A new report from London-based credit investment manager Aeon Investments, reveals a major shift in investment strategies of family offices, partly driven by the need for succession planning but also by the search for yield against a background of rising macroeconomic uncertainty.
The report, which is based on research with senior investment managers and wealth managers working for family offices with a total of USD98.4 billion in AUM shows increasing use of alternative assets in general and illiquid assets including private debt, private credit and real estate in particular.
Almost all (97 per cent) family office professional investors interviewed agree that the impact of COVID-19 accelerated the integration of succession planning into long-term strategies.
This has translated into increased education for younger generations and the study shows they are having a bigger influence on investment planning. Nearly two out five (39 per cent) family office executives strongly agree that younger family members are driving increased interest in sustainable investment and another 58 per cent slightly agree.
Nearly nine out of 10 (88 per cent) agree that family offices are increasingly diversifying into a wider range of asset classes with illiquid assets including private debt and real estate as the key components of the diversification drive.
Around 90 per cent questioned expect increased demand from family offices for illiquid assets over the next two years. The main motivation for this is their need to protect against macro uncertainty with private debt investments often offering strategies providing a floating rate coupon which has the potential to be a natural hedge against inflation.
Family offices also highlight the fact that private debt offers new investment opportunities and a growing array of assets as well as its role in the diversification of portfolios and access to ESG benefits in sub-asset classes in private debt.
The study found widespread agreement that the highest quality private debt instruments provide safety. Almost all (99 per cent) questioned pointed to the combination of attractive yields and structural protections such as debt covenants and credit enhancement as offering a high degree of safety. That is being bolstered by the expectation of improved regulation in the sector – more than a quarter (26 per cent) expect dramatic improvements in regulation for private debt over the next two years while 52 per cent expect slight improvements.
Some 80 per cent questioned expect family offices to increase allocations to private debt over the next two years with nearly one in 10 (9 per cent) predicting dramatic increases.
Customisation of alternative credit solutions for family offices is also set to expand strongly as demand builds for more bespoke maturity and return profiles. Nearly nine out of 10 (87 per cent) family offices expect increased customisation of alternative credit solutions over the next three years. Around 16 per cent of the senior executives at family offices forecast dramatic growth in customisation with just 2 per cent predicting customisation will decline over the period.
Ben Churchill, Chief Operating Officer, Aeon Investments says: “Family offices need to deliver stable and predictable income and that is driving increased interest in private debt with residential real estate and specialist areas of corporate finance proving to be the most popular asset classes to offer yield and capital preservation.
“Financial institutions, however, need to recognise that family offices are discerning when it comes to fee structures.”