Family Offices’ Perspectives: Q4 2021 Allocation Considerations
An insightful discussion with Alex Lee from Bennett Wilkie, condensed in this Q&A which provides an insight into what are on LPs minds going into Q4 2021.
Alex helps families transition from business operators to investors in public and private markets. The firm focuses on setting up customized investment platforms, solutions and networks to continue to create or preserve wealth. Based in Australia, Alex has 20+ years experience creating investment solutions for private clients and institutions in Asia.
Pictured: Alex Lee, Managing Director, Bennett Wilkie
Q: Which asset class do you expect Family Offices to be most overweight on, on an absolute basis, in alternatives over the rest of 2021 and into 2022?
Venture capital and private equity are leading the way with historical returns expected to persist into the future. For some Family Offices, these investments fall into “set and forget” allocations, due to less frequent mark-to-market valuations, hence removing unwanted anxiety.
Most families continue to believe building businesses is the most sustainable way of building wealth across generations. A trend observed is barbell clustering of investments in either liquid or illiquid assets. Family offices would shift their weightings based on their liquidity profiles, and to an extent their risk profiles.
Jittery investors prefer more liquid assets as liquidity provides an illusion of control. A confident and secure investor can handle illiquidity. Listed equities remain the liquid asset of choice (outside of cash). Digital assets (e.g. Bitcoin and Etherum) are gaining popularity amongst more digital native principals.
Q: Based on the Family Offices you work with, what is their appetite for first-time funds?
Most Family Offices I work with prefer funds with some AUM, preferably above USD 75-100m mark. Several recognize the endowment approach of investing in emerging funds where sub-100m funds tend to generate above-average returns, before falling back to average returns as fund size grow.
Q: What are Family Offices' main driver for allocating to emerging managers?
The potential of solid returns is the key driver. Headline numbers have to be attractive, leading to a deep dive into niche strategy options, the desire to access new talent, portfolio diversification, and better fees.
Q: What are the Family Offices’ expectations of ESG reporting by Fund Managers?
There is an increased expectation of ESG reporting, however do note some family offices are numbers driven – returns and their characteristics are paramount. Some are completely impact driven – not investing unless impact can be shown definitively. There are shades in between these two extremes. It is more important for the fund to remain true to its character instead of trying to be all things to all people.
Q: Are Family Offices wanting more frequency of dialogue from GPs?
In the current operating environment where COVID-19 could impact investments both positively and negatively, the families I work with want to be informed. It is not the frequency but more importantly quality.
They want to know which companies in a VC fund suffered and why. They want to understand why a futures trading strategy failed. Family Offices want to receive a performance report on an exit by an investee company.
As LPs, we consider ourselves insiders and hence would expect more than marketing spin. We want to see deeper thought and analysis in communications with us.
Q: Why has private debt been something Family Offices are comfortable with now?
There are several compounding reasons for the increased comfort with private debt:
1. In the course of creating wealth, almost all families have been exposed to some form of credit. Hence, families have a deeper appreciation of credit – how it generates returns and its risks. The appeal of lending out capital for a more certain rate of return is always there. The fit with portfolio construction as the “income” or “stable” component is a motivating factor.
2. Private debt is like a private club – the unique position of family offices allow for access and appreciation of the opportunities offered in private debt.
Due to changing regulations and preferences, opportunities that used to be hidden away in large banks and corporates are being offered to family offices. Examples are arbitrage trades arising from Basel rules, banking regulators directing a reduction of bank lending exposure to a certain sector, niche fixed income-like assets like life settlements.
These are opportunities that are hard to comprehend for the average investor, but can find favor with Family Offices. Families might have access to expertise which allows them to understand and invest in these opportunities, hence their exclusive pass to be closer to revenue generating action in the debt financing world.
3. Compared to an investment in a bank (either via an equity purchase or via a bank deposit), private debt allows Family Offices to get closer to revenue generating activity without the overhang of the banking sector.
For example, a fund specializing in property development debt would give family offices specific exposure to returns from financing debt in property development. This might suit a family office which does not want the other overhangs such as paying for the banking network infrastructure or potential returns contamination from other forms of lending that a bank might engage in.
4. There is more expertise available to manage private debt exposure.
There are more qualified and highly skilled debt specialists in the field who are managing private debt funds. This allow Family Offices to mitigate the risks of the specific debt exposure. It is one thing to appreciate the private debt opportunity, and another thing to manage the opportunity.