A comprehensive overview of a family office survey collated by Brad-Lee Lesar.
The COVID-19 pandemic has significantly impacted and disrupted the economy, and this includes family offices.
This has forced the family office community to take immediate action by determining how their current portfolio will be affected.
They have largely done this by reviewing their existing funding strategies, and identifying risks and opportunities.
Globally, the number of family offices has increased by approximately 38% between 2017 and 2021. Of the 7,300 family offices around the world, North America accounts for 42%, Europe 32%, and Asia Pacific and the Middle East 18%.
Business growth and development in the Middle East and Asia Pacific is said to be the driver for the increased number of high-net- worth individuals, while their need to manage their wealth professionally has led to an increase in the number of family offices.
[1] With a generational shift underway, and trillions of dollars expected to change hands in the next decade, we will see an increase in Millennial involvement in family office operations. [1][3]Unlike their predecessors, younger investors and family office leaders have a heightened awareness of the importance of sustainable and responsible investing and will move towards aligning their investments with their values.
Having Millennials move to the forefront of family office management and becoming more active in decision making, we will see an increase in sustainable investments moving forward. The three classes of sustainable investing are:
1. ESG investing, which measures the impact of investments outside of financial statements.
2. Socially Responsible Investing, which measures financial return as well as measurable environmental and social goals.
3. Impact Investing, which avoids any negative social and environmental investments.
Climate change, renewable energy, water management, solid waste management, healthcare and wellness have been identified as key areas of interest, and drivers of innovative and responsible investing. 73% of family offices globally are actively investing at least some assets sustainably.
22% of SFOs in Europe, 21% in Asia Pacific and the Middle East and 18% in Northern America are showing a move towards sustainable investment, with roughly 39% of offices globally stating an intention to allocate a significant portion of their portfolios sustainably in the next five years. [1][2]
Generally, sustainable investing forms part of long-term investment strategies, which are favourable to SFOs. What was once a few individuals trying to make a difference by making environmentally and socially responsible investments has and will continue to grow into an increasingly effective form of capital allocation. Earning a rate of return will remain a priority, but it will not carry the same weight in decision making as it did in the past.
The pandemic has brought forth a sense of urgency regarding technology, and has reinforced the importance of technology development, resulting in tech companies reporting tremendous growth during the pandemic.
In 2020 we noticed the growing risks at play with an alarming number of cyber-attacks reported, due to non-essential workers working from home. Many companies lacked the necessary infrastructure to successfully implement an effective and secure work from home program, which in turn has resulted in tech companies identifying and innovating security products and cloud computing.
Investment in privacy products, artificial intelligence and cyber security will be of interest to many, due to the likeness of family offices keeping their information private and becoming more efficient in their day-to-day business, as well as the likelihood of work from home practices becoming the new norm.
Extremely low interest rates have been forecasted to last until at least 2023. Central Banks in Japan, the EU, the UK, and the US have imposed a near zero and even negative interest, which naturally has led to a considerable reduction in bond yields.
This of course has resulted in investors steering away from stocks and bonds, instead focusing on private equity, real estate, and direct investment.
Private equity seems to be the favoured form of investment due to the diversification properties it offers, with 77% of family offices investing in this asset class – 31% making use of funds, 19% in direct investments and 26% investing in both funds and direct investment opportunities. [1]
The overarching theme for 2021 will be how quickly we will be able to recover from the pandemic, and how innovative we will be able to be with investment strategies. As the vaccines are rolled out, borders begin to open and the economy starts to recover from the detrimental effects of COVID-19, we should prepare ourselves for further uncertainty.
If the pandemic has taught us anything, it is that predicting the effects of the pandemic are extremely difficult.
However, any big picture information necessary for a micro understanding of what is going on and how to approach it is available in the public domain. Staying well informed and relating information gathered to your investment themes is of the utmost importance, now more than ever.
References [1] UBS Global Family Office Report 2020 [2] FINTRX – Rise of ESG and Impact Investing Among Family Offices [3] KPMG – How are current trends affecting the family office and UHNWI landscape?