Recent studies have revealed that large family offices are significantly moving away from traditional stock market investments in favor of alternative options. A new report by the JPMorgan Private Bank Global Family Office Report highlights that family offices now have 46% of their total portfolio allocated to alternative investments. These alternative choices encompass a diverse range including private equity, real estate, venture capital, hedge funds, and private credit. In contrast, family offices only have 26% of their assets invested in publicly traded stocks.
The study further delves into the specifics of American family offices, noting that those with assets exceeding $500 million are even more heavily concentrated in alternatives. The survey reports that over 49% of assets in these large family offices are invested in alternatives, while merely 22% is allocated to public stocks. This trend showcases a significant shift where family offices are stepping into the private markets to seek higher returns and lower volatility.
Family offices play a pivotal role in private equity markets, direct deals, venture capital, and private credit. With an astounding $6 trillion in assets being managed by family offices, they are becoming a dominant force in the realm of private investments. The report articulates that family offices often take a long-term perspective, investing for future generations. This extended time horizon allows family offices to capitalize on the “liquidity premium” offered by alternatives, granting better returns for patient capital.
Many family office founders are former entrepreneurs who have sold their businesses and transitioned into the world of private investments. These founders are now utilizing their family offices to acquire ownership stakes in other private companies. Leveraging their entrepreneurial experiences, they aim to facilitate the growth of these companies by providing strategic guidance and support.
William Sinclair, head of the U.S. Family Office Practice at JPMorgan Private Bank, predicts continued growth in family office investments in alternatives. He specifically highlights the potential rise in private credit investments and the need for better allocation in infrastructure, particularly digital infrastructure such as data centers. The study emphasizes the importance of keeping pace with evolving market trends and actively seeking new opportunities outside of traditional public markets.
Despite the strong emphasis on alternative investments, family offices still face challenges such as determining overall investment return targets. Surprisingly, less than half of family offices have clearly defined return objectives for their portfolios. This lack of clarity may hinder their ability to assess the success of their investments effectively. However, the report indicates that family offices are increasingly outsourcing functions to streamline operations and reduce costs. External advisors are being utilized for various tasks including investment management, trade execution, and cybersecurity measures.
With the rise of cyber threats, family offices are turning to financial institutions like JPMorgan for assistance in enhancing their cybersecurity measures. The survey revealed that 40% of family offices recognize cybersecurity as a significant gap in their capabilities, with nearly one in four admitting to experiencing a cyberattack. As digital threats continue to evolve, family offices are recognizing the importance of having robust cybersecurity protocols in place to safeguard their sensitive information.
The shift towards alternative investments by family offices signifies a broader trend in the financial landscape. By exploring new avenues beyond traditional stocks and bonds, family offices are positioning themselves to capitalize on emerging opportunities and achieve sustainable long-term growth. As family offices continue to evolve and adapt to changing market dynamics, it is essential for them to remain proactive in their investment strategies and seek advice from experts to navigate the complexities of the modern financial environment.