The trends for family offices in 2023 will be greatly influenced by inflation and its impact on global economic trends. New trends will affect the way family offices think, invest, and operate.
Establishing a family office is a great way to ensure that family wealth is properly managed and ultimately distributed to future generations. Not only does setting up a family office provide an opportunity to preserve assets, but it also has the potential to further increase wealth.
However, threats are always present. To help family offices reduce risks and ensure smooth operation, a recent overseas research institution has compiled the top twelve trends for family offices in 2023, which I hope will be helpful to you.
According to a report by Campden Wealth, over three-quarters of North American families saw an increase in wealth in 2022, and more than half of the assets managed by family offices grew.
In addition, North American family offices outperformed their global peers, with an average investment portfolio return rate of 15%, compared to 10% in the Asia-Pacific region and 13% in Europe.
Despite relatively good performance, the report found that family offices are pessimistic about the economic outlook for 2023 due to the persistence of high inflation. In fact, a survey by Citi Private Bank showed that inflation is a concern for family offices. The survey revealed that 81% of respondents said that investment risk is the top threat facing family offices.
Due to the sharp rise in inflation and interest rates, the outlook for the economic environment has worsened over the past year. Despite the pandemic, their investment performance has remained strong in recent years. This indicates that family offices are well-prepared to deal with volatile economic conditions. They are flexible investors with ample cash reserves and diversified investment portfolios. As a result, they can navigate economic waves and also profit from opportunistic transactions.
1.investment risk has become the number one threat to home office
It is a good time to reconsider strategic asset allocation (SAA). In an inflationary environment, holding cash and fixed income will not create the returns expected by family offices.
William Sels, Global Chief Investment Officer of HSBC Private Banking and Wealth Management, said that a diversified portfolio that includes stocks, gold, and real estate as physical assets is a good long-term hedge against inflation.
He also suggested that family offices could align their returns with specific drivers of inflation outside of their core investment portfolio. For example, they could consider investing in the development of automation or high-quality companies with strong profit margins.
In the Campden Wealth survey, 3 out of 4 family offices invested in healthcare in 2022, and 39% of surveyed family offices plan to increase their investments in 2023. Other areas most likely to see an increase in allocation are artificial intelligence, with 40% of investors planning to increase their allocation, green technology (35%), and biotechnology (34%).
Family offices have found that private markets are a good hedge against inflation, so they have increased their exposure to private debt, private equity, and real estate.
According to Morgan Stanley’s analysis, private equity, venture capital, private credit, private real estate, and infrastructure investments have historically outperformed public markets.
Family offices allocate an average of about 45% of their portfolios to alternative asset classes. According to a report by UBS, more than 80% of family offices invest in private equity.
Among these family offices, an increasing number are making direct investments each year. The average allocation to private equity continues to rise, increasing from an average of 16% in 2019 to 21% in 2021.
Furthermore, 29% of respondents plan to significantly or moderately reduce their investments in developed market fixed income. Two-thirds (63%) of respondents no longer believe that high-quality fixed income contributes to portfolio diversification.
The reasons for the increase in private equity investments are simple. According to another survey by UBS, 74% of family offices that may increase their private equity allocation believe that these investments will continue to outperform publicly traded stocks.
Here are several reasons why family offices prefer direct investments:
· Better control
· A call for entrepreneurial families to be more hands-on in their investment approach
· Lower fees
Many fundraising institutions view family offices as good limited partner (LP) partners for the following reasons:
· Long-term investment horizon
· More flexible investment approach
· Direct and fast investment decision-making
2. Manage inflation with a diversified investment portfolio
The pandemic is not over yet, but vaccines and better treatments have helped people regain a certain degree of normal life. People are returning to the office, but not as they were before the pandemic.
According to a survey by consulting firm Agreus, 64% of family offices have adopted a hybrid work model, 14% of family offices are working full-time remotely, 22% of family offices have returned to full-time office work, and 78% of family offices work from home at least once a week.
Under the pandemic, providing flexible working hours for family offices is no longer just a way to stand out from other companies, but simply to meet industry standards.
Despite this, face-to-face and interpersonal communication remain an important part of the trust and relationship building required to operate a family office.
With the collapse of FTX, the market is skeptical about the future of Bitcoin and other cryptocurrencies.
Surveys show that one in five family offices invest in cryptocurrencies. Their ownership accounts for 4% of all cryptocurrency investments, and 77% of family offices express interest in digital assets.
Although many family offices are willing to invest in different asset classes and take risks, it is not wise to take on too much risk, especially when wealth preservation is the core goal of the family office.
If wealth preservation is the goal of the family office, and considering the collapse of FTX and high volatility, single and joint family offices should only allocate a small portion of their assets to cryptocurrencies.
3. Home-run private equity and direct investment rise, while fixed income lags
Family offices recognize that they can play a role in addressing environmental issues, and relying solely on government action is not enough.
