Solutions for borrowers, brokers and investors

What We're Reading: Alternative investments play a role in long-term wealth accumulation

What We're Reading: Alternative investments play a role in long-term wealth accumulation

Date Posted: November 1, 2017

Category: ACC / What We're Reading

We read and enjoyed this article and report from iCapital Network out of the US. 

Some takeaways:

  • "With the investment landscape becoming ever more complex and a number of longstanding investment paradigms facing an uncertain future, it has become increasingly difficult to meet portfolio goals using traditional means."
  • "The research showed that 90 percent of single-family offices maintained or increased their private equity exposure over the past year whether through funds or direct deals."
  • "About 40 percent of second-generation single-family offices are investing at least 15 percent of their total portfolios into alternatives, compared to 20 percent of first-generation single-family offices allocating at this level."
  • "Another reason for the shift towards direct deals is the desire to avoid the fees associated with gaining private equity exposure via third-party funds."

iCapital Report: Alternative Investments Key Part of Single-Family Office Portfolio Strategy

Source: Newswire.com

Alternative Investments Key Part of Single-Family Office Portfolio Strategy

90 percent of single-family offices maintained or increased private equity exposure; Next generation has greater appetite for alternatives

PRESS RELEASE  UPDATED: NOV 9, 2017 09:41 EST

NEW YORK, NY, November 9, 2017 (Newswire.com) - ‚Äč‚ÄčiCapital Network, the financial technology platform democratizing alternative investments for high-net-worth (HNW) individuals and their advisors, today released its second report reviewing single-family office investment activities across private equity funds, hedge funds and direct deals. This report follows iCapital’s 2015 report on single-family office investment activities specifically in private equity.

The report is based on data collected from more than 150 single-family offices, the ultra-private organizations that help the world’s wealthiest families oversee their financial and personal affairs. iCapital’s research aggregates the behavior of these exclusive and difficult-to-reach organizations to offer a rare representation of their alternative investment preferences. The findings indicate that of single-family offices that invest in alternatives, an overwhelming majority (87 percent) allocate a meaningful portion of their portfolios to these types of strategies, consistent with the level of institutional allocations, and many expect to increase their investments moving forward.

“Our research demonstrates that single-family offices, which otherwise hold complex priorities unique to the family they serve, are united in a belief that alternative investments can play a role in long-term wealth accumulation,” said Lawrence Calcano, chief executive officer of iCapital Network. “These organizations are sophisticated investors that are comfortable trading liquidity to capture incremental return, and can embrace volatility to their advantage in periods of market dislocation.”

Our research demonstrates that single-family offices, which otherwise hold complex priorities unique to the family they serve, are united in a belief that alternative investments can play a role in long-term wealth accumulation.

 LAWRENCE CALCANO, CHIEF EXECUTIVE OFFICER OF ICAPITAL NETWORK

Study respondents represented a perspective of significant wealth: over three-quarters manage $500 million or more and over 30 percent manage in excess of $1 billion. Additionally, the report segmented data by first-generation and second-generation single-family office leadership, revealing that the younger generation of single-family offices not only allocate to alternatives in greater percentages, but are inclined to invest more in those asset classes, particularly direct deals, in the future.

“Single-family offices have the expertise and resources to choose asset classes they believe will generate the best returns and diversification for their portfolios,” continued Mr. Calcano. “Their investment behavior, which consistently includes higher levels of exposure to a core suite of alternative investments, arguably acts as a weather vane for retail investors looking to replicate these benefits.”

Majority of Single-Family Offices Allocate 10 Percent or More Across Core Suite of Alternative Investments

To understand how single-family offices are responding to the changing investment landscape, iCapital’s study segmented those single-family offices that are active in each of the three kinds of alternative investments — private equity, hedge funds and direct deals — and asked about how their allocations had changed in the prior 12 months.

  • The research showed that 90 percent of single-family offices maintained or increased their private equity exposure over the past year whether through funds or direct deals.
     
  • Eighty-seven percent of single-family offices surveyed allocate 10 percent or more to alternative asset classes, with over a quarter allocating 15 percent or more.
     
  • Private equity funds are the most popular type of alternative investment, with about 41 percent of single-family offices maintaining exposure, followed closely by hedge funds (39 percent). About a quarter of single-family offices invest in private companies on a direct basis.

