Alternatives allocations stay high as more family offices stick to strategies – UBS

May 23, 2024 (Preqin News) – The majority of family offices believe that long-term returns in private equity are likely to be better than their public counterparts (71%), with more than a third (39%) planning to increase allocations in the asset class, according to a new report from UBS.

The Swiss bank’s 2024 Global Family Office Report surveyed 320 single-family offices with an average net worth of $2.6bn, double the average family office net worth of $1.3bn, and up from 230 respondents last year.

‘On average, only a little over a quarter (27%) of family offices intend to make changes to their strategic asset allocation in 2024 – down from over a third (37%) that said they planned changes for 2023 in last year’s report,’ the report says.

The report finds that half of portfolios are invested in North American assets. This is forecast to continue as the region has proved resilient to high policy rates and geopolitical risks. However, a ‘home bias’ must be considered within these figures; US family offices allocate 82% on average to North America, while Swiss family offices deploy 54% to Western Europe.

Alternatives allocations vary between regions, with US family offices on average allocating 59% to alternative asset classes in 2023 – including 35% in private equity, 10% in real estate, and 4% in private debt. Similarly, Middle East family offices allocate 51% to private markets, although have the most of any region in real estate (15%).

Europe's strategic asset allocation to alternatives was 45%, with nearly half of that in private equity (22%). North Asia allocated just over a third to alternatives (34%), in similar fashion to their South Asia counterparts (36%).

The top concern for family offices is major geopolitical conflict, both in the near and the medium term. Over the next 12 months, inflation and interest rates also feature as a concern, while over the next five years, climate change and high levels of debt feature more prominently as concerns.

‘Turning to real estate, family offices with real estate investments most commonly buy fully-owned physical property, making 52% of real estate investments this way. However, co-investments in physical real estate are increasing in popularity, as are investments in direct closed-end funds, with allocations of 19% going to each respectively,’ the report stated.

Planned allocation for 2024 puts private equity at 22% (split over direct investments and funds/funds of funds at 9% and 13% respectively), 12% real estate, 4% hedge funds, and smaller allocations to infrastructure, gold and precious metals, and art. This is a one percentage point (ppt) increase for private debt, a 2ppt increase for real estate, and a 1ppt drop for hedge funds compared with the allocations in 2023.

Within private equity, a shift is seen from direct investments – which have been reduced to 9% from 11% in 2023 – to funds and funds of funds, which have increased from 11% to 13%, likely in search of greater diversification, according to the report.

Globally, 39% of family offices stated that they are relying more on manager selection and active management to enhance portfolio diversification, 4% more than in 2023. This is split regionally, with 43% of European family offices and 42% of APAC family offices relying more on manager selection or active management, compared with 32% of US family offices and 31% of Swiss.

Other strategies for diversification include high-quality, short-duration fixed income (selected by 35% of family offices globally) and hedge funds (33%).

Outside of alternatives, UBS drew attention to the fact that developed markets fixed income reached its highest level in five years, up from 11% in 2019 to 16% in 2023, and is expected to remain at 16% in 2024. Emerging markets fixed income has steadily declined from 6% in 2019 to a planned 2% allocation in 2024. Developed markets equities have a planned 2ppts increase to 26% in 2024 compared to 2023, and emerging market equities have seen a decrease from 6% in 2019 to 4% in 2023, with a further drop to 3% planned for 2024.

Unsurprisingly, AI is the investment theme of most interest to family offices, with a 78% likelihood of investing in AI over the next two to three years, followed by healthtech (70%), and automation and robotics (67%). Investors believe AI’s anticipated productivity gains may relieve global labor shortages, making the technology even more attractive.

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