contributor to future returns.
The report — the summary of a comprehensive survey conducted by the Wharton GFA — draws on insights from four years of Wharton studies undertaken to better understand the financial performance and operational strategy at family offices. While family offices place high importance on future portfolio results, this year’s respondents emphasized success also centers on education and succession planning for their family, and talent acquisition for the office.
Managing the family
Family offices are increasingly focused on the importance of a holistic wealth management approach that goes beyond investments. Commitments to educational programs have increased since the previous year, and family offices look to vendors such as private banks to help prepare the next generation for leadership. Reinforcing the importance of education, respondents favored a merit-based approach to succession, with more than 50 percent indicating expertise in managing family dynamics is the leading factor in succession planning. This year’s sample of family offices are more focused on promoting leaders with emotional intelligence and business expertise than on age and seniority.
Talent and tech
Family offices are in search of highly qualified and deeply experienced professionals who can navigate the increasingly complex regulatory and capital markets environments. Many family offices are relying more heavily on personal referrals to recruit top talent, noting a nearly 50 percent decline in the utilization of head-hunters and vendors from 2014 to 2017. With experienced family office workers in high demand, the report also illustrates an increase in the incorporation of non-monetary perks, such as attractive work environment and benefits, into family office incentive packages. Notably, the importance of investment with a social/ethical dimension as a talent incentive has nearly doubled over the past three years.
Technology continues to be critical to a family office’s ability to enhance productivity and expand operations, and they are willing to invest to get the best experience. When selecting a financial technology platform, survey respondents indicate adaptability and ease of use are their top priorities, more so than cost. As technology’s role increases, family offices are leveraging the efficiencies to widen their scope. Relative to past surveys, the median family office grew in the number of professionals employed, number of households serviced and number of custodians.