In 2020, family offices allocated an average of 16% of their investment portfolios to sustainable investments. By 2022, this figure had increased to 20%. It is expected to rise to 31% in five years.
Part of the growth in sustainable investments is due to the fact that as older family members retire, younger family members have a greater influence in managing family offices. In 2022, 37% of North American family offices were engaged in sustainable investments, up from 34% in 2021 and 26% in 2019.
Family offices benefit from technological advancements, whether through the use of technology or investment in it. When the pandemic forced many people to work from home, cloud-based platforms and video conferencing applications enabled remote work, minimizing the negative impact of the pandemic.
Family offices use cloud-based asset management platforms to manage all their data and reporting. In addition, they also invest in the technology industry through publicly traded stocks, venture capital, or private equity investments. As a result, family offices have reaped substantial returns. However, technology is not perfect, and family offices have certain concerns about data privacy.
4. Hybrid working is the new normal
According to Northern Trust’s family office benchmark survey, cybersecurity is the most concerning issue for family offices worldwide.
This concern is not unfounded. Among the 78 global family offices surveyed, 96% of respondents reported experiencing at least one cybersecurity attack. According to the survey, 32% of family offices suffered losses in cyber attacks. In one case, a family office lost $10 million. 48% of respondents did not have a cybersecurity plan.
Compared with traditional wealth and asset management companies, family offices are usually subject to less regulation, and in these cases, family offices have fewer measures in data security and control. This further supports cybercriminals’ attacks on family offices. They target institutions with a large amount of funds but weak cybersecurity.
Research has found that in family offices in North America, 30% of the next generation has already taken control of the family business, and another 27% of respondents are expected to take over in the next ten years.
These transfers of power reflect a larger trend of intergenerational wealth transfer. According to research firm Cerulli Associates, they predict that the total wealth transferred intergenerationally between 2021 and 2045 will reach $84.4 trillion.
However, only 33% of family offices have a succession plan for key personnel, and 40% of family offices believe that there is a lack of qualified next-generation members to take over.
Similar trends have also emerged in emerging markets. Formulating a succession plan for family offices in emerging markets is a worrying issue. According to a study by Invesco, “Most wealth is founded by the first generation of family members, so it is necessary to establish new inheritance structures for large families within the local legal framework.”
In mature markets such as the United States and Western Europe, finding suitable service providers to manage this wealth is often a good thing, where the legal and financial frameworks are more suitable for these families. If local laws are insufficient to handle the distribution of wealth among family members, then the challenge lies in the succession plan itself. Campden said that formulating such a plan within 12-24 months is a priority, and 69% of the surveyed family offices plan to achieve intergenerational wealth transfer within 15 years.
Regardless of the region, intergenerational inheritance is not smooth sailing, for the following reasons:
· The younger generation lacks interest or qualifications to run the family office
· Older family members are unwilling to relinquish control
· Intergenerational differences in investment strategies after the transition
· Distrust of the way the family office operates
5. Growing interest and skepticism toward cryptocurrencies
The private wealth industry has been slow to adopt technological changes. Danielle Valkner, the head of PwC’s family office, said that although family offices were once hesitant to upgrade software due to cost and complexity issues, the number of cloud-based software as a service (SaaS) solutions has become more affordable and easier to implement.
As the world becomes more mobile and digital, accessing all data through devices anytime and anywhere has become the norm. Although the older generation in the family may not demand the latest and best mobile applications and financial technology as quickly, the younger generation has higher requirements in this regard.
In addition, real-time data updates are another reason for the shift to cloud-based operations. With efficiency in terms of turnover time and reporting accuracy, family offices have access to the information needed to make wise decisions faster than ever before.
A survey by UBS showed that 87% of family office respondents believe that artificial intelligence (AI) will be the biggest disruptive force in global business. When the capabilities of AI are fully utilized, it can perform tasks faster and more efficiently than humans. Although this may sound “scary” to some people, the key is to understand how AI can free up human time to focus on higher-value, customer-facing activities.
Automating routine manual tasks is another technology-related opportunity for family offices. Predictable and repeatable tasks that were once performed by humans can now be done by robots. This allows employees to focus on higher-value activities.
Currently, inflation is a hot topic, and economic pressures have affected many trends in family offices in 2023. Changes in investment strategies, increased social awareness, and the use of technology, automation, and outsourcing are just some of the developments in the current environment. In addition, the growth of direct investment and impact investment had already begun before the pandemic. Succession planning issues and rising operating costs are also concerns. With proper planning and action, family offices can mitigate risks.
Cybersecurity remains a hot topic. Although these risks will not disappear, family offices can take measures to mitigate them.
Overall, family offices are a viable and desirable way for ultra-high-net-worth families to grow and preserve their wealth and assets. Despite some challenges, the outlook is promising.
(Note: The content and views are for reference only and do not constitute any investment advice.)
