Recent studies have shown that large family offices are making a significant move towards alternative investments rather than traditional stock markets. According to the JPMorgan Private Bank Global Family Office Report, these family offices have allocated almost half of their investments in private markets and alternatives. This shift aims to achieve higher returns and lower volatility within their portfolios. The report surveyed 190 single family offices worldwide, with an average of $1.4 billion in assets. This trend is particularly evident in American family offices with assets exceeding $500 million, where over 49% is invested in alternatives, such as private equity, real estate, venture capital, hedge funds, and private credit.
Family offices are considered the private investment arms of affluent families, with assets totaling over $6 trillion. This massive wealth allows them to become dominant players in private equity markets, direct deals, venture capital, and private credit. The shift from public to private markets signifies a strategic move by family offices to capitalize on longer-term investment horizons. These offices aim to benefit from the “liquidity premium” offered by private investments, enabling them to hold assets for decades, unlike the volatile nature of stocks. The adaptability of private markets to the multi-decade view of family offices aligns with their strategy of seeking sustained growth and minimizing short-term risks.
Many family office founders originated as entrepreneurs who built and sold successful businesses. They now leverage their experiences to invest in other private companies through their family offices. This acquisition strategy allows family offices to take ownership stakes in promising businesses and contribute to their growth trajectory. The founders’ entrepreneurial backgrounds make them valuable assets for the companies they invest in, as they bring a wealth of knowledge and expertise to the table. Family offices are increasingly sought after by companies looking to strengthen their capital base with strategic investors who possess a deep understanding of various industries.
The growth of family office investments in alternatives is projected to continue, with a specific emphasis on private credit and infrastructure investments. According to William Sinclair, head of the U.S. Family Office Practice at JPMorgan Private Bank, many family offices are currently under-allocated in infrastructure assets, particularly in digital infrastructure such as data centers. This shift reflects a strategic move towards capitalizing on the evolving landscape of technology and connectivity. By aligning their investments with sectors positioned for growth, family offices aim to diversify their portfolios and capture new opportunities in emerging markets. The competitive advantage of family offices lies in their ability to leverage industry expertise and take calculated risks in pursuit of long-term value creation.
Despite the significant allocations to alternatives, U.S. family offices still maintain sizeable positions in cash and bonds. A surprisingly low percentage of family offices have formal investment return targets, signaling a more flexible and opportunistic approach to portfolio management. However, the adoption of benchmarks to evaluate performance remains prevalent, with customized benchmarks being more common among larger family offices. As part of cost-saving measures and operational optimization, family offices are increasingly outsourcing functions to external advisors. This trend allows family offices to leverage specialized expertise in investment management, trade execution, and cybersecurity. The rise of cyber threats has prompted family offices to prioritize cybersecurity measures, with a notable percentage citing it as a significant area for improvement and support.
The rise of family offices in alternative investments reflects a strategic shift towards long-term value creation and risk mitigation. By leveraging their significant assets and industry expertise, family offices are well-positioned to capitalize on emerging opportunities in private markets and contribute to the growth of promising businesses. The evolving investment strategies of family offices underscore their adaptability to changing market conditions and their commitment to maximizing returns while safeguarding against potential risks.
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