The Changing Landscape of Asset Classes

Posted On: 28 Feb 2019

Families are traditionally private about their personal and business affairs, so as a professional Family Office, we are always interested in gaining insights into what other Family Offices are doing and how they are performing.

According to the recently published Global Family Office Report 2018 (published by Campden Wealth), the investment performances of global Family Offices have more than doubled year-on-year.  Nearly half of the 300 Family Offices surveyed also reported an increase in their managed assets during the same period.

What is interesting to learn from this report is the growing trend towards riskier more illiquid investments. This corroborates our own experience of how Family Office clients are tending to diversify and explore new asset classes.

Within the report, it notes that Alternative investments account for 46% (nearly half) of the average family portfolio, with real estate investments accounting for only 17%.  Many factors can be attributed to this rise in new and emerging asset classes.  These days, business is much more entrepreneurial and also transcends borders.  But social and economic factors also play their part, with families wanting to demonstrate a more ‘socially responsible’ way of doing business.  Of course, technology also plays a huge part in creating new channels of business, and as part of this evolution, the creation of new asset classes and investment opportunities naturally follows.

Higher risk investments such as cryptocurrency are becoming more globally popular, although they are still a relatively new proposition for many within the Family Office arena.  But if the Family Offices of today want to remain an attractive proposition for future generations, it is critical to their business vision that they remain vigilant and open to new ideas. It’s also crucial that they educate themselves about the trends, opportunities and of course the risks for new and emerging asset classes. In a previous article, we reported how we are nearing one of the largest intergenerational transfers in the next 10 to 15 years and the challenges this has brought about in terms of succession planning.  Interestingly, one of the report’s findings highlights how it is ‘millennials’ who are the most engaged with ‘impact investing’.

Impact Investing

‘Impact Investing’ has gained much media attention during the past 12 months, and whether or not it has reached your door, it is definitely being viewed as an emerging asset class, creating a communication means by which next gen millennials are connecting with their family’s business interests. ‘Impact Investing’ is defined by the Global Impact Investing Network (GINN) as; investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

In our article we explored how many families are facing the same issues with future generations who are either not interested in picking up the family business baton, or who simply don’t have the skills and knowledge to take it on.  Within the Global Family Office Report, it identified that it is millennials who are driving impact investing within the family office arena.  Perhaps their own heightened sense of social and environmental issues through 24/7 access to global news and social media platforms has created this consciousness, bringing with it good news for many Families as a way to engage this next generation in a dialogue about the future of their businesses and investments.  Such is the extent of this within the USA that Harvard Kennedy School has created training programs for ‘next gens’ on how to sell in the idea of ‘impact investing’ to their families.

Real Estate

But not all emerging assets are totally new to Family Offices.  Real Estate, whilst only accounting for 17% of the investment performance, still offers a long term investment strategy for many.  This is particularly vital when wealth preservation is at the very core of what a Family Office does.

There is plenty of media coverage regarding the appeal of a Central London property to global Family Offices, particularly those located in the Middle East, Europe, India and China who are seeking a safe and stable location for their capital.  Indeed, many of the Capital’s landmarks are now owned by Family Offices.  Brexit may have deterred a few, but for most this location remains a priority for those looking for longer term investments.

Whilst the global report detailed a slight decline in Real Estate investment allocation findings, within this sector many Family Offices are looking at alternative investments.  Away from the luxury hotels, retail and city landmarks, many Family Offices are undertaking joint ventures with local property developers, investing in hotel, leisure and warehousing projects outside of London. Many are exploring the full realms of what the residential property arena has to offer, including student accommodation, care homes, senior living and the private rental sector.

Managing assets

With these changes comes the issue of how these assets are effectively managed.  Traditional investments such as a FTSE 500 listed company would enable the share prices to be accurately tracked.  Through regular dialogue with the investment team, reports would be generated and a decision to maintain or sell off the shares would be made.  But with something like ‘seed investment,’ where the client has invested capital within a non-listed start-up company, how do you properly manage and control the asset?

‘Moveable assets’ such as cars, yachts, planes, race horses or artwork create increased challenges and risks for Family Offices, and indeed wealth managers in general.  For example, how do you manage where a ‘moveable asset’ is at any given time?  Depending upon how a yacht or private jet is to be operated, this will then dictate how this asset will then need to be managed.  Each jurisdiction the vessel or aircraft enters will have differing legal and regulatory requirements to consider, and this ever-changing landscape is not aided by the current uncertainty of Brexit.  Family Offices have generally been viewed as risk-averse industries – so the need to invest in additional in-house expertise to offset any risk (in-house legal counsel, compliance etc.) are just some of the issues Family Office CEOs are being faced with.

For many, owing to the more entrepreneurial approach within this sector and the vast range of emerging asset classes, sourcing strategic partnerships with specialists is a key component.  For us personally, this has seen us forge closer bonds with a wide range of advisers and industry professionals, including asset managers and insurers.  Naturally it goes without saying that any wealth adviser needs to have full disclosure of the client’s affairs to fully manage risk aversion, and for Family Offices, they have the advantage of knowing the full breadth of both the personal and business affairs of the families they manage.

Joint ventures and the trend towards fragmented ownership investments increases the number of parties and shareholders involved, adding complexity to the reporting channels and how these assets are managed.  But they are also creating further opportunities through dialogue with other families and entrepreneurs with a similar mindset and investment appetite.

Other Considerations

In their 22nd Annual global CEO Survey, PWC reported how CEOs are seeking to bridge the skills gap and educate their workforce in relevant areas such as data and analytics. Cyber-security, privacy, data ownership and integrity were all listed within the survey as key CEO concerns.  Previous generations were more prone to decisions based on the experience and intuition of their trusted wealth advisor.  But the more digitally savvy ‘next gens’ will be looking for data driven analysis and more on-demand reporting of their assets and investments.

Over-regulation was cited within the survey as the number one threat related to the ease of doing business, closely followed by terrorism, geopolitical uncertainty and cyber threats.

Family Offices are becoming more frequent victims of data breaches, so secure digital solutions will be essential in ensuring Family Offices remain a trusted proposition for future generations.  How this impacts on the appeal of cryptocurrency and blockchain is yet to be seen.  But some within the industry believe that these digital currencies could open the door to even more methods of asset ownership through security tokens.  If we consider rare art or luxury cars for example, industry opinion believes the technology will enable buyers and sellers to transact directly without the need for dealers or traditional auction houses.  With this approach, fractional ownership, which is already successful in industries such as the Superyacht marketplace, could offer wider appeal and greater alternative investment opportunities, creating yet more reporting and asset management considerations for Family Office professionals.

As the next generation prepare to pick up the baton and take on the family’s interests, we have no doubt that there will be much planning and debating over effective strategies and more socially conscious, tech driven investments.  As an experienced Family Office who already manages a wide range of asset classes for our private clients, we will definitely be watching and listening!

 

Research sources:

http://www.campdenfb.com/article/family-offices-enjoy-bumper-year-investment-performance-more-doubles

https://www.forbes.com/sites/rkulkarni/2018/11/01/seven-ways-tokenizing-traditional-assets-will-launch-security-tokens-to-main-street-in-2019/#37073c354b07

https://www.juliusbaer.com/insights/real-estate/family-offices-and-their-real-estate-strategies/

https://www.pwc.com/gx/en/ceo-survey/2019/report/pwc-22nd-annual-global-ceo-survey.pdf