Expert Wealth Management
“What should I invest in now?” It’s the million-dollar question – literally, in many cases. It’s also the question we hear wealthy families and business leaders always ask. This question gains urgency when considering alternative investments, a response to the current global context of geopolitical tensions, soaring interest rates, and rampant inflation.
As an ultra-high-net-worth individual (UHNWI) or a business owner sitting atop trapped capital, financial management may seem like a tightrope walk between two skyscrapers – one of capital preservation, the other of wealth growth. Although traditional financial markets have demonstrated long-term reliability, they might not offer sufficient diversification, especially for multi-generational family wealth. Alternative investments such as private equity, real estate, and private debt provide additional options for achieving these objectives.
High-net-worth families and individuals often collaborate with family offices to obtain the specialized expertise and tailored strategies required to navigate this complex financial environment. For further insights into how family offices contribute value, refer to our preceding article.
Let’s explore some of the alternative asset classes that typically resonate with affluent families looking for direct investments, and how these are being affected by current market conditions.
Navigating the Complex and Rewarding World of Private Equity and Venture Capital
Since the summer of 2022, with the onset of interest rate hikes by central banks, the private equity (PE) and venture capital (VC) sectors have encountered substantial obstacles in investment activities, fundraising, and exit strategies. Buyers and sellers are struggling to agree on asset values, and even when they do, financing remains a hurdle.
Private Equity
Private equity performance
Despite these challenges, PE has consistently outperformed public stock markets, achieving an average annual excess return of 5.3% and a total return of 13.4%, according to Bain & Company. This isn’t luck; it’s skill. Great fund managers have a knack for picking companies with promise, and then rolling up their sleeves to improve operations and streamline finances.
The Family Office Connection
Family offices have recognized the potential in PE, shifting from a predominantly passive role in fund-level investing to a more active stance in direct investments. They have emerged as a crucial source of funding for growing companies.
Investment Approaches
There are two primary pathways to engage in PE and VC: pooled funds or direct investments. Both approaches have distinct advantages, and family offices must judiciously choose between fund managers and target companies.
Crafting a Strategic Approach
Family offices need a clear strategy that not only targets financial returns but also accounts for factors like control, diversification, impact, and education—especially for the next generation, or “NexGen.” They must define their role – whether as hands-on operators, active or passive investors, or asset allocators – which will significantly influence their investment strategy and implementation.
Additionally, family offices should tailor a strategy that leverages their distinct strengths, such as operational or industry expertise, a relevant network, or experience in owning and managing a family business. Honest self-evaluation is key to identifying areas where they can add significant value, particularly when aligning with family-owned businesses seeking investment but cautious of external investors.
Venture Capital: A Petri Dish for Innovation
VC is an essential field for those interested in innovation and disruptive growth. With over 40% of US IPOs being venture-backed, according to the National Venture Capital Association, VC stands out as a critical platform for emerging companies.
Historical Importance and Future Promise
VC has been a rewarding yet demanding playground for investors. The long-term nature of the investment, coupled with high risk and the necessity for extensive networks, makes VC a niche investment choice, not suitable for all strategies.
Role of Family Offices in Venture Capital
Family offices have become increasingly important in the VC ecosystem, providing not just funding but also invaluable expertise and support. They often focus their investments in sectors where they can apply their own experience or foster innovation, offering a unique combination of financial and intellectual resources.
Challenges and Intricacies
The complexities of sourcing deals, performing due diligence, and managing illiquid investments make VC a demanding asset class. Family offices must carefully consider these aspects, ensuring they align with their broader wealth management strategies and determining the extent to which VC fits into their portfolio.
Looking Beyond Financial Returns
While VC is known for offering uncorrelated returns and potentially higher long-term gains, its appeal to many family offices extends beyond mere financial metrics. It provides an opportunity to influence sectors they are passionate about, such as healthcare or climate technology.
Developing a Strategic Framework
No one should enter VC on a whim. Engaging in VC requires a carefully crafted strategy that addresses both financial and non-financial objectives. Given the competitive nature of the VC market, family offices also need to assess their access to high-quality investment opportunities.
The Road Ahead
Presently, family offices are focusing their VC investments on rapidly evolving sectors like medical devices, healthcare, gaming, and climate technology. Those new to VC must be prepared for a steep learning curve, best navigated by cultivating networks and accumulating hands-on experience.
Investing in Private Debt: High Yields in a High-Interest World
In the current climate of economic fluctuation and modest growth, private debt emerges as a highly attractive asset class.
