William Huston, AIF®, AIFA®

What Are Family Offices Investing In?

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

What Are Family Offices Investing In?

Traditional family offices were developed for wealth management purposes, however, modern family offices have reached maturity in their capacity as key investment vehicles.

Key Takeaways
  • There are several types of investments that family offices regularly pursue including stocks, funds and others
  • Recent trends in family office investments include non-economic and economic trends
  • Economic trends include privacy concerns and ESG concerns and economic trends including rise in private equity investments and venture capital deals
  • These trends are influenced by family offices' push for experience, expertise and greater involvement

The contents of this article are for educational purposes only. They are not intended to serve as a source of professional financial advice. Find experts on financial planning and wealth management here. More on disclaimer here.

Types of Investments

Depending on the goals and risk tolerance of the family, a single family office or multi family office may invest in a broad array of assets. Common types of investments that family offices make include:

  • Stocks and Bonds: many family offices invest in publicly traded stocks and bonds to generate income and capital appreciation.
  • Real Estate: to accrue income and capital appreciation, a family office may invest in real estate from commercial and residential properties to farmland and protected areas.
  • Alternative investments: alternative investments such as art works, fine wine, precious metals, and other collectibles may also be among the investment interests of a family office.

  • Private Equity: private equity funds provide access to a diversified portfolio of private companies and this has been a juicy investment option for family offices.
  • Hedge Funds: For principals who have a wide risk tolerance and drive for high returns, a family office may invest in pooled investment vehicles such as hedge funds.
  • Impact Investing: Family offices may also invest in socially responsible or impact investing, where they seek to generate financial returns while also making a positive impact on society.
  • Philanthropy: a family office may also support philanthropic and charitable causes that align with the family's values and goals.

However, prolonged periods of economic, social, and environmental turbulence have led to some changes in the way family offices make investments and portfolio allocations. These changes are aimed at keeping up with the goal of preserving and growing wealth, as well as being more socially and environmentally responsible.

In recent years, family office investment strategies have continued to tilt more towards direct investments, with investments in private equities and venture capitals taking the larger share over low-yielding fixed income investments. Some estimates suggest that about one-third of family office wealth is invested in equities, with private equities accounting for over 20%; cash and real estate account for 10% and 12% respectively, while fixed income investments have fallen to 15% of total family office investment.

With technological and digital revolutions on the rise, family office investments in these emerging economies are also growing. Motivations driving the growth of investments in certain securities and a simultaneous decline in others are not simply based on performance metrics. Social and environmental awareness and responsibility are also among the driving forces currently redirecting family office interests.

Privacy Concerns

Family offices such as Bay Street Capital Holdings are well positioned to take advantage of private equity investment opportunities. Also, low interest rates have been partly responsible for the attractiveness of private equity over more traditional forms of investment.

UBS' Global Family Office Report 2021 reveals 83% of family offices invest in private equity, with 77 percent making expansion/growth equity investments.

However, family offices investing in private equity are taking a more direct approach than in the past. Although they involve greater risks, private offices now prefer direct deals in order to better control their investments and information about it, as well as to gain more flexibility and fewer fees.

A single family office or multi family office that seeks more control over decision-making and more privacy in their dealings, are finding private equities to come up as their first option.

Impact and Value-based Investing

Risk tolerance and the potential for returns aren't the only drivers of family office investment strategy. Although wealth preservation remains a primary purpose for family offices, there's a growing interest in how their investment aligns with larger purposes and global concerns.

In recent years, the global shift in attitude towards social justice and environmental care has deeply informed family office asset allocation, a trend that is picking up speed due to next-gen leadership. And investors at large are increasingly letting their values guide their investment decisions.

Family offices are backing the talks with action, with 56% engaged in sustainable or ethically-minded investing, according to a 2021 UBS report. According to an earlier report in 2019 by the same organization, thematic investing has gained the upper hand and it involves emphasizing investment efforts in specific areas such as clean energy or education.

While a dedicated family office takes this approach to integrate environmental and social governance factors into their investment strategies, others employ a much more active approach by influencing companies they invest in toward more sustainable practices.

According to the US SIF Foundation, more than $17 trillion (or 1 of every 3 dollars under professional management in the U.S) was earmarked for sustainable investment strategies as of 2019.

What Makes ESG & Impact Investing Attractive to Family Offices?

Although the wealthy may enjoy some freedom that common people don't, they too are often constrained by their reputations. Beyond profits and investment returns, family offices and enterprises have a legacy to maintain, and the more family offices emphasize sustainability and ESG imperatives, the more their peers are inspired to share the burden.

As a result, impact investing has enjoyed immense growth over the last decade, outperforming the benchmark annually, eight times out of 10, according to the MSCI ESG Leaders Index.

Moreover, researchers have discovered that investment strategies that are purpose-driven easily bring about great collaboration between family offices and family members. They also attract and retain the best talent and make room for such talents to bring forth their best work.

Purpose-driven investing is nevertheless influenced by the interest of family members, and family offices might focus on one or the other, the most popular being education, climate change and healthcare.

ESG and impact investments have become highly attractive to the family office ecosystem as they set forth the agenda of investing responsibly, in addition to producing a strong ROI.

A number of economically inclined trends are also worth examining.

Explosion in Investments to Private Equity

Private equity has become a major interest for many family offices, and research has identified a steady year-on-year growth in family office allocation to direct, private equity deals.

