Family offices add PE after sharp return drop

Family offices posted flat returns last year, thanks to negative performance by bonds and equities, but they are rebounding. Like big institutional investors, they are turning more to private assets.
Family offices add PE after sharp return drop

Family offices globally have boosted their private equity allocations in the past 12 months, while slightly paring their hedge fund exposure, and that trend is set to continue, found research by UBS Wealth Management and Campden Wealth Research*.

The report also unearthed a heavy fall in performance for the segment, which returned an average of 0.3% last year, down from 6.1% in 2014; this year is looking more rosy, however.

It seems that family offices are, like big Asia-Pacific institutional investors, turning to private markets to boost returns.

The average global allocation to private equity (including venture capital and co-investment) rose to 22.1% this year from 19.8% in 2015, while the average hedge fund holding fell to 8.1% from 9.0%, according to The Global Family Office Report 2016 (see first table, below left  - click for full view).

Private equity funds have seen a particularly big rise in popularity, accounting for 41% of family offices’ total PE exposure this year, up from 31% last year (see second table, below right - click for full view).

Click for full view

Hedge funds losing lustre?

Hedge funds lost some appeal last year not only because of poor overall performance and high fees, but also because of doubts about their ability to generate future alpha even with the benefit of volatility, said the report.

In the hedge fund universe, family offices have been pulling money from credit and distressed investments amid concerns about how oil and energy sector-related defaults are affecting high-yield returns. Meanwhile, they have been allocating more to global macro and market-neutral strategies.

Enrico Mattoli, head of Greater China for the global family office division at UBS Wealth Management, said: “This pattern is likely to be reinforced going forward, with private equity becoming increasingly important in the portfolios of Asia-Pacific family offices looking to benefit from the illiquidity premium associated with the asset class.”

A principal at one single-family office said PE allowed family offices a better understanding of where the money is invested, the industry and the business model. Several family offices also cited the appeal of the illiquid nature of private equity, which provides lower reported volatility.

Meanwhile, equities and fixed income declined slightly in prominence in family office portfolios. The average bond allocation fell to 13.3% from 14.8% last year, while equities slipped to 26.7% from 27.3%. Both asset classes produced negative returns in 2015, and this weighed heavily on overall FO performance in 2015.

Click for full view

Performance issues

In terms of investment performance, Asia-Pacific family offices’ average return was 0% in 2015. This was even more meagre than the global average of 0.3%, down from 6.1% in 2014 and 8.5% in 2013. But family offices in emerging markets (ex Asia-Pacific) fared even worse, suffering a -0.6% loss.

Interestingly, Hong Kong-based family offices performed significantly better than their peers in the region, generating an 0.8% return last year. UBS attributed this to larger real estate holdings than the regional average and greater exposure to developed-market equities.

Europe was ahead of the other main regions in performance terms, with FOs there posting an average return of 0.6%, while those in North America gained 0.3%.

However, 2016 has seen something of a rebound in performance; for example, Asia-Pacific FO portfolios have returned 3.9% year-to-date.

*The research surveyed 242 family offices globally, representing $180 billion in assets. Asia Pacific accounted for 19% of respondents, which had average AUM of $492 million, compared with $759 million globally.

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