Driven by the pursuit of higher returns, diversification, and more direct control, family offices, especially those managed by UHNWIs and HNWIs, are progressively allocating their capital to private markets. As we delve deeper into this changing landscape, it’s critical to understand the factors driving this shift and how it may reshape the investment horizon for wealthy individuals.
Historical Performance: Private vs. Public Markets
The tug-of-war between private and public markets has always captivated discerning investors, particularly those in the UHNWIs and HNWIs brackets. While public markets may offer liquidity and transparency, private markets may have a unique set of advantages, often aligned with the long-term visions of wealthy individuals and their dedicated family office managers.
Benchmark Comparisons: A return analysis
To determine the true value of both markets, it is critical to examine their historical returns. Over the last decade, certain segments of the market, such as private equity investments, have outperformed major public benchmarks. For example, private buyout transactions, in which private equity funds completely acquire a company, outperform global public equities by an average of 1,079 basis points in each vintage year. Moreover, according to a 2020 report, in comparison to the 5.6% return on public equity, the 9.6% annualised return on investing in private equity over the entire 19-year period is impressive.
The allure of uncorrelated assets: Diversification benefits
One of the primary strategies employed by experienced investors is diversification. Private markets may offer a huge number of uncorrelated assets, distinct from the turbulence often witnessed in public markets such as stock exchanges. Investments in certain private sectors, like real estate and venture capital, respond differently to global economic shifts than their public counterparts. This difference might potentially reduce portfolio volatility, cushioning wealth against systemic shocks. For UHNWIs and HNWIs, this can be especially appealing, as preserving capital is as crucial as growing it.
Wealth Aggregation: Simple, Dynamic, and Secure Beyond Compare. Discover the Altoo Wealth Platform!
Hedging against Economic Uncertainties
Economic landscapes are abounding with uncertainties. Inflationary pressures, geopolitical tensions, and technological disruptions are just some of the factors that have UHNWIs and HNWIs, along with their investment managers, on their toes. These influential investors have historically been known to shift gears in response to these evolving dynamics, often looking for hedges and protective strategies.
In the face of such unpredictable environments, private markets could offer a sanctuary. They are appealing because they are not as affected by daily news cycles and short-term market sentiments, and they also give companies a chance to work directly with them. Also, being able to have a bigger impact on private holdings means that these investments could be changed in a strategic way to prepare for or deal with problems in the economy as a whole.
As the investment landscape evolves, the appeal of private markets grows, suggesting that they may play an increasingly important role in the portfolios of the world’s wealthiest individuals.
Inflation protection and private equity strategies
Inflation, the subtle wealth destroyer, remains a looming concern for the UHNWIs and HNWIs elite investment circles. Its potential to decrease asset value has caused even the most experienced investors to re-evaluate their portfolios over the years. However, with its long-term investment horizon and operational improvements, private equity emerges as a compelling inflation hedge.
As indicated by research, equities have historically delivered strong inflation-adjusted returns. This can be attributed to a few reasons:
- Operational Influence: Private equity investors frequently have significant control over the businesses in which they invest. It allows them to implement anti-inflationary strategies such as cost optimization or pricing adjustments
- Asset-Backed Investments: Many private equity deals are rooted in real assets, from real estate to infrastructure. These deals could potentially appreciate in value over time, in line with, or even surpass, inflation rates.
- Long-Term Horizon: Because of their typically long investment durations, private equity funds are less influenced by short-term economic disruptions. They can capitalise on long-term growth even in inflationary environments.
The Decline in Traditional Market Avenues and the Appeal of Private Assets
As traditional markets experience volatility and returns begin to fall, the appeal of private assets has grown. Several public market measures have seen lower returns in recent years, prompting UHNWIs and HNWIs to seek alternatives. On the otherhand, even with the expected decline in public equity markets in 2022, many valuation measures remain above historical averages. With future public market returns expected to be lower than what asset classes have delivered in the past, many investors are turning to private markets to help them meet their nominal long-term return objectives.
The appeal of private assets goes beyond mere returns:
- Direct Control: Unlike public markets where investors are largely passive, private investments allow for direct involvement, empowering individual investors to shape business strategies and growth.
- Innovative Opportunities: Private markets often house businesses at the forefront of innovation, from groundbreaking biotech firms to sustainable energy solutions. They provide a window into the next wave of disruptive entities.
