Inflation and its repercussions on the world economy will play a significant role in determining the family office trends for 2023. These factors affect the way family offices think, invest, and work. A wonderful approach to guarantee that family money is properly handled and eventually passed to succeeding generations is by establishing a family office. Opportunities exist for people to increase their fortune as well as maintain their holdings, as some high-net worth individuals have done since the pandemic began. Threats, though, are constant. Your firm can reduce the risk and guarantee a successful operation by positioning and planning in the appropriate manner.
Family office mark upward trends, but economic outlook is pessimistic
According to a new survey from Campden Wealth in London and Royal Bank of Canada in Toronto, more than three-quarters of North American families saw an increase in wealth in 2022, but the majority of them have pessimistic economic outlooks. Furthermore, the results of a worldwide survey of 382 family offices, including 179 in North America, show that North American family offices are outperforming their international counterparts with 15% average portfolio returns, compared to 10% in Asia-Pacific and 13% in Europe. The average family wealth of the 95% single-family and 5% multi-family offices that took part was $2 billion USD. The survey discovered that green technology, healthcare technology, and artificial intelligence are the three most alluring sectors for increased investment among North American family offices in 2023.
It’s the first year the report has monitored allocations to the metaverse, NFTs, and Web 3.0, according to Rebecca Gooch of Campden Wealth. She says that it is interesting to learn that around one in four family offices in North America invest in the metaverse, one in ten in NFTs, and more than a quarter in Web 3.0—and that family offices expect to increase their spending in each of these areas in 2023. According to Gooch, many of the trends observed in North America mirror those in other places because the problems family offices face—such as inflation, rising interest rates, recession fears, climate change, and other issues—are felt globally.
Investment techniques to combat inflation
It might be wise to review your strategic asset allocations (SAAs) at this time. Holding cash and fixed income will not preserve or produce the returns a family office anticipates in this inflationary environment. According to William Sels, the global chief investment officer of private banking and wealth management at HSBC, a diversified portfolio containing a mix of real assets like stocks, gold, and real estate is a strong long-term buffer against inflation. He also says that family offices can match returns to particular sources of inflation outside of their main holdings. They could, for instance, consider making investments in automation development or reputable businesses with substantial profit margins.
In a survey conducted by Campden Wealth, 39% of family offices said they will increase their investment in healthcare in 2023. Green technology (35%) and biotech (34%), which are the other sectors most likely to see an increase in allocations, each have 40% of investors planning to do so. Due to their increased exposure to private debt, private equity, and real estate, family offices trends have discovered that the private markets serve as an effective inflation hedge. More information about private investments will be provided below.
Private equity drive top results
Compared to earlier in the epidemic, when gains were primarily driven by public equities, private equity is now taking center stage in the family office space. Family offices typically handle 10 deals concurrently, both globally and in North America, however around 25% undertake even more. Despite being more careful about de-risking their portfolios this year, family offices “are likely to preserve a reasonable amount of growth-oriented assets and to be on the lookout for opportune deals.” Venture capital investments, she continues, were the major incentive. The majority of private equity investments in North America—about 54%—are fund-based as opposed to direct, with private equity funds outpacing fund of funds by a wide margin—46% to 8%, respectively.
Private equity will probably play a part even though family office trends are moving toward some moderation, including more balanced investing strategies, according to Gooch. Despite being more careful about de-risking their portfolios this year, family offices “are likely to preserve a reasonable amount of growth-oriented assets and to be on the lookout for opportune deals.”
Poor economic outlook
In 2022, 86% of individuals polled in the 2021 North American family office report were optimistic about economic growth. But that was before Russia’s invasion of Ukraine rattled the global markets and U.S. inflation reached a 40-year high. This year, 68% of respondents have a pessimistic perspective for 2022–2023; no North American respondents said their attitude was “extremely optimistic.” According to Gooch, “family office trends view inflation, rising interest rates, geopolitical tensions, a dramatic drop in the stock market, and the slowdown in China’s economy as the most significant market concerns going forward until 2023.”
With 69% of participants from throughout the world reporting a pessimistic economic view, this low level of confidence was present globally. Gooch claims that in North America, this is pushing family offices toward risk-management tactics such portfolio diversification and mild moves to more conservative or preservation-focused positions. Private equity, which is starting to compete with stocks as the most sought-after asset class among family offices, real estate, and commodities are the main asset classes to keep an eye on in the upcoming year, she adds.
Lags in succession planning
The next generation isn’t adequately prepared to assume the financial helm, according to 61% of North American family office executives, despite trillions of dollars expected to change hands in the coming years. The third generation curse, which is the idea that most families lose their wealth by the third generation, could result from the fact that “many families don’t have adequate succession plans in place,” according to Gooch. She continues that this is a crucial time for families to focus on succession planning and next generation training. 40% of North American family offices state that there isn’t a next generation member competent to take over.
Currently, 49% of North American offices stated that they expect future employees to get experience before joining by working somewhere else, such as an investment bank or hedge fund.
