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December 4, 2023

Private markets remain key to family office strategy despite dip in returns

Family offices plan to increase allocation to private markets as they seek greater diversification and higher return expectations, according to a new report

By Stephanie Bridger-Linning

Family offices remain bullish on private markets and plan to increase allocation to this asset class in future, fresh analysis suggests. 

The European Family Office Report 2023, published today by Campden Wealth in partnership with HSBC Global Private Banking, notes there has been an upwards trend in investment by family offices in private markets (private equity, venture capital, and private debt). This now constitutes 28 per cent of assets under management (AUM), making it the joint-largest asset class alongside equities. 

This is set to continue. More than a quarter of European family offices plan to increase their allocation to direct private equity and roughly one in five to venture capital, the report reveals. Two-thirds of family offices also believe private markets will outperform public markets. 

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[See also: Private markets: should individual investors take the plunge?]

Private equity portfolios also expose family offices to emerging businesses on the forefront of technological advancement. Healthcare, fintech and data centres are traditionally popular sectors for investment, while artificial intelligence is garnering substantial attention. 

‘We have seen a significant trend in family offices increasing their exposure to private equity in recent years, including in direct deals, as clients look to the private markets to broaden the opportunity set,’ says Caroline Kitidis, Global Head of UHNW, HSBC Global Private Banking. ‘Many family offices are attracted to the long-term approach of private markets, as well as the ability to use the asset class for diversification purposes and higher return expectations.’ 

The rise of private markets 

A key feature of family office investment in recent years has been an ever-increasing allocation to private markets. 

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In 2022, this accounted for 28 per cent of AUM. Although this represented a 1 per cent dip from 2021, it is still the largest asset class alongside equities. 

Looking ahead, many family offices are considering directing their surplus cash into private markets. A net 28 per cent intend to increase their allocation to direct private equity, followed by 21 per cent to venture capital, 18 per cent to private equity funds and 13 per cent to private debt/private lending. 

[See also: Individual investors are finding new ways to access private markets]

These are expected to supply the best long-term returns, despite relatively disappointing outcomes last year. In 2022, direct private equity was the best performing asset within this category, with returns of 8 per cent. This was followed by venture capital (5 per cent), and private equity funds (3 per cent) and private debt (3 per cent). This was reflective of the overall downwards trend but marked a notable drop from the high-teens returns achieved in the two preceding years. 

‘This reflects a more difficult environment for exits, and to the extent to which valuations are based on quoted comparables, stock market drawdowns,’ the report notes. 

Exposure to new technologies 

Through private equity portfolios, private offices invest in cutting-edge technology. The most popular sector is healthcare (67 per cent of family offices already invested), followed by fintech, artificial intelligence, biopharma and data centres (all 60 per cent).

Going forward, the most exciting prospect appears to be AI, with 38 per cent of family offices seeking to increase their involvement. Other frontrunners include climate change mitigation (27 per cent) and digital transformation (25 per cent). 

[See also: Family offices ride out turbulent third quarter without a retreat to cash]

The wide-ranging European Family Office Report 2023, which is accompanied by the North American and Asia-Pacific editions, also addresses areas including governance structures, technology, operational risk and succession planning. 

The report is based on statistical analysis of 330 survey responses from single family offices and private multi-family offices worldwide, of which 102 were located in Europe. On average, participating European families had a total wealth of US $1.7 billion.


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