Ultra-Wealthy Families Love Alternative Investments: iCapital

Second-generation SFOs’ appetite for alts far exceeds the founding generation’s

A new report on single-family office investment activities from iCapital Network, a financial technology platform, showed that 87% of these entities allocate one-tenth of their portfolios to alternative investments, and 27% allocate 15% or more.

Private equity funds were the most popular type of alternative investment, with 41% of single-family offices maintaining exposure, followed closely by hedge funds, the choice of 39% of these investors. Twenty-seven percent invested directly in private companies.

The research found that 90% of SFOs maintained or increased their private equity exposure over the past year whether through funds or direct deals, while 56% decreased their hedge fund allocations.

“This level for private equity is consistent with the target allocations of many institutional investors,” Nick Veronis, co-founder and managing partner at iCapital Network, said in a statement.

“Arguably, families at the center of a family office may have a higher comfort level with private equity as an asset class if their family’s original capital was created by a successful private business, which is often the case for some of the oldest and most affluent families.”

The Tiger 21 peer-to-peer learning network of wealthy investors reported a healthy allocation to private equity and strong disaffection with hedge funds in its second-quarter allocation report.

The iCapital report was based on data collected during the second half of 2016 and first half of 2017 from 157 SFOs that were actively investing in private equity, hedge funds, direct deals or a combination of these. Seventy-six percent of respondents managed $500 million or more, and 33% managed in excess of $1 billion.

SFOs in the study were generally interested in increasing their exposure to alternatives, direct investing in particular, with 66% of those surveyed planning to participate in more direct deals.

“Single-family offices have varying goals with their direct deal programs,” iCapital’s chief marketing officer Hannah Grove said in the statement. “Some are looking to diversify away from the traditional family industry, while others may be trying to find strategic investments that can generate synergies with the family business, gain tighter control of investments or simply utilize their expertise in a particular sector to uncover overlooked gems.”

Forty-seven percent of survey participants said they planned to increase their private equity fund exposure, and 37% expected to raise their allocations to hedge funds.

Rising Second Generation

Many established SFOs are starting to transition day-to-day control of operations to second generation family members, according to the report, making the younger generation’s investment priorities and preferences increasingly relevant.

In its study, iCapital segmented family offices still managed by founding family members from those that have transferred control and legal ownership of the family office to the second generation.

The research showed that 38% of second-generation SFOs were investing at least 15% percent of their total portfolios into alternatives, compared with 20% percent of first-generation single-family offices allocating at this level.

Queried about their actual change in alternative asset class allocation over the last year, 31% of second generation SFOs said they had increased their hedge fund exposure, compared with just 10% of first generation ones.

More striking, 71% of second generation family offices increased their direct investment allocations relative to last year, compared with 43% of the first-generation family offices surveyed.

Going forward, a larger percentage of second-generation SFOs will likely make greater use of the full range of alternative investments than first-generation ones, according to the report. For every type of alternative investment, the second generation was more likely to increase their allocation in the future:

  • Private equity funds: 54% second generation, 42% first generation
  • Hedge funds, 59% second generation, 23% first generation
  • Direct deals: 82% second generation, 56% first generation

“Second-generation family offices often represent lower AUMs than their first-generation counterparts due to wealth dilution from the founder to multiple heirs,” Eileen Duff, managing partner and head of distribution at iCapital Network, said in the statement.

Duff said lesser amounts of absolute wealth may also be contributing to a shift in mindset from wealth preservation to wealth accumulation, and driving a re-examination of investment strategies and allocations as well as institutional best practices.

“Simply put, second-generation single-family offices appear to be actively looking for higher returns and expect alternative investments to provide them,” she said.

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