Family offices are increasing their allocations in stocks and private assets, have plenty of cash to deploy and have fallen out of love with crypto, according to a new survey by Goldman Sachs.
The US bank surveyed 166 family offices at the start of the year — almost three-quarters (72 per cent) of which managed more than $1billion — and found a group of investors ready to take risks in a quickly-moving market environment.
‘Family offices, for the most part, are really risk on for the next 12 months,’ says Meena Flynn, co-head of Goldman Sachs Private Wealth Management.
‘They can bear more illiquidity and more risk than other investors. And quite frankly, they just don’t have to report to anybody else other than themselves. And so this is one of the reasons why they can zig while others zag.’
What will this mean for their allocations this year? Here are the main findings.
Cash equation changes
Family offices currently have 12 per cent of their portfolios in cash and cash-equivalent holdings, high compared to other investors, but that is expected to fall this year as 35 per cent of respondents plan to deploy more of its on new opportunities.
This is partly because of the opportunity set across public and private markets, but also a result of the changing cash equation in a higher interest rate environment.
‘If you really hold your alternative allocation in cash and fixed income while you wait for capital to be called, you’re really not maximising your return potential as it relates to what that asset class does,’ says Flynn.
Cash can offer a return of 4 per cent to 5 per cent, so clients are increasingly using ‘a combination of fixed income and equities to be able to cover those capital calls,’ says Flynn.
Some of that cash will go into public market investments, with typical stock holdings down to 28 per cent from 31 per cent in 2021 — showing just how far family office attitudes are removed from the traditional 60/40 portfolio of stocks and bonds.
Almost half (48 per cent) of respondents plan to increase exposure, with healthcare and IT sectors of most interest.
Family office have gone cold on crypto
‘Family offices have really made up their mind on cryptocurrency,’ says Sara Naison-Tarajano, Goldman’s global head of private wealth management capital markets.
Though a higher proportion of respondents are now invested in cryptocurrency, 26 per cent this year versus 16 per cent in 2021, the picture in terms of future intent has ‘changed dramatically’ — 12 per cent said they were interested for the future this year, compared to 45 per cent in 2021.
Blockchain technology is of more interest. ‘This is an area where families certainly see the power of blockchain having a big impact on businesses, how they operate from everything to real estate to private equity,’ adds Naison-Tarajano.
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Age of alternatives
Family offices have 44 per cent of their portfolios invested in alternatives, such as private equity, hedge funds and other non-traditional asset classes. This is already a relatively high amount compared to other investors.
‘Alternatives remain a major focus for family offices,’ according to Goldman, which said the group allocates more than other ultra-high net worth individuals with typical holdings of 20-25 per cent in alternatives.
That amount is set to increase, with interest concentrated in private equity and private credit for the year ahead. Their typical exposure to hedge funds, 6 per cent, is a relatively small part of their alternatives portfolio, but the survey noted ‘improving sentiment’ around macro and market-neutral trading.
‘In addition to portfolio diversification, the flexible mandate and liquidity of macro hedge funds allow them to remain opportunistic amid volatility.’
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Private equity push from family offices
But the private markets section of alternatives is top of the agenda for family offices — partly a result of the freedom granted by their distinctive, often very private structures.
‘Without the mark-to-market pressures from outside capital or stated benchmarks or mandates that other institutions may have, family offices can transact opportunistically,’ says Goldman. ‘In fact, as managers and private companies compete for a smaller available pool of capital in a difficult fundraising environment, family offices’ negotiating power is at a high point.’
Examples of more investor-friendly terms they can dictate include more-favourable fee structures or co-investment rights for funds, and governance rights or structures that offer attractive features.
Private equity was the most popular target, with 41 per cent of respondents planning to increase exposure.
Secondary private equity is ‘really resonating right now,’ says Flynn. ‘So as institutional capital might have to sell their private equity positions, there is a secondary market that buys those positions at a discount and will allow family offices and other investors to step into those positions again at a lower price.’
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Private credit opportunity returns
The second-biggest area of alternatives interest was private credit, otherwise known as direct or alternative lending, where current allocations run at 3 per cent but 30 per cent of respondents planned an increase.
‘This is an opportunity set that probably hasn't been this attractive in decades,’ says Flynn. ‘You're really getting equity like returns higher up in the capital structure. And so that's an area where we anticipate and we are seeing family offices put money to work.’
The sector offers ‘certainty, speed of execution and a flexible nature of the transactions that don't necessarily exist in the public markets,’ adds Naison-Tarajano.
‘Being able to earn well into the double digits in private credit, coupled with more muted expectations for equities, really has clients spending more time in the private credit space.’
A recent decision by the University of California’s investment fund to stop investing in hedge funds and allocate more to private credit showed how sentiment is changing.
Will Wainewright runs Alternative Fund Insight, a hedge fund and private markets news and research platform.