In recent years, family offices have faced pressure to adjust return rates and improve operational efficiency in an uncertain market environment.
The primary goal of family offices is to increase family wealth. However, during periods of economic uncertainty, geopolitical tensions have exacerbated inflationary pressures, leading to lower expected returns. If family offices want to create excess returns in operations and investments, they need to urgently review their choices.
Recently, a foreign research institution has identified the top ten trends for family offices in 2022, including re-evaluating asset allocation and focusing on risk management. This article has extracted the essence of these trends, hoping to inspire you.
Financial markets are in the most uncertain period in decades. Against the backdrop of rising inflation and interest rates, as traditional stocks and fixed-income performance trends downward, family offices are reassessing their asset allocation.
Family offices are seeking uncorrelated returns, increasingly turning to private equity, real estate, and private debt, and exploring other possibilities such as derivatives.
The increase in these asset classes has brought an increasing burden to family office data management and reporting processes. Many alternative assets are unmanaged assets, which means that family offices need to develop new, scalable solutions to handle this information. Capturing different data, then using tools to represent this data in an understandable way, and ultimately allowing family clients to clearly understand their wealth status, is one of the biggest challenges at present.
In the “UBS Global Family Office Report 2022”, 37% of family offices indicated that they are currently willing to accept managing more investment portfolio risks to achieve the same returns as before, while 54% of family offices are managing investment portfolio risks more actively than in previous years.
77% of family offices are still managing investment risk functions internally. However, in order to consider the additional data and analysis needed when managing riskier and more complex investments, they are seeking help from third-party providers to enable them to effectively monitor risks. Among them, an increasing number of family offices are incorporating risk exposure and liquidity analysis into their investment portfolio analysis.
01 Re-evaluate asset allocation
In recent years, private equity has been one of the main asset classes for family office investment growth. Now, eight out of ten family offices invest in this asset class. In the pursuit of diversification and uncorrelated returns, private equity is more popular than ever for family offices seeking alpha returns. Family offices invest both directly and through private equity funds.
The growing popularity of private equity poses another challenge for family offices. Private equity data is usually aggregated and manually entered into reporting systems, which can make monitoring metrics (such as market value, committed capital, and distributions) time-consuming and prone to errors, especially when considering multiple funds.
Now, more than half of family offices have allocated to sustainable investments. However, family offices have not fully embraced the latest developments in sustainable investment, as they are reluctant to become victims of “greenwashing”. Instead, they prefer a direct approach, excluding industries or controversial business activities.
However, this situation has begun to change. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) is taking the lead in defining sustainable investment, aiming to provide a reporting and disclosure framework that is easy for investors to understand. This will enable family offices to more easily identify “greenwashing” and understand the extent to which ESG considerations are incorporated into fund strategies.
In recent years, there has been an explosive growth in interest in digital assets. Although many family offices still regard the lack of regulation as a barrier to investment, the allocation to cryptocurrencies has been increasing.
However, cryptocurrencies have always been volatile, and the value of some major cryptocurrencies has plummeted in the recent global stock market crash. Although many investors are currently shunning crypto assets, family offices are still interested in learning more about this type of asset.
For family offices that have already invested or are about to invest in cryptocurrency technology, it is necessary to incorporate this data into the reporting process. Similar to other alternative investments, family offices need to build scalable solutions that enable them to accurately report the valuation and holdings of digital assets.
02 Focus on risk management
The threat of cyber attacks is a major concern for family offices, posing significant risks to their business operations. According to a survey conducted by Boston Private, 26% of family offices have experienced cyber attacks, with 17% of them being targeted in 2021. To ensure the security of important family information, an increasing number of people are inclined to better protect the privacy of their information.
Family offices are turning to cloud-based data hosting instead of server-based systems and hard copy documents to ensure the security and optimal protection of all data against cyber attacks.
Family offices find themselves having to pay higher salaries and bonuses to retain and attract top talent. Compared to previous years, employee turnover has become a more significant consideration.
One of the challenges faced by family offices is that if an expert in the team leaves, the remaining team members may know nothing about the business they were responsible for. For example, an employee may be very familiar with the complexities of a specific private equity fund, and their departure could increase the risk of investment.
Family offices are having to spend more and more money on staff, systems, and cybersecurity. To offset these rising costs, family offices are focusing on what they do best, which is managing family investment portfolios and risks, and increasingly looking for third-party vendors to outsource non-core functions.
The trend for family offices is to seek technological solutions for accounting and reporting, allowing staff to free up time to focus on their core competencies, either by outsourcing functions entirely to save on day-to-day expenses.
03 Double down on private equity
In 2022, a massive transfer of wealth is underway. Family offices recognize that failing to engage with the younger generations of their clients’ families could lead to the loss of clients.
As Simon Russell, CEO of Panthera Private Office, said, “You can’t just consider the data needs of the older, more mature family members, but rather what data their children need. How will your business be passed on to the next generation?”
Family offices should be prepared to consider the next generation of the family as their clients. Among them, the younger members of the family are often digital natives, and family offices must have a platform that provides the latest information and instant communication that the family is accustomed to in all areas of life.
Family offices are currently facing pressures from multiple fronts. They need to collect and report a vast amount of data from increasingly diverse asset categories, while also defending against cyberattacks and further enhancing operational efficiency amidst economic headwinds.
An increasing number of family offices are reviewing their technology to ensure they can manage complex data and create alpha more efficiently.
