Campden Wealth Research, in collaboration with UBS, has released its annual report on family offices around the world. The 2017 Global Family Office Report, the most in-depth study of its kind, surveyed the owners and executives of 262 family offices with average assets under management of US$921 million.
Investment performance jumped 7%, driven by equities
After returning a meager 0,3% in 2015, the global composite portfolio of family offices returned 7% in 2016. The recovery was driven by equities and private equity, which in turn were offset by more modest performance investment in real estate and hedge funds. Equities (27%) and private equity (20%) currently account for almost half of the average family office investment portfolio. This share is set to grow further as most family offices expect to maintain (60,6%) or increase (21,3%) their investments in emerging market equities, while 40,2% and 49,3 .XNUMX% intend to allocate a greater share respectively to private equity funds and co-investments.
Sara Ferrari, Head of Global Family Office Group, UBS AG, said: “Family offices have known how to leverage their ability to take risks and invest for the long term, increasingly accepting illiquidity, just like other sophisticated investors. The benefits of this bolder approach are obvious. North American family offices have invested more than any other region in growth-oriented strategies, a strategic choice that has paid off given their outperformance.”
Rebecca Gooch, Director of Research at Campden Wealth, said: “Once again this year we see family offices looking to increase their allocations to direct investments and co-investments. However, many of them struggle to identify attractive deals and find the right partners, and face due diligence challenges, as their internal resources are often limited. Some of the family offices that successfully co-invest have also told us that they conduct their trades using personal networks or choose to co-invest alongside funds to take advantage of their due diligence capabilities. Families looking to co-invest more may consider pursuing similar approaches.”
A cross-regional analysis shows important variations between the portfolio management strategies pursued by family offices around the world. While those based in North America and the Asia-Pacific region tend to be growth-oriented, business executives in Europe and emerging markets are likely opting for more balanced approaches.
Only a third of family offices have prepared a succession plan
According to last year's report, 69% of family offices planned to make a generational transfer of wealth within the next 15 years. The 2017 report examines the matter in detail and highlights that almost half of family offices (45,7%) do not yet have a succession plan in place, although 29,6% of these say they are in the preparation stage. A third (32,7%) has already drawn up a succession plan, while 14,6% have verbally agreed to prepare a plan but have not yet written it.
Family offices are taking a number of steps to prepare the next generation. These include work experience within a family office (57,9%) or externally such as at an investment bank (44,3%), training in structured investing (30,7%) or a commitment to philanthropic activities or impact investing (37,9%). Furthermore, the issue of family governance and succession planning» currently constitutes the most important part of the entire expenditure for professional services to families.
Sara Ferrari stated: «Only 30% of generational transfers are successful, so it is an existential problem. We see a recognition of the challenges associated with the transfer of assets and a growing understanding of the steps to be taken. Family offices can play a crucial role in maintaining family unity when it comes to decision making and talent development. The strategic role of the family office should not be underestimated.”
Strong growth expected for sustainable investing and impact investing
Over 40% of family offices plan to increase their allocations to impact investing and investments based on environmental, social and corporate governance (ESG) criteria. This confirms what emerged in last year's report, namely that there will be an increase in requests to participate in impact investing from families with children born after 1980. Of the family offices already active in this area, 62,5% resorts to private investments and 56,3% to private equity. Preferred areas to invest in are education, environmental protection and energy/resource efficiency.
The average family office that directly manages the family's philanthropic businesses gave $5,7 million in the past 12 months. Nearly 95% of family offices intend to maintain or increase their philanthropic commitments in the next year. As for the specific causes, environmental protection and poverty received much more attention, falling from 33,3% to 41,7% and from 34,7% to 41,7% respectively between 2016 and 2017.
Sara Ferrari added: «We know that the Millennium Generation is contributing to the adoption of sustainable investing and impact investing. As he hones his skills and takes more control, this theme will continue to grow. This is an opportunity for family offices to use their investment expertise to translate social goals into financial returns and shape a family's intent."
