Publications

- December 1, 2017: Vol. 4, Number 12

Roundtable: Where Family Offices Are Investing Their Assets

by Matthew Erskine, Michael Felman, Maria Elena Lagomasino, Martin Lemke, Tom Livergood, Bob Miller and Richard Wilson

The number of U.S. family office has grown to at least 3,000 with investments of $1 trillion to $1.2 trillion, and average cost of those offices is about 0.6 percent of AUM. The largest multifamily office as measured by assets is more the $140 billion under management, and the largest multifamily office by number of families is Bessemer Trust in New York City with about 2,200 client families.

According to the Global Family Office Report 2017, the number one objective of family office executives is intergenerational wealth (creating a succession plan was cited by 69 percent of respondents), followed by accounting and tax and estate planning, according to the report produced by UBS and Campden Research. The report also noted the average family office gave $5.7 million to philanthropy during the past 12 months, and the number of those that gave to environmental causes climbed 9.4 percent to 41.7 percent between 2016 and 2017, while the proportion that gave to poverty alleviation rose 7.0 percent to 41.7 percent. Also on the rise is impact investing, with one-quarter (28.3 percent) of family offices currently engaged in impact investing, and more than half of them are engaged via direct private investment (62.5 percent) or private equity funds (56.3 percent), while the most popular sectors to invest in are education (54.3 percent), energy and resource efficiency (50.0 percent), and environmental conservation (45.7 percent).

That was then, this is now. We asked a handful of executives involved in various aspects of family office investing to give us a brief answer to this question: What are the latest investment trends among family offices? Here is what they had to say.

 

Martin Lemke, managing director, AM alpha KVG

We see a still increasing demand of family offices for real assets, especially real estate. This may result in a changing allocation between the asset classes where strong performing buckets like stocks are peaking and those dollars being reallocated to less volatile asset classes. Equities and private equity are likely to keep a strong position in family office portfolios, though less dominant than in previous cycles. In real estate, family offices are starting to widen the investment range, with the domestic bias softening. Transcontinental investments are becoming more attractive to family offices as a means for diversifying both asset classes and economies. The flight to core assets, as happened during the global financial crisis, has now transformed into a more timing-based and return-focused approach. The illiquidity premium in these investments is attractive to family offices because there is still a significant spread between these types of assets and the “risk free” return. Asia, as the expected growth center of the world’s economy, is gaining appeal not only with regard to equities and PE, but also among joint venture and club deals.

 

Maria Elena (Mel) Lagomasino, CEO and managing partner, WE Family Offices

We are witnessing a significant increase in the allocation by family offices to nontraditional assets. These allocations span the spectrum from venture capital to private credit. One can clearly see this trend in the ever-larger funds being raised by the traditional private equity funds. The rationale for this trend derives from families, as they solve their income and growth needs, seeing more opportunity in the private markets and express a willingness to trade liquidity for returns. Caution is warranted when considering these types of investments and assets, as they present additional complexity and illiquidity. That illiquidity and the fact that most of these investment commitments are for multiple years, require the investor to know the character of the general partner.

 

Michael Felman, president, MSF Capital Advisors

Family offices have become more cautious in their investment outlook. Although the stock market seems to break new records every day, family offices realize that there will a be correction in the not too distant future because that rise has been fueled by low interest rates and not healthy balance sheets. It also appears that despite low unemployment and modest wage increases, inflation seems to be trending downward. Therefore, we don’t see any incentive for the Federal Reserve to raise interest rates significantly. The dollar has also been losing steam against other currencies. That has been a positive sign for emerging markets and commodities. We have seen renewed interest in both these asset classes from family offices. However, both of these asset classes are extremely volatile. Investment in emerging market debt funds and commodity trading advisers can help dampen that volatility but still achieve very positive returns.

 

Matthew Erskine, owner and managing partner, Erskine Family Office

  1. Indirect investments will remain important, but declining as a percentage of investments.
  2. Direct investments, and co-investments, will increase as a percentage of investments and high P/E ratios for such deals will continue.
  3. Impact investing will continue even at inflated prices and below-market returns.
  4. Tangible investments — such as artwork, cars, trophy residences and so forth — will continue to be popular among the members of the family, but ignored as an investment class by the family office.

 

Richard Wilson, founder and CEO, Billionaire Family Office

  1. Direct investments: The trend that everyone is already aware of but has to be on the list is the desire to be investing directly in operating businesses and real estate assets instead of through blind funds. Many families want to know exactly what their money is going into, want to pick and choose investments that make the most sense for them, and want to exert their strategic insight, control, timing of the sale, etc., in ways that benefit them. Many families have go-to strategies for increasing NOI on a specific type of asset, such as apartment building investments.
  2. Private lending: High-net-worth families are lending at 30 percent to 60 percent LTV against condos in New York City, apartment buildings, office buildings and other assets. Sometimes these deals include warrants or equity kickers, and many times families are looking for 10 percent to 14 percent returns. Some deals are getting done at 8 percent to 10 percent, and some at 14 percent to17 percent, but the fairway is really 12 percent to 13 percent.
  3. Virtual family office setups: Finally, I am seeing a lot of interest in setting up very lean single-family offices or virtual family offices. This typically involves an outsourced CEO or one full-time person at most, and then outsourcing everything else. The family may have an operating business with many employees and invest strategically through that company, or even have up to three full-time employees at the family office level. But the whole point of the virtual family office is to keep expenses at a minimum and use experts in various areas to supplement the internal team’s abilities. I have worked with families ranging from $10 million to $880 million in assets operating in this fashion, but typically it makes the most sense for the $50 million to $300 million net-worth-type families, as after you get past $200 million or $300 million the percentage of your wealth it would take to build-out the family office more formally and have that extra control and management of execution tends to make more sense.

 

Bob Miller, CEO, Private Client Resources

The biggest trend we see among the data compiled from 1,400 families is the increasing expansion beyond traditional investments in stocks, bonds, and even alternatives such as hedge funds. Many ultra-high-net-worth family offices with investable assets in excess of $200 million are pursuing longer duration private equity and real estate capital deployment opportunities. They are also opting into more direct investment and co-investment transactions where they can best leverage their past experience. The challenge is ensuring the investor obtains and monitors their investments concisely across three primary dimensions — liquidity, exposure and performance. Sophisticated investors have moved way beyond basic, custodial pass-through where they simply take custodial/manager data that ties to statements. Custodians have no idea these assets exist but they represent an ever-increasing portion of the portfolio. Achieving something we call “total wealth normalization,” where the ultra-high-net-worth investor can aggregate all away assets, both marketable and especially illiquid, is an operational and technological necessity.

Tom Livergood, CEO, The Family Wealth Alliance

The family office community represents a robust and enterprising source of investment funds. Capital preservation, low market correlation and liquidity are today’s watchwords. We see these three trends in the marketplace:

  1. Outsourced chief investment officers. Roughly one-third of single-family offices now outsource their CIO function. Many factors are driving this trend: cost of in-house CIO staff, and the growing complexity of alternative investment options, among them.
  2. Direct private equity investments. These direct deals avoid the fees, lack of control and lack of transparency that go with private equity funds. The liquidity is not great, but probably not any worse than a 10-year lockup in a private equity fund.
  3. Impact investing. This is a venture capital-like strategy that aims to generate both a financial return and measurable social or environmental gain. It’s particularly popular with younger family members because it can be meshed with charitable or social values.
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