Family offices are facing an increasing challenge as the investment landscape becomes more intense. Inflation, recession, geopolitical risks and their impact on the global economy rank high on the list of threats that will affect how family offices invest in 2023 and beyond.
In October 2022, 188 people from 32 countries participated in the Dentons Family Office Direct Investment Survey. The findings reveal that while many family offices are preparing for the worst as investors, they are looking for the best opportunities in direct investments and private markets. Private equity has increased allocations within the family office portfolio over the last few years and remains a major focus.
Edward Marshall, Global Head of Family Offices at Dentons, said, “As 2023 investment strategies continue to refine, this report will provide our clients and the broader family office community with actionable, differentiated and valuable insights. Marshall also points out that data often lacks comparability, noting that “Family offices currently compare their direct investment-related activity to peers of similar size and geography. We have data that can be evaluated by
Key Findings Revealing Some Interesting Insights
Below are five key insights extrapolated from the survey’s data that are guaranteed to be considered by those involved in family office direct investment strategies.
1. Direct investment in strategic asset allocation and grading and tactical asset allocation
Strategic asset allocation (SAA) is often the starting point when considering portfolio architecture. However, the current environment highlights the growing importance of family office asset allocation at both the strategic and tactical levels to ensure a systematic and dynamic investment approach. This protects your long-term investment strategy and frees up your assets for repurposing into short-term investments that may offer higher returns.
If family offices are reviewing the strategies employed within their portfolios, it is worth considering the two approaches in this complex mix. They should be selected according to the family investment and overall purpose.
A tilted strategic asset allocation in which families tilt their investments directly into specific geographies or key capabilities to further reduce risk and optimize returns. Tactical asset allocation also helps you adjust long-term allocations to minimize risk and profit from short-term market movements.
2. Direct control and operational risk
Dentons survey data reveals that many respondents struggle with operational risk and management. This also extends to direct investment activities of family offices.
With respect to direct investment strategies, those who formulate and implement them have a clear understanding of the family office’s financial return objectives, risk tolerance, and how these investments fit into the family’s current portfolio. is needed. Diversification of investments within this category is also essential to reduce risk.
Direct investment risk can be further reduced by identifying opportunities for strategic synergies with family or family office core activities. This allows families to leverage their key competencies, experience, networks and more to make direct investments during difficult times.
3. Opportunity to partner on unique investment vehicles when moving outside of key focus areas
Dentons’ report shows that family offices are looking to external partners for deep expertise when investigating direct investments. Where a family office is building expertise in a significant sector, there is considerable opportunity to package this expertise into its own fund vehicle.
Family offices can open their own funds for others to invest in these. This makes it easier for family offices to step outside of their primary focus areas and further diversify their portfolios.
4. Relying solely on direct investment referrals is not sustainable in the long run
A key factor in a successful family office direct investment strategy is attracting the right deals at the right stage. As this is a critical success factor, there is an urgent need to move beyond referrals from tight networks to a more formal deal sourcing and evaluation function to build and ensure sustainability of the deal flow pipeline. .
There are several ways to proactively seek out investment prospects that match the interests and expertise of the Family Office, including direct investments, limited partnerships, equity crowdfunding, syndications and participation in angel groups and networks. increase. Additionally, participating in trade associations within the family’s sphere of interest and influence can also create connections that lead to well-coordinated direct investment opportunities.
5. Successful direct investment requires adequate resources and due diligence
Commencement of direct investment requires substantial resources and capabilities from family offices, even through fund vehicles. According to Denton’s research, the ability to conduct proper due diligence is a key challenge for family offices.
For companies facing due diligence challenges, co-investing with other family offices that can lead in this regard may be a practical solution. Yet attracting and retaining top talent remains a key success factor. In an increasingly competitive environment, family offices must work harder than ever to attract top talent, partners and investment opportunities. In this regard, creativity, transparency and connection when it comes to recruiting efforts, and flexibility and alignment of interests when it comes to incentive options are all important.
In turbulent times like ours, direct investment may also offer the most viable avenue of opportunity, growth and profit for family offices. When strategically designed and executed based on the family office’s interests and expertise, direct investment offers many benefits to the family office. These include fee savings, increased control and transparency around investments, enhanced ability to customize risk exposure, and next generation engagement.
Family offices that heed the insights from Dentons data, invest the necessary resources, conduct adequate due diligence and implement sound governance will be in a strong position in 2023 and beyond. will be