- Diversification: As discussed earlier, the uncorrelated nature of private assets makes them a worthy addition to portfolios, potentially reducing risk and enhancing overall returns.
The Expert Investor: Family Offices’ Unique Position
When delving into the world of investment, the position of family offices remains unparalleled. These entities, deeply embedded in the financial framework of UHNWIs and HNWIs, offer a distinctive approach to investment, backed by years of experience, business knowledge, and an entrepreneurial ethos.
Entrepreneurial lineage: An in-depth understanding of businesses
Family offices often emerge from entrepreneurial roots. Their founders, typically business tycoons or industry leaders, pass down not just wealth but a rich legacy of business understanding. This lineage equips family offices with:
- Insight: Having built businesses from scratch, these families possess an innate understanding of operational challenges, growth trajectories, and market dynamics. An article from Forbes notes how this deep insight allows for shrewder, more informed investment decisions.
- Risk Appetite: Entrepreneurial ventures come with their fair share of risk. Having faced these risks head-on in the past, family offices often display a balanced risk appetite.
- Network: Over years of business dealings, these families build a robust network spanning industries and geographies. Such connections can prove invaluable, offering insider knowledge and opening doors to exclusive investment opportunities.
Financing gaps and the role of family offices
With global economies in constant flux, financing gaps have emerged, particularly for startups and SMEs. Traditional financial institutions, often wary of the uncertainties these businesses face, might hesitate to invest. Here’s where family offices step in:
Alternative Financing: Family offices, with their significant capital reserves, are well-positioned to potentially fill these financing voids. To raise capital, they may offer alternative financing solutions, ranging from venture capital to bridge financing.
Patient Capital: Unlike institutional investors seeking quick returns, family offices can afford to be patient investors. This allows businesses the breathing space to innovate, grow, and deliver returns over a more extended period.
Mentorship: Beyond mere financing, family offices, given their entrepreneurial background, provide businesses with mentorship and guidance. Such support can be the difference between the success and failure of a company.
Sustainable Investments: The Next-Gen Influence
The realm of investments is witnessing a paradigm shift, driven primarily by the next generation of wealthy individuals. Recognizing the significance of their financial prowess, they are directing their assets towards more sustainable endeavors. They are ensuring that their legacy is not only prosperous but also environmentally friendly.
Trends in ESG investments by family offices
Environmental, Social, and Governance (ESG) investments are increasingly becoming the cornerstone of family office portfolios. As stated in Medium, family offices are increasingly aware that their investment decisions have implications that go beyond financial returns.
- Growing Interest: Over the past decade, there’s been a surge in interest among family offices in ESG-focused funds. The younger generation, in particular, is keen on ensuring that their investments resonate with their values.
- Higher Returns: Contrary to the misconception that sustainable investments might yield lower returns, ESG portfolios have, in some cases, outperformed traditional assets.
- Risk Mitigation: ESG investments are seen as a buffer against market volatility. Companies with sound governance and sustainable practises are perceived as more resilient in the face of economic downturns.
Unlisted equities in green tech and smart mobility: A closer look
Green technology and smart mobility are attracting a lot of attention right now. Family offices, which are always looking for new ideas, are particularly interested in unlisted equities in these sectors. Here’s why:
- Innovation Driven: Startups are everywhere in these industries, bringing innovative approaches to critical global issues ranging from carbon emissions to urban pollution.
- Future Potential: With global sentiments leaning towards eco-friendly solutions, the demand for green tech and smart mobility solutions could see exponential growth in the coming decades.
- Direct Impact: Investing in these sectors allows family offices to make a tangible impact. By financing solutions that address global challenges, they’re actively contributing to a brighter, sustainable future. According to a Credit Suisse survey of family offices, nearly half of those polled intend to increase their sustainable investing over the next 2-3 years.
In the ever-evolving landscape of investments, family offices stand as a testament to the delicate balance between tradition and innovation. Their adaptability and foresight, underscore the immense potential of private markets. These forays provide not only a lesson in strategic diversification but also a masterplan for aligning long-term financial objectives with transformative global trends for ultra-high-net-worth and high-net-worth individuals. As the investment horizon broadens, it is clear that the relationship between private market investments and family office strategy will be pivotal in the future.
