A report by UBS Global Wealth Management earlier this month revealed that single family offices around the world are delving deeper into private markets in response to high inflation, rising interest rates and central banks reducing their market support. .
Of the 221 family offices surveyed — with an average net worth of $2.2 billion — many plan to shift their strategic asset allocation to focus on private equity, real estate and private debt. Strategic asset allocation reflects an investor’s long-term perspective.
“Most family offices are looking at all of this with the view that inflation #1 will eventually subside but will be at higher levels than pre-Covid; number 2, that [central bank] As we all know, policy rates are rising but in reality they may not reach very high levels given the high level of debt from COVID; And #3, that growth is declining, but it’s not collapsing,” said Max Kunkel, chief investment officer for wealth management division Global Family and Institutional Wealth.
Given this approach, family offices need to consider “what asset allocation will help me achieve my overarching goal – growing wealth with the lowest possible real volatility.” ‘ says Kunkel.
Unlike many investors, these wealthy families, all of whom are UBS clients, can tie up their capital for many years with peace of mind, earning better returns than investing in liquid public markets. Is.
penta recently spoke with Kunkel and Joseph Stadler, Executive Vice President of UBS Global Wealth Management, about this private markets shift by some of the world’s wealthiest investors.
move away from government bonds
The survey shows that rising inflation rates around the world are prompting family offices to consider the role of bonds and cash in their portfolios. For years, some have trimmed public fixed income because of low yields and the possibility that bond yields will rise (which means the prices of those securities will fall).
Fixed income has been under pressure from rising interest rates and inflation expectations for about a year and a half, says Stadler. This has led to a correction in interest rate sensitive securities, which has been accompanied by a stock market correction. The broader US index, the S&P 500, for example, lost more than 18% for the year due to Monday’s close.
“The fundamental question is to what extent this interest rate volatility will stop so that the asset class can be reinvested,” says Stadler. “We don’t know.” Rate hikes could stop now, or short-term rates could rise to 4.5% (from around 3.2% today). Until there is clarity, “the vast majority of our clients — a significant majority — are unable or required to use fixed income,” Stadler says.
In addition, he added, investors are witnessing secular change, which is bad for bonds. “We were used to low inflation, low interest rates and high growth; Now we [experiencing] High inflation, high interest rates, low growth,” says Stadler. “It’s a tectonic shift that will continue for a while.”
change in real wealth
In response, the single family offices surveyed by UBS are turning to real estate as part of the options. According to the survey results, 21% of fixed income investors prefer to invest in real estate, particularly in China, Middle East & Africa and Latin America. In the next five years, 37% of the family offices surveyed plan to increase their allocation to real estate.
“Ultimately, it comes down to what role fixed income plays in the portfolio,” says Kunkel. “Is it mainly about delivering products? Or primarily for diversification? Or should it deliver relatively low returns with low volatility at the same time?
Families are also increasingly considering personal loans. In 2021, this asset class accounted for around 2% of the assets of the family offices surveyed. But 27% of bureaus plan to invest in private lending offerings over the next five years, UBS found.
Private credit markets offer family offices opportunities to invest in loans, often to mid-market companies that might not otherwise have access to credit due to increased regulatory demands on banks, Kunkel says. Investing in these personal loans typically gives investors access to high-yield, adjustable-rate loans that are attractive in a rising-rate environment.
Preference for direct private equity
In 2021, the strategic asset allocation for households was broadly the same as in the previous year and in the previous year. UBS surveyed 191 households last year and 121 households in 2020, the first year of the survey. An exception to this continuum was private equity, whose share of assets steadily increased.
In 2019, households invested 9% in direct private equity and 7% in private equity funds and funds of funds; By 2020, this allocation increased to 10% for direct investments and 8% for funds. In 2021, direct investment grew to 13% of assets, while investment in the fund remained flat.
The main reason for this steady change is simple: 74% of households expected to increase their private equity allocation believe these investments will continue to outperform public equity, the survey found.
In addition, more than half of the households surveyed believe that private equity offers a broader investment universe than is available in the public markets. For example, in the US, the number of new IPOs rose from 380 in 2000 to 165 in 2020, while the number of private equity-backed companies more than quintupled from 1,698 in 2000 to 8,892 in 2020, UBS said.
“Public markets are becoming more concentrated and private markets more accessible,” he says.
Family offices also tend to make direct investments because they see it as “an extension of the client’s entrepreneurial activities,” says Kunkel.
He says these offices often spread risk and invest in direct investments where they believe they can add the most value. It is important, says Kunkel, that family offices do not blindly invest in private equity.
“They focus on diversification, due diligence and where I have a different approach,” he says. “If you don’t fully understand what you’re investing in, don’t invest in it. If they don’t see it [a given investment] Because the risks they face vary widely, they are generally more cautious about them. When they see that they have no difference, they reconsider whether the allocation should be as high as they might have thought before. ,
The survey found that 42% of family offices surveyed expect to increase their direct investment allocation over the next five years and 38% expect to increase their financing allocation.
what lies in the pit of the future
Overall, these families’ strategic asset allocation split 57% into traditional asset classes and 43% into options including private equity and real estate.
Over the past year, the total allocation was 60% to traditional assets and 40% to options. Even if it is difficult to predict what the survey results will show next year, Stadler says: “The trend is clear.”
One change that could be visible next year is sustainable investing. The survey found that 56% of family offices worldwide use sustainable strategies, with the percentage varying by location. American households invest only 39% in sustainable strategies, while Middle Eastern households invest 70% of their investments.
While the overall percentage of properties dedicated to these strategies has not changed over the years, family offices surveyed this year indicated that they were more selective when it came to implementing sustainability standards and environmental, social and governance considerations went. There is a lack of “ambiguity as to where the trend is going,” says Stadler.
According to the survey, investors are relying on so-called greenwashing and are looking for ways to better assess the effects. Investors are starting to say that “perhaps it’s best for us to do our analysis and draw our own conclusions before we ask people what they think about us — that’s new,” Stadler says.
It’s possible that more investors will consider private market investing, which can give them more control, especially when investing directly in companies. Just as households have turned to private equity and personal loans, “that would also be a natural follow-up to sustainable investing,” he says.