01 Asset Allocation Reviews
The financial markets are facing one of the most uncertain periods in decades. Global inflation and high interest rates force FOs to review their portfolio allocations. FOs will look for uncorrelated returns to downward-trending equities. They will be increasingly turning to private equity, real estate, and private debt, as well as exploring other possibilities such as derivatives.
According to Goldman Sachs 2023 Family Office Investment Insights, FOs on average are allocating 44% total across alternative asset classes; 35% indicated that they plan to reduce their allocation to cash and cash equivalents in the next 12 months; and 41% expect to increase their allocation to private equity in the next 12 months. Family offices tend to primarily invest through managers to mitigate some risk through diversification.
02 Succession Planning
Since the Great Wealth Transfer is well underway, FOs are already putting strategies in place to ensure that they retain the business of families. Family offices should be prepared to treat the next generation as if they are clients whose businesses they’re trying to win. The future generation will be digital natives. FOs must have a platform that provides the up-to-date information and instant communications families are accustomed to in all areas of life.
03 ESG Investments
Sustainable investment enables FOs to demonstrate that their financial goals are aligned with their commitment to environmental protection and social responsibility. By transparently reporting on their investment practices, FOs can enhance their reputation and attract like-minded investors who share their values. More than half of family offices now have allocations for sustainable investments.
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The European Union’s Sustainable Finance Disclosure Regime (SFDR) is taking the lead in defining sustainable investing. It provides a reporting and disclosure framework that is easy for investors to understand. FOs should be prepared to play a key advisory role for both existing and future family leaders on ESG matters.
04 Cybersecurity
The threat of a cyber attack is a very real concern for FOs, posing a critical risk to the business. To keep critical family information safe, there is a growing trend towards better safeguards around the privacy of information, securing access on a need-to-know basis.
Sophisticated detection systems, strong authentication, and encryption techniques to protect user data are standard. The level of expertise and resources vendors can devote to monitoring the infrastructure and addressing new threats as they emerge ensures the highest standards of security are met.
05 Technology Upgrades
FOs need to gather and report on an abundance of data across increasingly diversified asset classes and to build defences against cyberattacks at the same time. Moreover, they have to find operational efficiencies in a time of economic uncertainty. Thus, FOs will be reviewing their tech stack to ensure that they can take command of complex data and create the consolidated reporting needed.
06 Risk Management Focus
FOs typically favour a conservative approach to investing and maintain a balance between the need to preserve capital and the desire to grow wealth. However, in recent years, FOs have been increasingly willing to push themselves out along the risk curve in pursuit of higher risk-adjusted returns. In this matter, the FOs increasingly seek third-party assistance. These experts enable them to incorporate exposures, risk contributions, and liquidity analysis into their portfolio analysis.
07 Volatile Digital Assets
Although many FOs still see the lack of regulation as an obstacle to investment, allocations in cryptocurrencies and similar assets have been on the increase. Still, cryptocurrencies have always been volatile, and many investors remain unconvinced. But the interest from both FOs and beneficiaries to understand more about this asset type is on an upward curve. Similarly to other alternative investments, FOs will need to build scalable solutions that enable them to accurately report on valuations and holdings across any digital assets.
08 Staffing Issues
Staff turnover is a greater consideration than in previous years. FOs recognise that it is increasingly difficult to hire the right people. In a competitive job market, they will have to pay more in salaries and bonuses in order to attract top talent. The situation will be a little bit easier with sophisticated technology platforms and automated back-office functions. But as for every employer, and also for FOs, good people are inevitable, so they are concerned with long-term achievements.
09 Higher Staffing Costs
This trend is connected with the mentioned staffing challenges. With global inflation, FOs have to spend increasing amounts on staff, systems, and cybersecurity. To counteract these rising costs, FOs are placing their focus on managing family portfolios and risk. Alongside this, they are increasingly looking for third-party providers to automate or outsource non-core functions, reducing costs and harnessing the economies of scale these providers enable.
10 Investments into Private Equity
Private equity is more popular than ever for FOs; it has been one of the main asset classes in which FO investments have grown in recent years. They invested both directly in private companies and also through private equity funds. The growing popularity of private equity presents another reporting challenge. A survey of North American family offices conducted by Campden Wealth and RBC found that FOs had 29.2% of their investments in private markets, which include private equity, venture capital, and private debt, compared to 28.5% in publicly traded stocks. It marks the first time in the survey that family offices have invested more in private markets than public stock.