Above 80% of family offices are invested in private equity, with about one-third having their entire investments exclusive in this asset class. According to data from UBS and Campden Research's The Global Family Office Report 2019, family office investments in private equities recorded a sizable mean return from 8.6% to 16%.

Also contained in the report was evidence of a continual upward climb in allocations, a trend that took the private equity allocations to 20% of the global family office portfolio (of which between 79%-88% exceeded performance expectations).

This trend is expected to continue as the family office prioritizes returns over liquidity and, therefore, embrace a longer-term, less risk-averse approach.

Additionally, with the family office seeking more active involvement in the investment process and a seat in the management of businesses they invest in, private equity affords them this opportunity to do so. With family offices seeking more control over decision-making and more privacy in their dealings, private equity is becoming an increasingly attractive option.

Venture Capital Deals on the Rise

Venture investments are also gaining popularity among single and multi family offices. While early-stage start-up investments are high risks, they have often produced greater returns, and this has influenced many family offices to invest in this space through venture funds or direct investments.

Many single and multi family offices make their way into VC through funds, but many do graduate to direct investment and bring in other important values besides funds.

This type of investment is mutually beneficial since family offices are seeking involvement and participation and start-ups can take advantage of the values they bring not only of the seed capital but also of their strategic guidance and network connections.

From one other perspective, another reason why family office portfolios may be expanding in venture capital investments is that the latter brings together the qualities of private equity and value-based investment.

From common knowledge, it appears that VC gives family offices the room to make value-driven funding decisions and have a direct impact on the startups in which they invest. Some investors are taking advantage of this allowance to bring their family members along for learning purposes.

Investing into New Technologies

The 21st century is marked by accelerating technological changes as well as social and industry disruptions. New industries are quickly being established that transform the way people live and, hence, put other industries out of business.

These life-changing technologies and industries have been mainly responsible for recent additions to the league of ultra high net worth individuals. The trend does not seem to be losing steam and family offices are seeking out investment opportunities in this ever growing tech space. In fact, the technology sector has become the most popular sector for private equity investment, with over 80% of family offices invested.

Investing into Digital Assets and Cryptocurrencies

The recent rise in popularity of blockchain, digital assets and cryptocurrencies may be the signal for an incoming revolution. Hence, these volatilities have begun to grow in potential to become a major family office portfolio.

The digital age continues to plant its flag around the globe and digital financial assets continue to grow in popularity. Their potential for several high returns is paired with their high risk nature, and these two qualities make them a serious consideration for family office investors, who often require extra homework before buying into the promise.

Investing in Luxury Assets

Rather than representing part of a family's assets, luxuries can constitute cost centers; some of them such as aircrafts and other high-end vehicles take up huge running costs.

However, a smart family office investor can receive capital gains from the family's assets through market-timed sale and repurchase or charter offers. This potential is often unprofitable when supplies of luxury assets outweigh their demand, which has been the situation since 2008.

Why Are Family Offices Getting More Involved in Direct Investment?

Family office asset allocation cuts across public and private markets through a wide range of asset classes. This ranges from equity and fixed income to real estate and commodities across.

In terms of private equity, as an addition to PE fund investments, single and multi family offices are increasing their direct investments to private companies; over 40% of them have been directly investing and about 46% of them are prepping to increase their direct investments.

The reasons family offices are increasingly going direct range from alignment to performance.

1. Performance

The UBS-Campden Wealth Global Family Office Survey 2019 stated that, among asset classes, private equity performed best overall, producing an annual return of 16%. This is obviously the main motivation for the push in direct investments among family offices.

2. Lower Fees

Since there are no performance fees in direct investment, the difference in investment performance between direct investments and funds may be due to the ‘two-and-twenty’ rule (management-performance fees) which is common to popular funds; private equities, hedge funds, and venture capitals.

More importantly, the modern family office has developed strong investment capabilities including research and analysis, as well as in-house legal expertise and systems. This has reduced the need for outsourcing to third party fund managers.

3. Alignment

Family offices with investment objectives may find it hard to achieve them through general investing. Direct investing may be the preferable vehicle for impact investing with particular investment goals. Indeed, 76% of family offices choose direct investments for impact investing.

4. Educational Purposes

A large number of family offices prefer a more hands on approach in their investment portfolio.

On one hand, investors want to channel investment into sectors where they have in-house expertise, such that will be useful to their investment recipients. On the other hand, some want to get more involved in order to learn from these entrepreneurs and hone their skills. This is not the case with hedge funds and private equity managers.

Why Family Offices Invest The Way They Do

Family offices and their managers (or family members) endeavor to focus their operations on experience and expertise, for example in the same sector as family businesses. And they are always aiming for above average returns. These two motivations are central to the way family offices invest and may ultimately be responsible for which types of asset classes are becoming more and more prominent.

Bay Street Capital Holdings

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Bay Street Capital Holdings is a Black-owned, independent investment advisory, wealth management, and financial planning firm headquartered in Palo Alto, CA. They manage portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. Although many advisors may focus on maximizing returns, they place a higher priority on managing total risk and volatility.

Our founder, William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is recognized as Investopedia’s Top 100 Financial Advisors for 2022. In California, Bay Street Capital Holdings is the only Black-owned firm out of the twenty firms that received this recognition.

In Scottsdale Arizona, Ekenna Anya-Gafu CFP, AAMS is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness, and detail. Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs.

In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).








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