Global Family Office Returns Bounced Back in 2017

Many family offices unprepared for looming generational wealth transfer, UBS finds

The composite global portfolio of family offices returned 7% in 2016, rebounding from a skimpy 0.3% return in 2015, according to the latest global family office report from Campden Wealth Research, in partnership with UBS.

The report said equities and private equity propelled the recovery, counterbalancing the more subdued performance of real estate and hedge funds.

The findings were based on an online survey conducted between February and May of principals and executives in 262 family offices with an average size of $921 million in assets under management.

Equities now represent 27% and private equity 20% of the average family office’s investment portfolio, according to the survey.

This share is likely to grow further as 82% of family offices plan to maintain or increase their investments in developing market equities, and 40% intend to allocate more to private equity funds and 49% to co-investments.

“Family offices have been making the most of their ability to embrace risk and invest for the long term, increasingly accepting illiquidity, much like other sophisticated investors,” Sara Ferrari, head of global family office group at UBS, said in a statement.

“North American family offices invested more than any other region into growth orientated strategies, and this strategy paid off as they outperformed.”

Indeed, North American family offices had the best return globally, 7.7%, owing to their relatively lower allocations to real estate in favor of equities and private equity.

A recent report by Tiger 21 revealed that high-net-worth investors have been moving more of their assets into real estate — an average of 33% of their portfolios.

As family offices look to increase their allocations to direct investing and co-investing, “many are struggling to source interesting deals and find the right partners, and face challenges related to due diligence, as their in-house resources are often tight,” Campden Wealth’s director of research Rebecca Gooch said in the statement.

“In turn, some of those who are co-investing successfully told us that they source their deals through personal networks or choose to co-invest alongside funds for their due diligence capabilities. Families who wish to co-invest more may consider following similar approaches.”

The report’s cross-regional analysis showed important variations between portfolio management strategies pursued by family offices across the globe.

North America- and Asia/Pacific-based ones tend to be committed to growth, while executives in Europe and emerging markets are likely to opt for more balanced approaches.

Inside Family Offices

The Campden Wealth/UBS statement noted that the previous year’s survey had found that 69% of family offices expected to undergo a generational wealth transfer within the next 15 years.

The 2017 report investigated this issue, and discovered that 46% of family offices did not yet have a succession plan, although 30% of these reported that they were currently developing one.

A third said they already had written succession plans, and 15% had a verbal agreement, but no written plans.

“Only 30% of generational transfers are successful, so this is an existential issue,” Ferrari said. “What we are seeing is recognition of the challenges associated with wealth transfer, and a growing understanding of the actions that need to be taken.”

Family offices are taking several actions to prepare the next generation:

  • Work experience in the family office: 57.9%
  • Work experience externally such as at an investment bank: 44.3%
  • Involvement in philanthropy or impact investing: 37.9%
  • Structured investment training: 30.7%

In addition, “family governance and succession planning” now accounts for the largest proportion of all family professional services spend.

The survey found that family offices spent a total average of $10.6 million on services in 2017. Operating costs accounted for $6.5 million of this figure, while external management performance and administration fees accounted for $4.1 million.

C-suite salaries increased across the board between 2016 and 2017, with chief executives and chief operating officers receiving the highest annual growth in base salaries, up 9.8% and 10.1%.

Only 7.7% of the family offices surveyed had female leaders, leaving nine out of 10 of the remaining top spots to men. Women held 13.2% of chief investment officer posts, along with 38% of chief operating and chief finance officer posts.

Sustainable and Impact Investing

The survey found that some 40% of family offices expected to increase their allocations to impact and environmental, social and corporate governance investments. Families with millennial-age children are at the forefront of this push.

“We know that millennials are driving the adoption of sustainable and impact investing,” Ferrari said. “As they strengthen their skillsets and assume more control, we’ll see this theme continue to take hold.

“This is an opportunity for family offices to use their investment expertise to convert social objectives into financial returns and shape the purpose of a family.”

Of those family offices already active in this area, 62.5% said they engaged via private investment and 56.3% through private equity. The most popular sectors to invest in are education, environmental conservation and energy/resource efficiency.

The average family office that manages a family’s philanthropic activities directly gave $5.7 million over the past 12 months. Nearly all family offices in the survey said they planned to maintain or increase their philanthropic commitments in the coming year.

In terms of specific causes, environmental protection and poverty climbed from 33.3% to 41.7% and 34.7% to 41.7%, respectively, between 2016 and 2017.

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