A survey of US family offices, carried out through February to May, delves into what concerns they have, how they measure success in investment, and their attitudes to risks such as equity valuations and inflation.
(An earlier version of this article was released on Family Wealth Report, sister news service to this one. Given the global nature of some of the trends expressed, we republish it here as we hope readers find this valuable.)
Single family offices are highly focused on keeping costs in check and most aren’t likely to hire third-party consultants, according to a survey charting the way in which these institutions behave.
The median number of staff for a single family office is eight. The median number of staff dedicated exclusively to investing is two. Larger family offices tend to hire in-house investment teams, especially if their focus is on idiosyncratic markets/strategies, which require specialisation, such as direct investments, a survey by Fidelity found.
The 2021 Fidelity Family Office Investment Study, which surveyed 127 respondents from across the United States representing over $600 billion in assets under management, found that 39 per cent of respondents said they have used third-party consultants (stable compared with 38 per cent in 2019). Of those who engaged consultants, 80 per cent have hired them on a non-discretionary basis, while 20 per cent have hired them on a discretionary basis.
Among other findings, the survey found that family offices have different ways of measuring investment success. Some 35 per cent use an absolute return target; 28 go for a relative return yardstick; 4 per cent have an absolute risk target; 10 per cent say they aim to beat “the market” in rising markets and not lose markets when they drop; 11 per cent have “other” targets, and 12 per cent don’t have a specific goal.
Family offices, on average, have a 44 per cent allocation of all assets to equity (70 per cent public equity and 30 per cent private); fixed income takes 10 per cent (55 per cent public, 45 per cent private), and 10 per cent goes to real estate.
Asked about the largest risks to investments for the next three to five years, 28 per cent said they worried about valuations; 22 per cent said inflation, and 18 per cent mentioned a hike to interest rates. Among those identifying inflation as their top risk, the top three ways of dealing with it were increasing cash, increasing liquidity, and de-risking within asset classes. Interestingly, 32 per cent said they were not planning to make any changes to handle inflation.
As regularly reported by FWR, family offices have been eager direct investors in companies and buildings, bypassing the fees levied by funds, and also important investors in private markets, aiming for higher returns to compensate for lower liquidity. Fidelity found that the top three illiquid asset classes family offices put most focus on this year were private equity (74 per cent); venture/growth equity capital (66 per cent), and direct real estate (53 per cent). Some 73 per cent said they were likely to put any additional hires of staff to the illiquid assets area, rising from 59 per cent when that question was asked in 2019.
More than half (54 per cent) of family offices participate in club deals currently. Roughly one in five (22 per cent) of family offices say that co-investing is extremely important for their office’s investment strategy currently, and about one in three (31 per cent) say that they expect co-investing to be extremely important in the next three to five years.
Most family offices (80 per cent) who co-invest do so with PE managers. For nearly three-quarters of these cases (71 per cent), managers charge fees, though mostly discounted.
The majority of family offices (77 per cent) look to their peers for generating investment ideas. Partnering for co-investment requires a strong personal rapport between partners, which is likely why roughly one-third of offices (32 per cent) consider finding the right manager a hurdle, behind being too time consuming (42 per cent) and having an understaffed family office (36 per cent).