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2024-03-05
Introduction
The investment landscape for family offices is constantly changing due to the influence of geopolitics, financial markets, regulations, and the overall economy. As a result, new trends continue to emerge. There are four main trends that we at Stryde have identified for 2024 through our conversations with clients and candidates: increased allocations to alternatives, the rise of impact investing, embracing AI technologies and the need for succession planning.
At Stryde we are working with our clients to navigate the talent implications of these changes and identify gaps in expertise as investments and strategies shift.
This is the first of a series of articles to be shared here on our website:
Trend 1: Increased Allocation to Alternatives
There has been an increase in popularity over recent years to focus on greater allocations to alternative investments, while this remains steady for 2024, the allocation to private equity and private credit is significant. Alternatives is the largest asset class families are currently invested in, outpacing public equity investments. This was the number one investment priority for family offices in 2023, as detailed in a survey by Campden Wealth. On average, family offices are investing 52% of total AUM into the alternative investment class, according to the KKR 2023 Family Capital Survey. Of those alternative investments, private equity and private credit are experiencing significant increases.
Private Equity
In 2024, family office CIOs are planning to broaden portfolio allocations towards investments in private equity, an area expected to yield the greatest longstanding returns. The capital for such investments will come primarily from public equities and cash, according to a KKR survey. PE investments can take a variety of shapes (direct, co-investing, funds, secondaries), each requiring a different approach and resources for sourcing, evaluating and executing potential deals.
All PE investing requires analysis, due diligence and legal counsel but those investment teams deploying capital towards direct deals could necessitate additional resources as the acquisition may benefit from operational support and counsel from the family office. A minority investment in a company might mean a silent investor role, but a majority investment or full buy-out would result in a different approach. We see family offices acting as operating partners and striving to take advantage of synergies across their portfolio and leverage domain expertise to facilitate faster growth and innovation.
We are likely to see more of these direct deals emerge as M&A activity is set to increase in 2024, resulting from a pullback over the past two years. There is a big opportunity for M&A transactions in the year ahead with companies feeling the pinch of the economic environment and family offices set to capitalize on opportunities, with cash holdings up, CIOs planning to increase illiquidity and the private markets set to be the number one beneficiary.
Private Credit
As part of the growing focus on alternatives mentioned, private lending will remain an important investment choice for family offices in 2024. A pullback in bank lending over the past 18 months, plus a changing macroeconomic environment and increased regulation has led to higher demand for private lending. The yields are upward of 10% and attractive to CIOs, due to their predictable returns. The previously referenced KKR 2023 Family Capital Survey states that 45% of respondents reported planning to increase allocations to private credit in 2024. Family offices have the ‘patient capital’ to take advantage of such long-term investments. Average allocations to private credit increased from 8% of total assets in 2018 to 11% in 2023 in the USA.
Talent Implication
Significant changes in asset allocations could warrant a shift internally, requiring unique skillsets and expertise not currently within the family office. As CIOs find themselves spending more time on asset allocation and rebalancing portfolios, there may be an opportunity to add to the investment team to take a wider view of the market and make way for necessary strategic planning to create alpha. As with all advice regarding family offices, the talent strategy should be aligned to the philosophy and values of the family.
Does a Shift Towards Alternatives Require a Larger Team?
It depends on the current team structure, strategy for investments as well as the change in allocation to alternatives. Those family offices allocating capital to direct private credit deals will need the resources to perform underwriting and put in place proper legal structure in the event of a default. For those investing in PE and moving towards more diversified portfolios, it is important to decide how to best structure a team to support these investments long-term. A common scenario for most family offices is that they have grown their private investments at a rate much higher than they have increased headcount to support such investments. In fact, KKR reports that “more infrastructure is required to support these pools of capital” as on average the assets under management have increased by 50% in the past 5 years but headcount is only up 10%, according to their survey. This is where problems begin to surface, spreading teams too thin to capitalize on the potential of each opportunity fully.
What Expertise is Missing?
When assessing the family office structure, as it relates to private investments, it is important to consider the following types of questions. Does the team need additional expertise to support new investments? Are these investments substantial enough to warrant an internal team or additional specialists supporting the new ventures? What are the best roles to add? Could the team benefit from a Fund Controller or PE Investor? An investment banker who can best evaluate the risk of direct lending? A dedicated M&A (legal counsel or domain specialist) expert to guide the growth of acquired businesses into the future? For those involved in direct investing, can someone within the existing team become responsible for the strategic direction and operating performance of a complex portfolio or is this a new role to be created? Each family and team is unique in the questions they will ask and how these are answered, but in all cases, it is important to evaluate existing expertise versus what is needed and proceed accordingly. So far this year, Stryde has worked with family offices to add roles focusing on value creation, M&A expertise, taxation and portfolio management.
Understanding the Value of your Team
The necessary team structure is unique to each family and set of investments, but some factors influencing talent needs are type, size, scope, ownership stake and strategy of new investments. Our conversations with family office executives have highlighted the conflict that can exist between the need for more diverse skillsets and the family’s desire to keep operating costs down. In these cases, it is important for executives to “sell” the family on the importance of this expertise to the trajectory of long-term wealth growth to justify the increase in overhead. While adding new expertise to the team is an option, a family office may have existing talent, nimble enough to pivot within the organization, providing the guidance and support needed to lead private investments into the future. A thorough organizational analysis is the best tool to assess available resources and identify gaps in expertise.
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