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Year-on-year changes in investment sentiment. The areas where investment sentiment has changed the most since the 2022 survey include:
At our 2023 Family Office Leadership event in June, we focused on re-evaluating asset allocation and investment opportunities. Among the asset classes that family offices are particularly focused on are high-yield opportunities in the credit market. In the panel discussion on "Opportunities in Credit Market Mismatch", the views presented by the participants reflected the following investment sentiment: We believe there are potential opportunities in short- to medium-term instruments in the secondary bond market. Bullish factors include yield, sequencing of the capital structure, contractual cash flows, preferential commitments, reasonable pro forma leverage, and the upside potential of equities under certain circumstances. You can choose fund houses that have the potential to achieve outstanding performance in high-yield markets or distressed asset markets in order to access these investment opportunities.
Divided by asset management scale
While family offices have broadly similar investment intentions regardless of size, larger family offices are more likely to increase their allocation to private credit than smaller ones (55% vs. 31%). Smaller family offices are more likely than larger ones to consider reducing their allocations to private equity funds (25% vs. 16%) and real estate (37% vs. 28%, respectively), while also planning to reduce their allocations to cash assets (10% vs. 3%).
By region
Regionally, while sentiment across asset classes is generally similar, EMEA (73%) is much more optimistic about global investment-grade fixed income than other regions, particularly North America (32%). As mentioned earlier, private equity direct investment remains in the spotlight, with widespread optimism around the world. By region, North America (47%) and EMEA (38%) are the most optimistic, followed by Latin America (31%) and Asia-Pacific (29%), where neutral sentiment may imply a "wait-and-see" approach until economic uncertainty subsides.
The industry preference of the public market in the coming year
Global Overview. While sentiment in public equity over the next 12 months has been mixed, the majority of respondents said they would increase their investment in technology (69%) and healthcare (58%).
Divided by asset management scale
In the most favoured technology sector, smaller family offices are more likely to increase their exposure to public markets than their larger counterparts (74% vs. 67%, respectively). While respondents' responses were broadly similar in other areas, larger family offices were more likely to add to the financial sector (33% vs. 22%, respectively).
By region
Across all geographies, technology and healthcare are the two most popular sectors in the public market. The third largest sectors are Finance (37%) in APAC, Real Estate and Finance (35% each) in EMEA, Real Estate (36%) in North America, and Industrials and Energy (31% each) in Latin America.
The expected return of the portfolio for the year ahead
Despite concerns about inflation and geopolitical conflicts, the previous two editions of the Global Family Office Survey showed that respondents were generally optimistic about the outlook for the next 12 months. This year was no exception, with overall optimism mixed with some concerns. We believe that despite the short-term market challenges, family offices are able to actively adjust and deploy patient capital to capture investment opportunities in a timely manner.
Global Overview
Notably, almost all respondents (95%) expect positive portfolio returns over the next 12 months, with more than two-thirds expecting double-digit returns. Expected increases range from 0-5% (5%), 5-10% (25%), 10-15% (53%) and more than 15% (12%).
Divided by asset management scale
Family offices with assets of US$500 million or more are more optimistic about the outlook for portfolio returns, with 70% expecting returns of 10% or more in the coming year, compared to 61% of smaller family offices.
By region
Across all regions, respondents were highly optimistic about the outlook for portfolio returns. Some 97% of Latin American family offices expect returns of 5-10% or more over the next 12 months, followed by EMEA (94%), followed by North America and Asia Pacific (89% and 88% respectively). Interestingly, family offices in Latin America are not optimistic about "very high" returns (above 15%). Only 3% of respondents expect to achieve this level of return, compared to 23% in EMEA.
Family offices continue to favour private equity, real estate and hedge fund investments The average level of allocation to public and private equity is the same, at 22% Cash allocation remains high at 12% Local preference and concentration are prevalent in all regions of the world Investments in alternative assets (private equity and private credit, real estate and hedge funds) account for almost half (46%) of respondents' portfolios. The size of the private equity allocation is similar to that of the public equity, at 22%. Private equity fund investment (12%) is slightly higher than direct private equity investment (10%). Concentrated holdings are one of the common sources of wealth for family offices, usually invested in a company that the family has founded and is growing rapidly. Two-thirds of global respondents said they have a concentrated holding in public or private companies. In addition to concentrated holdings, a local bias (i.e., a bias towards the local market) can also pose a threat to existing wealth. However, this phenomenon is present in family offices in all regions.
