INSIGHTS
                     
The Rising Generation of Wealth and Alternative Investments

May 2018 by Hannah Grove

THE RISING GENERATION OF WEALTH AND ALTERNATIVE INVESTMENTS - CoverFamily offices are long-time advocates and users of alternative investments, and recent research indicates that the commitment to alternatives – including private equity funds, hedge funds and direct investments – increases as leadership of the family office transitions to younger wealth holders.

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Family offices are long-time advocates and users of alternative investments, and recent research indicates that the commitment to alternatives – including private equity funds, hedge funds and direct investments – increases as leadership of the family office transitions to younger wealth holders.

In a Q4 2017 survey conducted with 157 single-family offices (Figure 1), nearly nine out of 10 respondents said they allocate 10% or more of their portfolio to alternative investments and nearly one-third of single-family offices allocate more than 15% to alternatives (Figure 2).

Figure 1 - Investable Assets of SFO Respondents Figure 2 - Percentage of Financial Assets in Alternatives

Interestingly the single-family offices in our study that were run by second-generation family members were more likely to maintain higher overall allocations to alternatives, more likely to be investing in private equity, hedge funds and direct deals, and more likely to increase those investments moving forward when compared to offices run by the first generation.

With many established single-family offices beginning to transition day-to-day control of operations to second generation family members, the investment preferences of the younger generation are becoming increasingly relevant – so we segregated family offices still managed by founding family members (G1) from those that have transferred control and legal ownership of the family office to the second generation (G2) to understand more about how the two generations view alternatives.

Rising GenerationOne of the key insights from our research is that second generation-led single-family offices are significantly more interested, active, and likely to increase allocations to alternative investments. This was evidenced by their proportionally greater commitment of financial assets to alternatives, greater use of different kinds of alternative investments, and relatively greater increase in allocations to alternative investments over the previous year, particularly in hedge funds and direct investments in privately held companies.

About 40% of second generation single-family offices are investing 15% or more of their total portfolios into alternatives, compared to 20% of first generation single-family offices that are investing at similar levels. This difference is driven by a sophisticated subset of second generation family offices who are allocating over 20% of their financial assets to alternatives. Second generation single-family offices in general are also inclined to invest in more types of alternatives, particularly direct deals. 

Going forward, a larger percentage of second generation single-family offices are much more likely to make greater use of the full range of alternative investments (Figure 3) and these forward indications mirror what family offices have actually done over the past year. Almost a third of second generation single-family offices surveyed increased their hedge fund exposure, compared to just a tenth of first generation single-family offices. Even more striking, 71% of second generation family offices increased their direct investment allocations relative to last year, compared to less than half of the first generation family offices surveyed.

Figure 3 - Generation Split - Likelihood of Increasing Alternative Investments

DRIVERS OF SECOND-GENERATION INTEREST IN ALTERNATIVES

There are several possible reasons for the more aggressive use of alternatives by second generation-led single-family offices.

• First generation family offices are generally established with the intent of overseeing and protecting much of the family’s financial assets, but may not be seen as significant engines of wealth creation. Family office founders, by definition, have amassed their personal wealth through other business ventures, in contrast to their heirs who, while they may have established professional careers, often view the family office as a more meaningful driver of their wealth and are thus relatively more interested in employing alternative investments to actively grow assets.

• The varied and often extensive professional experience of heirs is also a driving force behind the growing institutionalization of many family offices, as these younger family members seek to adopt the best practices they have encountered in other organizations.

• We also noted a pronounced overall difference between the two generations with respect to the assets they are managing. Generally speaking, the first generation single- family offices are investing greater sums. These differentials are driven in part by wealth dilution from the founder of the family office to multiple heirs. Lesser absolute amounts of wealth may also be contributing to the shift in mindset from wealth preservation to wealth accumulation, driving a reexamination of investment strategies and allocations as well as institutional best practices. Simply put, second generation single-family offices appear to be actively looking for higher returns and expect alternative investments to provide them.

WILL THIS TREND PERSIST?

Family wealth can be mercurial. Each generation has its own lens through which the obligations and opportunities of multi-generational wealth are seen, and that perspective is further influenced by personal experiences, lifestyle and family values, among other factors. The current levels of interest we have seen from rising generations in running their family offices and taking an active role in establishing and implementing investment strategies may be eclipsed by other priorities and interests as social and ideological belief systems and the broader economic climate continue to evolve.

The old proverb "shirtsleeves to shirtsleeves in three generations" (and similar regional variations) continues to be a touchstone in the private wealth community because what compels and propels one group of people may not be as fascinating for another group, even if everyone involved shares DNA. It’s impossible to predict what will be of interest to the rising generations of family wealth – only that there are assets in motion between today’s decision-makers and their inheritors, and the latter group will need assistance structuring and managing those assets to achieve their financial and personal objectives.


IMPORTANT INFORMATION / DISCLAIMER

The data presented in this article was collected by iCapital Network as part of a 2017 research study with 157 single-family offices with AUM of at least US$250 million about their use of and perspectives on alternative investments. The complete findings are available in Single-Family Offices and Alternative Investments. This industry information, including iCapital’s findings regarding its 2017 SFO survey, and its importance is an opinion only and should not be relied upon as the only important information available. This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation to buy, or as an offer to sell, any interest in any fund or security offered by iCapital. Past performance is not indicative of future results. Alternative investments such as those described are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. All rights reserved.