A new report by JPMorgan Private Bank reveals that family offices are seeking higher returns by exploring investment opportunities beyond the stock market. The report highlights that large family offices have almost half of their investments in private markets and alternatives, indicating a shift away from the stock market in search of higher returns and lower volatility.
According to the study, family offices have 46% of their total portfolio invested in alternative investments such as private equity, real estate, venture capital, hedge funds, and private credit. This is compared to only 26% of their assets invested in publicly traded stocks. The survey covered 190 single family offices worldwide, with an average of $1.4 billion in assets.
The study also found that American family offices with assets exceeding $500 million are even more concentrated in alternatives, with over 49% of their investments allocated to this asset class. Of the alternative investments, 19% was in private equity, 14% in real estate, 5% in venture capital, 5% in hedge funds, and 4% in private credit.
This shift from public to private markets represents a significant change for family offices, which are the private investment arms of wealthy families. With family offices now deploying over $6 trillion in assets globally, they are becoming a powerful force in private equity markets, direct deals, venture capital, and private credit.
The move towards alternatives is driven by the desire for higher returns and longer-term investment horizons. Family offices typically have longer time horizons, investing for the next 50 to 100 years or more. This allows them to hold assets for decades and benefit from the “liquidity premium” associated with more patient capital. Unlike stocks, which can be volatile and experience sudden swings in valuation, alternatives such as private equity and private companies offer more gradual changes in valuation, providing stability and reduced volatility.
William Sinclair, head of the U.S. Family Office Practice at JPMorgan Private Bank, highlighted that while stocks and bonds remain important for family offices, they are increasingly turning to alternatives for higher returns. Sinclair emphasized that these clients take a multi-decade view of their wealth and are willing to tolerate illiquidity. Many of them are now identifying opportunities outside of public markets.
The report also revealed that many family office founders started as entrepreneurs themselves and sold a business. These founders now want to use their family offices to take ownership stakes in other private companies and apply their experience to assist in their growth. Sinclair explained that JPMorgan works with a significant number of billionaires in the country and many companies want their clients on their board and cap table to be alongside major venture capital and private equity firms.
Sinclair believes that the growth of family office investments in alternatives will continue, with a particular emphasis on private credit and infrastructure, especially digital infrastructure such as data centers.
The study also found that U.S. family offices have an average of 9% of their investments in cash, which is historically high, and 10% in bonds. Surprisingly, less than half of family offices have an overall investment return target. However, those who do have a target return set it at a median of 8%.
Family offices use various benchmarks to evaluate performance, with over three-quarters of those surveyed utilizing some benchmark. Larger family offices are more likely to use customized benchmarks. In addition, family offices are increasingly outsourcing functions to reduce costs, particularly among smaller family offices with assets under $500 million. The report highlights that 80% of family offices now use external advisors for investment management, access to managers, trade execution, and portfolio construction.
Lastly, the report reveals that family offices are increasingly turning to companies like JPMorgan for assistance with cybersecurity to protect against hacking. About 40% of the surveyed family offices identified cybersecurity as their biggest capability gap, with almost 25% admitting to being victims of cyberattacks.
Overall, the report highlights the growing trend of family offices seeking higher returns and lower volatility through investments in private markets and alternatives. With their long-term investment horizons and significant assets under management, family offices are becoming a powerful force in the private equity and alternative investment space. They are also looking to outsource functions and seek assistance with cybersecurity to ensure the protection of their wealth and investments.
