The Powerhouse of Private Markets: How Family Offices Cast Their Net Beyond Public Stocks
In the ever-evolving investment landscape, family offices, the financial havens of affluent families, are steering away from traditional stock markets and venturing into the realm of private markets and alternative investments. A recent study by JPMorgan Private Bank unveils this intriguing shift in portfolio strategies.
A Thriving Haven for Alternatives
The study reveals that family offices have allocated a substantial 46% of their total investment portfolios to alternative assets, such as private equity, real estate, venture capital, hedge funds, and private credit. Their enthusiasm for alternatives is evident across the globe, but it’s particularly pronounced in the United States, where family offices with ample assets are dedicating over 49% of their investments to this domain.
Breaking Down the Alternative Landscape
As for the specific distribution within alternative investments, private equity emerges as the leading choice, capturing 19% of family office holdings. Real estate remains a significant asset class, accounting for 14%, while venture capital, hedge funds, and private credit follow with their respective shares.
The Driving Force: Higher Returns and Lower Swings
This migration to private markets is fueled by family offices’ pursuit of higher returns and reduced volatility. Unlike publicly traded stocks that experience volatile daily fluctuations, alternatives offer steadier valuation adjustments, smoothening out the highs and lows.
Furthermore, family offices often possess extended time horizons, enabling them to hold assets for prolonged periods, thereby capturing the “liquidity premium” associated with illiquid investments.
The Savvy Entrepreneurs Behind Family Offices
Interestingly, the founders of many family offices have entrepreneurial backgrounds, having built and sold their own businesses. This entrepreneurial spirit drives them to invest in other private companies and leverage their expertise to foster growth.
Outsourcing for Efficiency, Cybersecurity for Protection
To streamline operations and enhance cost-effectiveness, family offices are increasingly outsourcing various functions, with smaller operations leading the trend. They turn to external advisors for investment management, access to skilled managers, and tailored portfolio construction.
Cybersecurity is also a critical concern for family offices, recognizing the rising threat of cyberattacks. They proactively seek support from reputable institutions like JPMorgan to safeguard their assets and mitigate risks.
The Pursuit of Returns and Performance Benchmarks
Despite their investment diversification, surprisingly fewer than half of family offices establish concrete return targets. Nevertheless, those that do have set their sights high, with a median return goal of 8%. To gauge their performance, family offices rely on various benchmarks, with larger ones often opting for customized benchmarks.
Conclusion
The JPMorgan Private Bank Global Family Office Report paints a clear picture of the investment strategies employed by family offices today. Embracing private markets and alternative investments, these financial powerhouses seek higher returns, reduced volatility, and the opportunity to align their investments with their entrepreneurial experience. Their strategic diversification and risk management practices position them for continued growth in the ever-changing financial landscape.