Asset Allocation – by Category
The overall asset allocation is beginning to reflect the tactical and strategic reassessments mentioned above. In this year's survey, we divided private equity and real estate into two categories: fund investment and direct investment, and further broke down the asset allocation.
Global Overview
Family offices continue to favor alternative investments, with private equity and private credit, real estate and hedge funds collectively accounting for 46%. Cash allocation is 12% and fixed income is 16%. The allocation of public equity and private equity is the same, at 22%, and private equity fund investment (12%) is slightly higher than private equity direct investment (10%). Among alternative investments, family offices continued to invest in real estate (17%), with direct investment accounting for the majority (14%). Despite the potential benefits of hedge funds for diversification in times of market turmoil, respondents' preference for hedge funds remains low (4%). Private credit allocation is still low (3%), but 44% of family offices are optimistic about private credit, so private credit allocation is expected to increase in the coming months.
Real estate has long been a major component of the assets held by many family offices and is one of the channels for creating family wealth. During the Family Office Leadership 2023 event, we explored the challenges and opportunities facing this key sector of real estate. The panel expressed the following views: While the commercial real estate sector faces issues such as rising interest rates, high vacancy rates and debt imminentness, there are also some bright spots, such as travel and hospitality, both of which are benefiting from "revenge tourism" in the post-pandemic era. The recovery in manufacturing capacity has boosted industrial real estate, especially in the United States. Investors who value quality over quantity can choose investment opportunities in high-end, multi-family and office real estate around the world.
Divided by asset management scale
Overall, the configuration of family offices is broadly similar regardless of size. Specifically, smaller family offices have a relatively slightly higher allocation to cash and fixed income, most likely due to their lower preference for illiquid assets.
By region
The asset allocation of family offices is broadly similar across regions. Specifically, the fixed income share of Latin American family offices (30%) is much higher than the average in other regions (13.7%). The cash holdings of Asia-Pacific family offices (18%) are higher than the average in other regions (10.3%). The share of private equity direct investment by North American family offices (14%) is about double the average in the rest of the world (7.3%).
Asset Allocation by Region
Global Overview
Globally, North America (57%) has the highest regional asset allocation, followed by Europe (16%) and Asia Pacific (excluding China) (11%). In terms of regional distribution, there is a clear local preference for family offices, as detailed below.
By region
Headquartered in North America, family offices allocate an average of 80% of their assets to the North American domestic market. Family offices in other regions also show a local bias: EMEA (47%), Asia Pacific (56%), Asia Pacific (excluding China) (30%) and Latin America (30%). EMEA headquartered family offices accounted for 47% of assets in the U.S. market, Asia-Pacific family offices accounted for 30% of assets in the U.S. market, and Latin American family offices accounted for 54% of assets in the U.S. market. North America, Latin America and EMEA have the lowest allocation to the Asia-Pacific region.
Concentrate your positions
Overall, two-thirds of respondents reported a concentrated exposure to listed or unlisted companies. While concentrated asset allocation is a typical feature of the early stages of wealth creation (usually in the form of the creation of a business), the later stages of concentrated holdings can pose an unnecessarily significant threat to wealth preservation.
Global Overview
Almost two-thirds of family offices have concentrated holdings. The "concentration" here, of course, is relative to the sheer scale of their sheer wealth.
In the Family Office Leadership 2023 campaign, we explored the key considerations and strategies for families seeking to liquidate or exit their concentrated holdings. Participants commented that family-owned and highly controlled companies could seek to bring in external capital, acquire equity interests in existing family shareholders or external shareholders through acquisitions and/or other growth initiatives, and deleverage balance sheets through equity strategies to enhance operational flexibility. It is important to maintain a robust governance structure, develop a well-thought-out succession plan and long-term vision, and ensure that stakeholders and family members are aligned and cohesive. Sovereign wealth funds are one of the sources of long-term patient capital to better meet family expectations for long-term peace and prosperity, and partnerships with like-minded private equity firms are a fruitful way to do so. 【To be continued】Please stay tuned for the next issue.