Large family offices have almost half of their investments in private markets and alternatives as they exit the stock market in search of higher returns and lower volatility, a new study shows.
Family offices have 46% of their total portfolio in alternative investments, including private equity, real estate, venture capital, hedge funds and private credit, according to the JPMorgan Private Bank Global Family Office Report released Monday. The family offices covered by the study had 26% of their assets invested in listed shares.
The study examined 190 individual family offices around the world, with an average of $1.4 billion in assets.
Large family offices in the US are even more focused on alternatives, the survey shows. According to the study, US family offices with over $500 million in assets had invested more than 49% in alternatives, of which 22% in public equities.
Of the alternative investments described in the study, 19% of family office holdings were in private equity, 14% in real estate, 5% in venture capital, 5% in hedge funds and 4% in private credit.
The shift from public to private markets represents a major shift in family offices, the private investment arm of wealthy families that have exploded in size and number in recent years. With family offices now deploying more than $6 trillion in assets, they are becoming a powerful force in the private equity markets, direct deals, venture capital and private credit.
William Sinclair, head of the US Family Office Practice at JPMorgan Private Bank, said that while stocks and bonds remain important to family offices, they are increasingly turning to alternatives for higher returns.
Family offices typically have a longer time horizon and invest for the next 50 to 100 years or more, so they can hold assets for decades and benefit from the so-called 'liquidity premium' of higher returns for more patient capital. Unlike stocks, which can fluctuate wildly from day to day or even hour to hour, alternatives such as private equity and private companies experience more gradual valuation changes, smoothing out volatility.
“These clients are looking at their wealth over multiple decades, and they can deal with the illiquidity,” Sinclair said. “Many of them see opportunities outside the public markets.”
The report also states that many family office founders started out as entrepreneurs themselves and sold a company. These founders now want to use their family offices to take ownership stakes in other private companies and apply their experience to help the companies grow.
“[JPMorgan] is fortunate to work with 60% of the billionaires in this country,” Sinclair said. “So there are companies that want our clients on their boards and on their capital tables, along with some of the largest venture capital and private equity firms in the world. over there.”
Sinclair said he thinks the growth of family office investment in alternatives will continue.
“I think you'll see growth primarily in private lending,” he said. “And I think a lot of customers are being under-allocated for infrastructure, especially digital infrastructure, when you think about some of these data centers that are being built now and the power that's required.”
Of their other investments, US family offices averaged 9% in cash, which is historically high, and 10% in bonds.
Surprisingly, less than half of family offices have an overall investment return objective, according to the survey. In the US, only 49% of family offices have a long-term target return for their portfolio. Among those who do have a return target, the average return target was 8%.
Yet family offices use different benchmarks for their investment portfolios, with more than three-quarters of respondents using some benchmark to evaluate performance. According to the research, larger family offices more often use customized benchmarks.
Family offices are increasingly looking to outsource more functions to reduce costs, especially among smaller family offices with less than $500 million. According to the report, 80% now use external advisors, mainly for investment management, access to managers, trade execution and portfolio construction.
Family offices are also increasingly turning to companies like JPMorgan for cybersecurity help to protect against hacking. Of family offices surveyed, 40% say cybersecurity is their biggest 'gap' in their capabilities, and almost 1 in 4 say they have fallen victim to a cyber attack.
“They're asking us for help,” Sinclair said.
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