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A preferred source of opportunity for family offices

More than half of family offices (52%) see it as a way of accessing investments that aren’t accessible in public markets.

Asset allocation: adapting to an altered world

Continued low interest rates have shaken family offices’ long-standing faith in fixed income. About a third (35%) intend to raise equity allocations in developed markets, more than half (56%) will do so in developing markets.


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Private equity: a preferred source of opportunity for family offices

In partnership with UBS Evidence Lab

Private equity (PE) is a preferred source of opportunity. More than half of family offices (52%) see it as a way of accessing investments that aren’t accessible in public markets. Forty-seven percent of them use both funds and direct investments, while 30% opt for direct investments only. According to the survey of UBS Evidence Lab in 2021.

With PE edging ever higher in portfolios, the asset class has become key for driving returns in an otherwise low-yield world. Three quarters (75%) of family offices think PE will deliver higher returns than public equity markets, while 44% see it as a source of diversification. But more than half (52%) look to PE for its broader range of opportunities. In a quarter (25%) of cases, the business owner is passionate about PE, often investing in the sectors where he or she already has a business. “Over the last 10 years it’s hard to find something that’s delivered better returns than public markets so for us private equity is there for diversification,” notes the COO of one Swiss family office. “Yes, it’s an equity risk but it’s not reacting to news at the same time for the same reason, like public markets or other assets.”

Expert Investors

Just as PE has become a greater source of funding for the real economy, so it’s natural for business families to become more directly involved. There’s a sharp drop-off in the use of funds of funds, with investment in funds and direct investments rising significantly. 83% of survey respondents invest in PE. But while 37% of them invested in funds or funds of funds in 2020, that fell to 23% in 2021. Almost half (47%) invest in both funds and direct investments, up from 31% in 2020. Meanwhile, just under a third (30%) only invest in direct PE, a similar level to 2020. As a rule, direct PE is becoming more accessible, with secondary markets providing greater liquidity.

More than half (57%) of family offices use intermediaries such as banks to source investments, valuing access to opportunities and knowledge. Almost two thirds (65%) of those using intermediaries say they do so for access to investment opportunities in funds that are otherwise difficult to enter, while privileged knowledge of the underlying market is similarly important (60%). Asian family offices find intermediaries’ access to funds and keen knowledge especially important. With most PE houses still based in the US, the region’s family offices have smaller need of intermediaries’ expertise.

Seeking innovation

At a time when many young companies are growing fast, disrupting the incumbents, there’s a quest to invest in the innovators. More than three quarters (77%) of family offices make expansion/growth equity investments, with that proportion even higher in Switzerland (86%) and the US (92%).
“We look at a lot of deals in China giving access to the new consumer,” notes the CIO of a family office based in Beijing and Hong Kong. “In the US, we look more at technology. We also look at opportunities in Japan. It just depends where the opportunity is.”

Similarly, venture capital (VC) is the second most popular type of investment. Almost two thirds (61%) of family offices make VC investments; yet the proportion is higher still in Eastern Europe where three quarters (75%) do so.

From a life cycle perspective, later-stage and pre-IPO/mezzanine financing are preferred. This mitigates risk in what otherwise can be a high octane form of investing.

Note: UBS Evidence Lab surveyed 191 UBS clients globally in February 2021.

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Asset allocation: adapting to an altered world

In partnership with UBS Evidence Lab

2021 marks the gradual acceleration of a change in strategic asset allocation (SAA) as family offices adapt to an altered world of interest rates at close to zero or even negative in many developed markets. While SAA is broadly stable compared with the previous year, they’re contemplating a world where fixed income yields remain relatively low for some time and there are new sources of growth.

Looking back at 2020, portfolios finished the year broadly diversified across asset classes, including alternatives. Average allocations were stable, with approximately a third (32%) dedicated to equities, a fifth (18%) to fixed income, a similar amount (18%) to private equity and 13% to real estate. Cash was 10% and hedge funds 6%, with smaller allocations to gold, other precious metals, commodities, and art and antiques. Note that these are global averages. For instance, US family offices allocated more than those in other regions to direct private equity and hedge funds while Asian family offices were more in favour of developing market equities.

Interviews with chief investment officers (CIOs) of family offices suggest that there has been an uptick in trading activity. “We handle tactical asset allocation very actively – mostly making changes for a duration of three to six months, overweighting or underweighting some asset classes that we have in our strategic asset allocation,” explains a CIO of a family office based in Switzerland. “This is how we basically deal with shifting opportunities. We have been doing this extensively for a year and a half.”

Turning to cryptocurrencies, upwards momentum makes them hard to ignore. Thirteen percent of respondents have invested, and 15% are considering doing so, although not as part of their SAA. “For us, it started really as just a pure trade,” notes the Swiss CIO. “We saw the institutional adoption and that was why we took on a small allocation in bitcoin, maybe almost a year ago. We figured that institutional adoption is only going to increase. It began as a pure momentum trade.” In Asia, a quarter report having invested, although it’s most likely at the margin of portfolios.

Valuations and rising inflation rates worry family offices across the globe

Looking at the short-term positioning and the key concerns, valuations and rising inflation rates worry family offices across the globe. In response, 36% are currently hedging/reducing their equity position, whilst 53% are not. This environment is very attractive for alternative assets and family offices are increasing their exposure to private markets with 40% intending to increase private equity, 26% hedge funds, 19% real estate. 

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