Family offices are reducing their fixed-income allocations and increasing investments in private equity, real estate, and private debt, sacrificing liquidity for returns, according to a new report.
This shift to alternative diversifiers has been prompted by high inflation and rising interest rates, UBS says in the Global Family Office Report 2022, which surveyed 221 single family offices across the globe.
In Asia-Pacific, 40% plan to increase direct private equity allocations, while 18% intend to raise investments in private equity funds and funds of funds. Real estate is favoured by 26%, while 33% are turning to private debt.
A third (33%) of the average family office portfolio in the region was allocated to equities in 2021, 15% to fixed income, 11% to real estate and 2% to private debt. Looking to the future, family offices are exploring incremental shifts in strategic asset allocation (SAA), venturing further into the private markets they have been investing in over the past few years.
Source: UBS Global Family Office Report 2022
“Family offices are keeping pace with a period of substantial transformation. In response to the Covid-19 pandemic, digital disruption and now a war in Ukraine, they are reviewing their options with greater urgency, as a strategic shift towards additional sources of return and alternative diversifiers gains ground,” says Josef Stadler, executive vice chairman at UBS Global Wealth Management. “Against challenging market conditions, family offices see the bigger picture and are applying prudence and innovation to their strategic asset allocation.”
Private equity’s broad opportunity and potential to produce higher returns is popular among family offices globally, the report finds. About 96% of family offices in the United States invest in private equity, followed by those in Switzerland at 86%, Middle East at 83% and Asia-Pacific at 79%. Even in Western Europe and Latin America, where private equity investment lags, participation is high at 73% and 76% respectively.
Family offices are seeking out more active strategies. In Asia-Pacific, 39% of respondents are either relying more on active strategies and manager selection or considering doing so. About 18% of those in the region are also setting sights on illiquid assets.
According to 66% of APAC family offices, it’s hard to find uncorrelated returns in the current environment. Reflecting low bond yields, 52% of those in the region say they no longer think high-quality fixed income helps diversification. Just above a quarter (27%) use hedge funds to diversify or are considering doing so. As the search for alternative diversifiers intensifies, 41% in the region think they’re no longer able to build a complete portfolio with long-only investments.
“Asia-Pacific family offices continue to favour private equity, and their allocations to private equity look set to rise further in the next five years,” says Tommy Leung, co-head of global family and institutional wealth APAC at UBS Global Wealth Management. “Technology is the most common sector for PE investments. More than a third of their investment portfolio is allocated to alternatives including private equity, private debt, hedge funds and real estate.”
A preferred investment theme is automation and robotics, according to 86% of family offices in Asia-Pacific. About 79% say digital transformation is another investment theme that resonates with them. This spans across e-commerce, data, artificial intelligence, the cloud and blockchain. As regards digital assets and distributed ledger technology (DLT), 24% in the region either invested in DLT or considered doing so in 2021, while also about 24% invested in cryptocurrencies or considered doing so.
About half (53%) of the family offices in the region have sustainable investments, believing that such investments will outperform the overall market in the next five years.
