A survey of how family offices invest shows their enthusiasm for alternative investments – chiming with results of other studies of the sector. The Goldman Sachs report also demonstrates how rising interest rates affect asset allocation.
When it comes to investing, family offices really like alternatives, secular growth themes, fixed income, their own operating businesses and, increasingly, private credit and venture capital. What they’re not crazy about is crypto and cash and cash-equivalent holdings.
Private equity, private real estate and infrastructure, hedge funds, and private credit account for 44 per cent of holdings in family offices surveyed by Goldman Sachs in the firm’s just released Family Office Investment Insight Report.
Over 166 family offices around the world (57 per cent in the Americas; 21 per cent in Europe, the Middle East and Africa and 22 per cent in Asia-Pacific) were surveyed. Three-quarters had over $1 billion in net worth and 13 per cent had net worth of over $10 billion.
These family offices are being “incredibly opportunistic” when it comes to asset allocation and taking advantage of their permanent capital, long duration time frame and ability to “bear more risk,” according to Meena Lakdawala Flynn, co-head, Global Private Wealth Management for Goldman Sachs.
Tech and healthcare spearhead growth
Nine out of 10 family offices had investments with secular growth themes, the survey found. Not surprisingly, information technology and healthcare investments led the way, offering what investors hope to be a “clear path to profitability,” said Sara Naison-Tarajano, global head of Goldman Sachs Apex and Private Wealth Management Capital Markets.
Also not surprisingly, as interest rates continue to rise, 39 per cent of family offices plan to increase their holdings in fixed income over the next 12 months.
Down on crypto
But family office sentiment regarding cryptocurrencies has “changed dramatically,” said Naison-Tarajano, a co-lead for Goldman’s family office initiative. Two years ago, 39 per cent of respondents said they weren’t investing in crypto but 45 per cent said they would be interested in investing in the future.
This year, nearly two-thirds of family offices said they weren’t investing in crypto and only 12 per cent said they would consider investing in it in the future. Family office investors “have made up their minds about crypto,” Naison-Tarajano said, giving the speculative asset a big thumbs down.
Appeal of operating businesses
By contrast, operating businesses are extremely popular among family offices. Three-quarters of survey respondents support at least one operating business, and slightly more than one-third say they plan to hold on to ownership in perpetuity.
A combination of steady cash flow, familiarity or an emotional bond accounts for the popularity of operating businesses, said Ken Hirsh, a Goldman partner and co-lead on global banking and markets for the firm's family office initiative. One-third of surveyed family offices indicated that investing in family owned businesses was central to their investing philosophy.
“Clients often leverage the family office for the benefit of their operating businesses in ways such as providing growth capital at attractive entry points or using family office assets to generate borrowing capacity for existing or new operating business activities,” Hirsch added.
Growing interest in private credit
While private credit currently represents only a small part of most family offices’ allocation at just 3 per cent, 30 per cent reported that they expect to increase their allocation over the next 12 months.
“Following the global financial crisis, banks pulled back from direct lending activity, and there is growing interest from family offices to fill this gap as private lenders,” said Naison-Tarajano. “Private credit is even more attractive in today’s environment given rising interest rates along with the quiet traditional financing markets across high yield and syndicated loan markets.”
Residential real estate remains attractive to family offices, with roughly one-third planning to increase exposure to the sub-sector over the next 12 months, and another 30 per cent considering maintaining their exposure.
Family offices are shying away from the troubled commercial real estate market particularly offices and retail space. Only 7 per cent of family offices are seeking to increase exposure to the office sector and 4 per cent to retail.