Where Are Family Offices Seeking Higher Returns?

Definition and Scope of Family Offices:

• Family offices are unique investor institutions managing the wealth of individuals or groups with a primary goal of delivering on specific family missions, values, and long-term wealth protection across generations.
• They manage a dual mandate encompassing investment oversight and non-investment responsibilities, including trust administration, tax planning, estate planning, governance, and family distributions.
• Over the last decade, the sector has expanded in size and scale due to favorable macroeconomic backdrops, increased M&A activity, and rising asset valuations, leading to more professionalized teams.
• Despite their institutional-like operations, family offices typically maintain lean investment teams, with 50% of surveyed entities employing fewer than five investment professionals.
• They operate with significant structural advantages over traditional institutions, including the absence of external reporting requirements to boards or outside investors, eliminating the risk of investor outflows.

Investment Strategy and Characteristics:

• Family offices utilize a "barbell" investment approach, balancing high allocations to illiquid assets and alternatives with substantial cash reserves to navigate market volatility.
• They demonstrate a long-term perspective, often comfortable holding assets for generations, and typically exhibit less focus on mark-to-market valuations compared to other institutional clients.
• Survey data indicates that institutional family offices allocate approximately 45% of their assets to alternatives, a trend driven by the ability to stay invested in markets to capture illiquidity premiums.
• In private equity, median managers have historically added incremental returns of roughly 2.5% annually, while top-quartile managers have added approximately 7.5% over public equities.
• Capital appreciation is the primary mission for 80% of the family offices surveyed.
• Family offices are increasingly nimble decision-makers, capable of making quick decisions and approving investments through streamlined processes due to their lack of external governance constraints.
• They serve as attractive partners for companies raising capital or selling businesses because of their flexible capital structures, willingness to invest across various capital structures, and ability to execute deals ranging from $25 million minority positions to $500 million+ control deals.
• During the pandemic, certain family offices provided 100% deal certainty by backstopping entire deals, eliminating financing risks that deterred other institutional investors.

Macroeconomic Themes and Asset Allocation Trends:

• A recent survey of 150 major family offices highlights three primary macro themes driving current portfolio positioning:
  • Inflation Concerns: Growing focus on inflation driven by monetary and fiscal stimulus, leading to increased client interest in hard assets.
  • Currency Debasement: Interest in hard assets, digital assets, and commodities as a hedge against global central bank policies.
  • Prolonged Low Interest Rates: Observations of multi-decade declining yield curves impacting cash management and traditional fixed income strategies.
• Real Estate:
  • Real estate remains a core asset class viewed as an inflation hedge and store of value, often utilized directly in markets familiar to the family or through local operators for larger scale needs.
  • Families have positioned themselves ahead of the curve by investing in non-tier-one markets, niche sectors, and areas benefiting from demographic shifts toward skilled workers in lower-cost regions.
  • Specific focus includes multifamily assets and industrial real estate driven by e-commerce and logistics trends, though current valuations have tempered immediate interest in adding new real estate exposure.
• Venture Capital (VC):
  • Venture capital flows reached record levels in the first half of 2021, with over $155 billion invested in North America.
  • Over 90% of survey respondents invest in VC, often facing challenges in accessing top-tier managers and utilizing networks to secure co-investment opportunities.
  • Strategies include making direct investments in sectors where the family possesses deep expertise (e.g., biotech, AI) or managing their own venture funds, though most continue to invest via funds or fund-of-funds.
  • Venture debt participation is observed primarily through pre-IPO convertibles for later-stage growth companies.

Emerging Investment Themes:

• ESG Integration:
  • ESG (Environmental, Social, Governance) investing is driven by a combination of mission-driven values and a pursuit of outsized returns, with 2021 recording the strongest year on record for global ESG fund flows.
  • EMEA leads the charge, with over 80% of respondents in that region reporting moderate to extreme focus on ESG.
  • Integration occurs across three areas: workplace policies (diversity), philanthropy, and investment strategies.
  • Regulatory tailwinds, including commitments from the U.S., EU, China, and the UN, are accelerating adoption, with a specific focus on clean energy, agriculture, and food tech.
  • While mission-driven initially, family offices increasingly view ESG as a vehicle for financial return rather than purely altruistic goals.
• Digital Assets and Cryptocurrencies:
  • Approximately 15% of institutional family offices currently hold exposure to cryptocurrencies, with another 45% considering future addition.
  • Bitcoin and Ether are the primary focuses, viewed as rules-based, fungible global currencies with an asymmetric risk-reward profile and inflation-hedging properties due to limited supply.
  • Concerns driving caution include price volatility, asset safekeeping, environmental energy usage, and an evolving regulatory landscape.
  • Beyond direct crypto holdings, family offices are increasing investment in the underlying distributed ledger technology and blockchain infrastructure.

Cross-Divisional Insights:

• The multi-divisional study approach was necessary because family office interests span public and private markets, funds and direct investments, and both investment and non-investment needs.
• Goldman Sachs leveraged insights from Consumer Wealth Management, Global Markets, and Investment Banking to provide a comprehensive view of the sector's complexity.
• The study reinforces that family offices are becoming more opaque yet influential, acting as a unique force on Wall Street with distinct investment behaviors that offer lessons for the broader investing community.