Family offices, the private wealth management firms which manage the fortunes of the ultra-rich, have seen a bounce-back in investment performance over the last year.
The firms achieved an average return of seven per cent in 2016, a huge increase from the disappointing 0.3 per cent the previous year, according to the global research from Campden Wealth Research and UBS.
This was driven by the continued trend towards more illiquid and higher risk investments, such as equities and private equity, in the hunt for yield.
“The benefits of this bolder approach are clear,” said Sara Ferrari, head of UBS’s global family office group.
“North American family offices invested more than any other region into growth oriented strategies, and this paid off as they outperformed.”
While equities and private equity are becoming increasingly popular, hedge funds and real estate are seeing a gradual decline in take-up by family offices.
Equities now represent 27 per cent and private equity 20 per cent of the average family office’s investment portfolio, a share which looks set to grow.
Most family offices (60.6 per cent) plan to maintain their investment into developing market equities, while 21.3 per cent plant to increase it.
Meanwhile 40.2 per cent intend to allocate more to private equity funds, while 49.3 per cent want to do more co-investment where they invest directly into a company alongside another investor.
However, Ferrari noted that the potentially higher returns which strategies such as private equity can deliver often come with a burden.
Many family offices are struggling to source deals or find the right partners for co-investment, explained Campden’s director of research Rebecca Gooch. Others face problems in performing the required level of due diligence, since human resources are often tight.
Those that are doing it successfully, Gooch added, are sourcing deals through their personal networks or are co-investing alongside funds for their due diligence capabilities.
A force for good
The study also showed that, as younger generations are becoming more involved in the running of their family offices, more of the firms are choosing to increase allocations to impact and environmental, social and corporate governance (ESG) investments.
Of the family offices which are active in this area, 62.5 per cent engage through private investment and 56.3 per cent through private equity.
The most popular sectors for impact investment were education, environmental conservation and energy or resource efficiency. Ferrari said:
We know that millennials are driving the adoption of sustainable and impact investing. As they strengthen their skill-sets and assume more control, we’ll see this theme continue to take hold.