Family offices are private wealth management firms serving ultra-high net worth individuals (HNWIs) and families. They offer a wide range of financial services for the family or families they serve, including budgeting, insurance, charitable giving, wealth transfer, and tax services.
The covid-19 pandemic created a real challenge for family offices, and many are still calculating the best way to move forward in a post-pandemic world. With many new trends emerging over the past two years, including growth in private equity and sustainability investing, there are plenty of considerations to make when planning investment strategies.
So, with all of this in mind, what are the key investment strategies being employed by family offices post-pandemic?
The majority of private investment firms have seen a rise in sustainable investing driven by environmental, social and governance (ESG) factors over the past couple of years, and family offices are no exception.
The investment strategies of a family office should always align with the family’s values and beliefs, and many families are now eager to show awareness of the impact their investments have on issues such as climate change, sustainability, health and the environment. This rise in ‘sustainable investing’ can be partially attributed to the succession of wealth from current holders to their children, with the next generation caring more about the impact of their investments on environmental and social causes.
Generally, this sustainable investing aims to generate a positive social or environmental impact whilst also creating financial return for the family.
Private equity investments
The place of private equity investments within a family office’s portfolio has increased in significance in recent times. According to Agreus, who asked which asset class family offices concentrated on most during the pandemic, 95% reported Private Equity, with 79% saying equities and 29% saying hedge funds.
Part of the attraction of private equity for family offices is, no doubt, the potential returns that they can generate from investments. Private equity investments are typically high risk, high reward, which appeals to the financial strategy of most family offices.
Another appealing aspect of private equity for family offices is the possibility of involvement within the companies they invest in. Many wealthy families have a very entrepreneurial mindset, and private equity allows them to continue to become involved in growing companies, potentially even after having stepped back from their own company. By investing directly in private equity rather than through a fund, the family may contribute both financial resources and professional experience.
Taking more risks
The increase in popularity of private equity investments – known to be a high risk investment type – is just one example of family offices’ willingness to take more risks in a post-pandemic world. Agreus’ survey of family offices revealed that 59% are more prone to taking risks following covid-19, with 74% diversifying their investment portfolios as a direct result of the pandemic.
Family offices have a history of risk-taking and opportunistic investing, but the pandemic has led to a direct increase in risky investment strategies. The passage of wealth to the next generation may be partially responsible for this, as younger generations tend to be more willing to invest in risky assets.
The survey by Agreus reported that 61% of family offices were investing in hedge funds, another alternative investment type associated with very high risk. A third of family offices also stated that they invest in currencies (24%) and cryptocurrencies (12%). Cryptocurrencies in particular are known to be extremely volatile, making investments highly risky – but also potentially very rewarding. Cryptocurrency investments have led to a huge amount of wealth generated, so it’s easy to see the appeal.
Globalisation of investments
As well as being more prone to risk-taking since the pandemic, family offices are also less restricted by physical borders. Agreus’ survey revealed that 29% of family offices have invested in new geographical regions as a direct result of the pandemic, 50% of which invested in Asia, 19% in the Middle East, 18% in the USA and 13% in Europe.
Asian economies have seen huge growth throughout the pandemic. China’s economy experienced the biggest growth in GDP since 1992, recording a growth of 18.3% in the first quarter of 2021 alone. With this rapid economic growth, it’s easy to understand why family offices are taking more interest in investing in Asia.
As for the Middle East, family offices play a huge role in its economy, with many of the largest businesses being run or controlled by families.
Family succession planning
The coronavirus pandemic has led many wealthy families to consider the question of succession. According to Campden, 69% of family offices plan for an inter-generational wealth transfer within 15 years.
The passage of wealth to the next generation isn’t always a smooth transition; many factors can make this process difficult, including a lack of interest or qualification in running the family office among the next generation, and disagreements over investment priorities among generations.
These potential difficulties highlight the importance for family offices to have a proper strategy for wealth succession, with plans for education of younger family members to prepare them for a future take-over. The devastating effects of the pandemic served to put a spotlight on the importance of succession planning for family offices, and many are now integrating this into their long-term strategies.