“This level for private equity is consistent with the target allocations of many institutional investors,” said Nick Veronis, co-founder and managing partner at iCapital Network. “Arguably, families at the center of a family office may have a higher comfort level with private equity as an asset class if their family’s original capital was created by a successful private business, which is often the case for some of the oldest and most affluent families.”

Furthermore, the research showed that single-family offices are comfortable working with a broader range of alternatives than are normally found in high-net-worth portfolios: about two fifths of the family offices surveyed invest in private equity and hedge funds, and a quarter invest directly in private companies, which may include co-investing alongside managers as well as "club" deals with other family offices.

Alternative Allocations Predicted to Increase with Focus on Direct Investments

Looking ahead, single-family offices are generally interested in increasing their exposure to alternatives. Direct investing is particularly in favor, with 66 percent of those surveyed indicating they plan to participate in more direct deals. Nearly half (47 percent) of those surveyed plan to increase their private equity fund exposure and, though overall allocations to hedge funds decreased over the past year, over a third plan to increase their hedge fund exposure going forward.

“Single-family offices have varying goals with their direct deal programs – some are looking to diversify away from the traditional family industry, while others may be trying to find strategic investments that can generate synergies with the family business, gain tighter control of investments or simply utilize their expertise in a particular sector to uncover overlooked gems. But in general, they are all seeking to access assets that can grow faster than standard stocks and bonds,” said Hannah Grove, chief marketing officer of iCapital Network.

Rising Generation of Single-Family Office Leadership More Active in Alternatives than Predecessors

With many established single-family offices beginning to transition day-to-day control of operations to second-generation family members, the investment priorities and preferences of the younger generation are increasingly relevant. To capture the attitudes of these new decisionmakers, iCapital segmented family offices still managed by founding family members from those that have transferred control and legal ownership of the family office to the second generation. Research found that the second generation-led single-family offices are significantly more active in alternative investments than the first generation.

About 40 percent of second-generation single-family offices are investing at least 15 percent of their total portfolios into alternatives, compared to 20 percent of first-generation single-family offices allocating at this level.

When queried about their actual change in alternative asset class allocation over the last year, almost a third of second-generation single-family offices had increased their hedge fund exposure, compared to just a tenth of first-generation single-family offices. Strikingly, 70 percent of second-generation family offices increased their direct investment allocations relative to last year, compared to less than half of the first-generation family offices surveyed.

Looking Forward: Second-Generation Single-Family Offices Expect to Invest Even More Heavily in Alternatives

Going forward, a larger percentage of second-generation single-family offices will likely make greater use of the full range of alternative investments than first-generation single-family offices. For every type of alternative investment, the second generation was more likely to increase their allocation in the future, with a particular discrepancy between the two generations for both hedge funds and direct deals:

  • For private equity funds, 42 percent of the first generation was likely to increase their allocation compared to 54 percent of the second generation.
     
  • For hedge funds, 23 percent of the first generation was likely to increase their allocation compared to 59 percent of the second generation.
     
  • For direct deals, 56 percent of the first generation was likely to increase their allocation compared to 82 percent of the second generation.

“Second-generation family offices often represent lower AUMs than their first-generation counterparts due to wealth dilution from the founder to multiple heirs,” said Eileen Duff, managing partner and head of distribution at iCapital Network. “Lesser amounts of absolute wealth may also be contributing to the shift in mindset from wealth preservation to wealth accumulation, driving a re-examination of investment strategies and allocations as well as institutional best practices.”

“Simply put, second-generation single-family offices appear to be actively looking for higher returns and expect alternative investments to provide them,” continued Ms. Duff.

For a full copy of the report, click HERE.

About the Research

This research was conducted in partnership with Prince & Assoc, Inc., a specialty research operation that has studied family offices consistently over the past 30 years. Data was collected using chain referral sampling from 157 single-family offices during the second half of 2016 and the first half of 2017 in an effort to examine how single-family offices invest in a core suite of alternative investments, including private equity funds, hedge funds and direct deals.

SFO respondents met the following criteria:

  • a separate legal entity distinct from other operating companies and businesses of the ultra-wealthy family;
     
  • an entity that serves as a primary source of investment management services either directly or through select third-party managers;
     
  • an entity that the ultra-wealthy family refers to as a “family office.”