When it comes to finances, everyone, rich or otherwise, has the same aim: preserve and build capital. The end goal may be different, with some aiming to grow already substantial holdings, some trying to grow a nest-egg for retirement and others playing to get rich.
In the pursuit of financial security and prosperity, it helps to pay attention to what the wealthiest families and individuals are doing with their money. These are investors with a lot of resources, as well as access to advice and opportunities out of reach of most people. But their strategies and allocations can help signal for the rest of us what the “smart money” is betting on, and what opportunities are considered best for the creation and preservation of generational wealth.
One thing that stands out immediately in a review of the allocation strategies of the ultra-wealthy is a growing love of alternative investments. According to the latest “Global Family Office Report” produced by UBS in association with Campden Research, the average family office had 45.4% of its invested capital in alternative assets.
In this research note, we take a look at this trend and what everyday investors can learn from it.
Direct investment is in vogue
A first thing to note is that allocations to real assets have been on the rise in recent years and remains a very popular investing strategy for large family offices. According to the UBS family office report, 17% and 14% of alternative asset allocations are to direct investment in real estate and private equity, respectively. Family offices, much like the big pension funds, have gotten increasingly sick of middlemen and management fees. Thus, they have taken many investment decisions in-house.
Cutting out the middleman has forced funds to slash fees and search for ways to provide value-adds to entice family office allocators. As overall investment in alternative assets continues to grow rapidly, funds have not suffered too badly as yet. But they will need to adapt and offer a superior service to be worth allocators’ time, especially as an increasing number of family offices (and pension funds) build out their own internal capabilities to be nearly as sophisticated as those of professional fund managers.
Real estate is tried and trusted
Real estate has always been popular among the wealthy, and indeed all people. For most savers, their home is by far their largest and most important asset. For big family offices, there is more room to maneuver, but the underlying appeal of real property as an asset class that is easy to understand and that can offer opportunities for both value appreciation and income-generation.
It is thus no surprise that direct investment in real estate has grown to represent 17% of the average family office alternatives portfolio. But direct real estate investment is not the only exposure family offices usually have to real estate. Private funds and REITs are also heavily represented in most portfolios.
Private equity continues to grow
Buying out, or investing in, private businesses directly, rather than through private equity funds has been growing in popularity in recent years. Once, these sorts of transactions were considered too sophisticated for a family office or wealthy individual to undertake. But the aforementioned growing sophistication in these organizations has changed that story. It actually makes a degree of intuitive sense that wealthy families would be attracted to private businesses, as family office executive Richard Clarke-Jervoise explains quite aptly:
“Private equity is very intuitive for a family, because for most families, that’s where their wealth came from, it was created by a private company of one sort or another, so they get that. And they understand risk completely from that point of view.”
That makes sense. A large part of generational wealth is the product of growing a private business to scale and then taking it public or selling it off, so seeing similar opportunities with other businesses seems like a natural fit for their skillset.
What can we learn?
It is all well and good to talk about what wealthy family offices are allocating their capital. But it is quite another matter to devise a way to emulate their methods, or to even get exposure to the kinds of deals they can access.
Thankfully, there are growing opportunities due to loosening regulations on private asset investment, even by middle-class investors. Furthermore, funds are becoming increasingly open to smaller allocations. Perhaps most interesting is the rise of crowdfunding platforms, which have exploded in number and diversity. Some target specific sectors, such as health care companies, while others are dedicated to real estate.
While it is an investing method still very much in its infancy, it is set to grow by leaps and bounds over the next decade. So much generational wealth is created and grown thanks to access to companies and opportunities while they are at their most nascent phase of development. The real returns can thus be far greater than, say, investing in public markets or buying into a REIT.
The big takeaway for investors looking to follow the lead of the ultra-wealthy is this: Look for assets and businesses you understand and work to get exposure to them early.
Disclosure: No positions.