Past and Present: The Appeal of Private Debt
Private debt has demonstrated an impressive average annual return of 8.3% over the past decade, according to Preqin. Its robust performance and resilience amidst market shifts have made it a preferred choice for many investors.
Advantages of Private Debt
For lenders, private debt presents attractive risk-adjusted returns and acts as a buffer against inflation and rising interest rates. Borrowers favor private debt for its expedited process, simplicity, and the potential for fewer lending parties – aspects particularly valuable in today’s unpredictable economic climate.
Emergence of Family Offices in Private Debt
Recently, family offices have begun to tap into the potential of private debt, recognizing its role in providing stability and higher yields in the current high-interest-rate scenario. These offices are increasingly pivotal in offering direct private credit solutions, with greater loan structuring flexibility compared to traditional financial institutions.
Global Expansion of Private Debt
Although the US is a major player in private debt, opportunities are abundant globally. Family offices are expanding their horizons, seeking diversified lending opportunities, especially in Gulf countries.
Future Prospects of Private Debt
Given its attractive features and strong historical performance, private debt is poised to remain a significant asset class. For family offices, it represents a chance to balance risk and return while leveraging their distinct capabilities in loan structuring and capital provision.
Real Assets, Real Opportunities: The Enduring Appeal of Real Estate Investments
The Timeless Attraction of Real Estate in Investment Portfolios
Real estate has long been a staple in diversified investment portfolios, prized for its balance of risk-adjusted returns and potential for capital preservation. This asset class holds a unique allure for family offices, but what factors contribute to its irresistible charm?
Steady Performance: A History of Strong Returns
Data from Benefit Street Partners reveal that private real estate has delivered an impressive average annual return of 8.7% over the last twenty years. This robust performance underscores real estate’s reliability and profitability as an investment choice.
Diverse Investment Spectrum in Real Estate
Real estate investment is not a monolith. It encompasses a dizzying array of segments, from residential and commercial properties to industrial spaces and undeveloped land. Recently, non-traditional sectors like student housing, medical facilities, and assisted living communities have attracted significant attention from family offices.
Why Family Offices Love Bricks and Mortar
Family offices have a diverse approach to real estate, influenced largely by the origins of their wealth and their investment objectives. Some have amassed their fortunes through real estate, naturally gravitating towards further investments in the sector. Others seek real estate for diversification or unique opportunities absent in public markets.
Complexities of Direct Real Estate Investment
Direct investment in real estate is intricate yet potentially lucrative, demanding considerable expertise. Family offices face challenges in identifying investment opportunities, formulating business strategies, arranging financing, and performing due diligence. A critical decision involves choosing between self-managing properties or employing external management.
Real Estate and Social Impact
Increasingly, family offices are considering the social impact of their real estate investments. By funding projects like low-income housing or specialized accommodations, they can make a tangible difference in society.
Measuring Real Estate Investment Success
The measure of a successful real estate investment often boils down to its equity multiple. For those considering direct investments, the key question is: “What would the financial outcome be if the property were sold for the same price at which it was acquired?”
Infrastructure: The Bedrock of Tomorrow
The Essential Role of Infrastructure
In an era marked by rapid technological advancements and economic growth, infrastructure is the cornerstone of modern society. Key sectors such as transportation, energy, utilities, and telecommunications are not just facilitators of societal advancement but also attractive avenues for financial investment, noted for their resilience and low volatility.
Infrastructure: A Market Poised for Expansion
2023 highlights the robustness of the infrastructure sector, even amidst economic fluctuations. According to McKinsey & Company, global infrastructure investments are projected to soar to an astonishing $49 trillion by 2030, indicating significant growth prospects.
Adapting to Global Shifts: Embracing Sustainable Investments
With a global shift towards sustainable energy, infrastructure investments are aligning with this trend. The renewables and natural gas sectors are becoming prime investment targets, especially for family offices.
The Synergy of Family Offices and Infrastructure
Family offices, with their extended investment horizons and adaptable capital structures, are ideally suited for infrastructure investment. These characteristics make them apt investors for projects that might be less appealing to traditional firms due to their scale, complexity, or long-term nature.
The Importance of ESG in Investment Decisions
Family offices are increasingly prioritizing environmental, social, and governance (ESG) considerations in their investments. In infrastructure, this translates to ensuring that projects are sustainable, ethically managed, and beneficial to local communities.
Leading the Way into the Future
The significance of infrastructure as an investment class continues to grow. With their ability to invest over the long term and their focus on ESG factors, family offices are well-positioned to make a profound impact, contributing significantly to the development of foundational projects that will shape future economies and societies.