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July 22, 2021

New Goldman Sachs research reveals how family offices are investing and thinking about the world economy

By Arun Kakar

New Goldman Sachs research reveals how family offices are investing and thinking about the world economy

Around two thirds of family offices are thinking about a ‘prolonged’ low interest rate environment and a similar proportion (65 per cent) are thinking about an increase in inflation, according to new research from Goldman Sachs.

The firm’s survey of 150 global family offices also found that 54 per cent of those thinking about inflation were increasing their allocation to equities.

Some 55 per cent of those positioning for an increase in inflation are also investing in other hard assets, often real estate. ‘For those utilizing real estate to protect against inflation, certain sectors such as multifamily are in sharper focus due to the potential to benefit in an inflationary environment as rents reset,’ it noted. 

Of all respondents, 39 per cent stated that they were thinking about currency debasement. Within this group, 42 per cent said they were investing in digital assets, followed by 37 per cent who are investing in precious metals and 33 per cent who are executing currency hedges.

In terms of a broad asset allocation, Goldman said that family offices tend to implement ‘aggressive’ strategies. This aggression was reflected in a 31 per cent average allocation to public equities, and 45 per cent to alternatives, which included private equity (24 per cent), real estate (11 per cent), hedge funds (6 per cent), private credit (4 per cent ) and commodities (1 per cent). An average allocation to cash and fixed income is 19 per cent.

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The overall bias toward public market equities is largely consistent with what Goldman said it was seeing with UHNWs, which it ‘partly attributed to the concentration of wealth in companies that have since gone public’. 

The allocation to alternatives, ‘markedly higher’ than other investor groups, aligns with Goldman’s view of family offices as better able to hold an asset beyond typical timeframes, combined with the entities’ professional diligence capabilities.

‘It is also in line with what we see among some institutional investors, such as endowments with $500 million or more in assets,’ the report’s authors noted. ‘While considering illiquidity risk and higher complexity, many investors we speak with believe that investing in private markets can generate incrementally higher returns over public markets. For that reason, some family offices follow the “endowment model.”’

Indeed, Goldman said that investors are continuing to allocate more to private equity and other ‘opportunistic’ asset classes. Nearly 100 per cent of respondents invest in private equity, and 90 per cent invest in venture capital. 

The firm found a wide range of investment approaches from respondents, who are ‘roughly split’ between investing through managers and going directly: 54 per cent and 43 per cent of family offices directly invest in private equity and venture capital respectively, while 43 and 49 per cent invest through managers.

‘A narrowing cohort of top managers, as well as an expansion of family office networks, has led to more families allocating directly through their networks, albeit in smaller portions,’ it said.

Just 15 per cent of family offices are invested in cryptocurrencies, but some 45 per cent expressed an interest in investing in the future. For those not invested, the most cited reason was that they ‘do not currently believe cryptocurrency is a good store of value’, followed by 38 per cent who said they weren’t ‘comfortable’ with the infrastructure. The same percentage said that they were not familiar with the asset class.

Despite this scepticism towards cryptocurrencies themselves, Goldman said it expects family offices to continue to focus on ‘monitoring the evolution and potential use cases for other digital assets and blockchain technology more broadly’.

Market trends aside, some 80 per cent of family offices saw their primary mission as being capital appreciation for multigenerational transfer, followed by 52 per cent who said wealth preservation and 29 per cent who said diversification of concentrated wealth or single stock exposure.

‘Family offices’ time horizon – multigenerational, with associated long-term pools of capital – differentiates them from other investors,’ said the report. ‘For example, we see many family offices looking to acquire similar assets as traditional institutions but with a greater capacity to hold in perpetuity.’

Image: Shutterstock/Trismegist san

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