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Family Offices Increase Illiquid, Higher-Risk Holdings

By Crucial Clips     December 27, 2017
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Oct. 2, 2017 

BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hi. This is Bruce Love with Financial Advisor IQ. And I'm here with Dr. Rebecca Gooch, who is the Research Director of Campden Wealth. Rebecca, you've just finished this year's rendition of the Global Family Office Report. How's that been going?

DR. REBECCA GOOCH, RESEARCH DIRECTOR, CAMPDEN WEALTH: Yes, it's been a really busy year. It's a year-long process to produce this report. It's gone very, very well. This year, we had 262 family offices from around the world participate. In particular, in North America, 31% of those came from that region. So it's been a fantastic year.

BRUCE LOVE: Rebecca, what's been going on with family office investments this year?

REBECCA GOOCH: It's been a really positive year for family offices. Last year, we reported, unfortunately, that the average family office return stood at 0.3%, which was pretty low.

But this year, the space has really bounced back. So the average yield this year has been at 7%. North America, in particular, performed the best. So regionally speaking, the average return stood at 7.7%.

BRUCE LOVE: Rebecca, what was the asset allocation that led family offices to have such good investments this year?

REBECCA GOOCH: Yeah. Family offices raised more illiquid, higher-risk strategies this year. So they drove up their investment to equities, and they maintained their investment to private equity, and that really, really helped. So for instance, in North America, their average return stood at 7.7%. Their allocation to equities stood at about a third of the average portfolio there. And for private equity, it stood at about a quarter.

BRUCE LOVE: Why do you think they were turning to illiquid investments?

REBECCA GOOCH: I think they were chasing returns. I mean, last year, with the average global return standing at 0.3%, they really wanted to make up for the difference. And essentially, the risk paid off.

BRUCE LOVE: And this came through in real estate and hedge funds as well.

REBECCA GOOCH: Real estate and hedge funds didn't do quite as well. We saw in terms of allocations, allocations to hedge funds, globally speaking, stood at 8% last year, and it dropped down to 7.1% this year. Real estate kind of had a similar story. So allocations dropped 0.7% to 16.2% of the average family office portfolio.

North America speaking, both real estate and hedge funds, the allocation level stood at 10% each. So in a sense, the issue with hedge funds is that there was concern that they couldn't generate the kind of returns that were needed. So that's why they pulled back a bit.

And in terms of real estate, it's asset class that's maintained. It's maintained its position at third place in terms of who family office, or most likely, what family office are most likely to invest in. But it didn't perform quite as well.

BRUCE LOVE: And family offices have tended to embrace co-investment as well. Is that still the case? At least in previous years, they've been quite into co-investing.

REBECCA GOOCH: It's actually an interesting story this year with co-investing. Because last year, we asked family office executives, do you intend to do more co-investment deals, and they showed a real appetite for it. However, despite this, the level of co-investing actually dropped 5.5% to 9.4% globally, which is interesting.

So we wanted to find out why has there been this reduction, because we know the appetite's there for it. And what we came back with is essentially that family offices were having a bit of a challenge sourcing positive co-investment deals.

They were having a challenge with deal flow, sufficient deal flow. And they were also having a challenge with elements like due diligence. The average family office is only 12 people. So a lot of these areas, it can be a little bit tricky.

BRUCE LOVE: Rebecca, is deal flow and due diligence then something that advisors can help family offices with in co-investment?

REBECCA GOOCH: Yeah, it's definitely an area that they can help it. And they can also help, essentially, family offices look at other ways to co-invest, such as co-investing alongside funds. So help them a) show them how to build up their due diligence capabilities, and b), potentially show them opportunities for investing alongside funds rather than family-to-family co-investing.

BRUCE LOVE: Rebecca, thank you very much.

REBECCA GOOCH: You're welcome.