The Spectacular Rise of Family Offices: A New Era in Wealth Management
The global landscape of family offices has experienced an unprecedented surge, with a recent report by investment data firm Preqin revealing a 21% increase last year, reaching 4,592 family offices. This has been a tripling trend since 2019, highlighting the booming sector. North America leads the way, hosting 1,682 family offices and accounting for over half of the assets held by these entities worldwide. This remarkable growth underscores the family office sector's rapid expansion, attracting significant attention from private equity firms eager to tap into this once-overlooked segment of the wealth management industry.
The Driving Forces Behind the Boom
Family offices, which serve as private investing arms for wealthy individuals and families, have thrived due to a variety ofcritical factors. The primary drivers are ballooning personal fortunes and the global proliferation of high-net-worth individuals (HNWIs). Forbes described 2024 as a record year for 10-figure wealth, with the billionaire class reaching unprecedented levels. This year's "World's Billionaires List" featured 2,781 billionaires collectively worth $14.2 trillion, up by $2 trillion from 2023.
The Appeal of Family Offices
To manage this immense wealth, family offices have become the preferred solution for affluent individuals and families. Estimates suggest that family offices manage over $6 trillion in combined assets. A key attribute of family offices is succession planning—preparing for wealth transfer to the next generation. This has made family-office services more appealing to wealthy families navigating the complexities of succession.
The Great Wealth Transfer
Preqin's head of real assets and research insights, Alex Murray, emphasised the significance of the great wealth transfer, predicting Millennials to become the richest generation in American history. As the ageing population transfers wealth to the next generation, family offices are shifting their focus from wealth creation to wealth retention.
Evolving Investment Preferences
As family offices grow, so do their evolving investment preferences. There is a pronounced interest in alternative assets, marking a departure from traditional stocks-and-bonds portfolios. Family offices are pursuing adventurous strategies to generate higher returns, with significant allocations to private equity, venture capital, hedge funds, infrastructure, and real estate. Preqin noted that family offices have the highest allocation to hedge funds among institutional investors.
According to J.P. Morgan Private Bank's "2024 Global Family Office Report," the average family-office portfolio allocation to alternative assets is 45%. This shift allows family offices to take on illiquidity risk for greater potential long-term returns. Despite this, family offices maintain core liquid portfolios, with average allocations of 26% to public equity and 20% to fixed income and cash.
Private Equity Takes Center Stage
Private equity has recently surpassed public equity as the top asset class for family-office investment. Deloitte Private's "2024 Family Office Insights Series – Global Edition" reported that private equity represented 30% of the average family-office portfolio last year, up from 22% in 2021. Public equities accounted for 25%, down from 34% in 2021. Majorinvestment managers like Blackstone, KKR, and Carlyle are increasingly courting family offices to expand their investor bases.
Direct Investments on the Rise
A recent survey by BNY Mellon Wealth Management found that 62% of family offices made at least six direct investments into private companies in the 12 months leading to June 2024. This trend indicates a preference for operating as their private equity funds, directly capturing more of the unlisted space. Family offices leverage their unique competencies, such as adding operating expertise or accessing exclusive opportunities, to successfully realise gains and exit investments.
A Diversified Approach
While there is a notable shift towards alternative investments, family offices maintain a diversified approach. William Marr of Welton Investment Partners LLC noted that some assets under the alternative segment might have peaked. Still, demand remains robust for illiquid segments like private debt and private-equity secondaries. This strategy aligns with the family-office investment approach of patient capital over longer time horizons.
Cryptocurrencies and Emerging Trends
Cryptocurrencies have also made a surprising appearance in family-office portfolios, with a 5% allocation recorded by the BNY Mellon report. Motivations for investing in crypto vary, with many citing the need to keep up with new investment trends. However, many family offices remain cautious due to market volatility and regulatory concerns.
Looking Ahead
Deloitte reports that 70% of family offices anticipate an increase in assets under management (AUM) in 2024, and 79% anticipate a growth in their families' total wealth. Family offices are well-positioned to withstand economic fluctuations, leveraging their patient capital and cash reserves to seize opportunistic deals.
Conclusion
The rise of family offices represents a new era in wealth management, driven by growing personal fortunes and evolving investment strategies. As they adapt and expand their influence, family offices are poised to assume a more pivotal role in the global financial landscape.