Coronavirus fallout has prompted single-family offices to reassess alternative investments such as private equity, according to a major new report from the private bank
In March of this year, 73 per cent of single-family offices expected private investments to outperform the public markets but, by May, that figure had fallen to just 51 per cent.
The figures come from a detailed UBS survey of principles and executives from 120 family offices with an average total wealth of $1.6bn, which is released today.
‘The average assets under management of the clients we surveyed is significantly larger than that of any other comparable study in the market,’ said Josef Stadler, head of the global family office division at UBS. ‘We can therefore say with confidence that our findings offer a unique window into the actions of the world’s biggest family offices.’
At the height of the crisis, the ‘immediate reaction of family offices’ was to view private equity with ‘greater caution’, the report notes. Just 28 per cent said in May that they expected to increase ‘direct private equity’ compared to 49 per cent ahead of the crisis.
However, the private markets continue to be important to family offices. Some 77 per cent remain invested in the asset class and more than two thirds (69 per cent) still view private equity as a key driver of returns.
‘For many business families, private equity is in the blood,’ noted the UBS report. ‘A third (34 per cent) of family offices describe private equity as a passion for the owner.’ What’s more, 35 per cent of family office principals and executives surveyed in May, during ‘the turbulent environment after the onset of Covid-19’, said that greater degree of control offered by private equity was ‘a plus’, compared to just 27 per cent of those surveyed in March.
The report also found that family offices had been able to weather the storm brought about by the pandemic. Respondents incurred an average maximum drawdown of 13 per cent during the March market downturn, but 77 per cent said portfolios have performed ‘in line with, or above, respective target benchmarks’ over the year to May. More than half (55 per cent) of families re-allocated their portfolios during March, when global markets recorded their worst month on record since October 2008.
Some 67 per cent of respondents said that their mid-term view ‘remains the same’, but a majority noted that they are seeking to make ‘tactical changes’ to portfolios in response to macroeconomic shifts. Some 45 per cent they were looking to ‘raise allocations’ in real estates, while 44 per cent said the same in relation to market equities and 38 per cent with regards to emerging market equities.
‘Family offices have behaved differently to others during one of the most volatile periods in the history of financial markets,’ said Stadler. ‘In some senses, we saw them take an institutional approach, applying meticulous asset allocation strategies and rigorous investment processes. However uncomfortable it may have been at times, they stuck to their plans and remained disciplined.’
Reflecting a broadly cautious approach, UBS said that ‘many’ family offices have added to their cash and gold reserves. Some 23 per cent indicated that they will lower their cash reserves over the next two-to-three years, while gold was viewed as more of a long-term beneficiary – some 45 per cent reported that they were looking to increase their exposure to the precious metal.
Succession planning was another key theme of the report, which found that the next generation, currently in their 20s and 30s, ‘do not comply with stereotypes’ and the next-in-line are more different than alike. Some 54 per cent of family offices says that the next generation are ‘just as interested’ in traditional investments as their parents, a total that climbs to 71 per cent in the US and Asia. Differences were still recognised, as 69 per cent of family offices reported that the ‘different generations have different passions’, but in another buck to stereotypes, only 48 per cent of respondents viewed next-gens as ‘pushing for an increase’ in sustainable investing.
Indeed, 73 per cent of family offices currently invest at least some assets sustainability, a total that UBS said it anticipates to accelerate. Some 39 per cent are intending to allocate ‘most’ of their portfolios sustainably in five years’ time.
The option of ‘exclusion-based’ strategies – removing investments that ‘don’t meet their values’ – are primarily targeted, making up 30 per cent of overall investments. The integration of Environmental Sustainable and Governance (ESG) strategies are set to double from a nine per cent share of portfolios to 19 per cent.