What's over the horizon for North American family offices?

Even as family offices in North America espouse caution in their investments for now, they’re looking toward the future at opportunities for growth, responsible investment, and preserving wealth through the generations, according to a new report.

The North America Family Office Report 2023, prepared in partnership by RBC and Campden Wealth, draws from a statistical analysis of 330 survey responses from single family offices and private multi-family offices globally. That includes 144 family offices located in North America, with average AUM of $0.9 billion and aggregate AUM of US$126 billion.

“Based on our aggregated data, we estimated that the average family office achieved a modest 1% return on its investment portfolio in 2022,” said Manju Jessa, Head, Family Office and Strategic Clients, Enterprise Strategic Client Group at RBC.

According to Jessa, that softness in 2022 performance was driven by family offices’ allocations to bonds (representing 8% of assets) and equities (29%). Both categories plummeted into negative territory amid a painful selloff in the public markets.

Private markets in focus

The largest allocations in North American family office portfolios were in private markets – specifically private equity, private debt, and venture capital – amounting to 29% of assets altogether. Unlike traditional assets, they managed to eke out mild but still positive returns in 2022.

Under private equity, the report said 10% of assets went to direct investments and another 10% to private equity funds, which saw returns of 5% and 3%, respectively. VC money accounted for 6% of family office assets and saw flat performance for the year, while private debt represented 3% of assets and generated a 6% return.

“It's not as bad as it sounds. The family office investment teams are typically sophisticated enough to understand that short-term returns, while important, aren’t going to impact the goals outlined in their investment policy statements, nor do they have an impact on performance which can be measured over the longer term,” Jessa says.

In the survey, Jessa notes a desire among family offices to explore new investment opportunities and diversify their portfolios. Conventional priorities, she says, have been eclipsed by the focus on investing in alternative asset classes. That shift could be attributed to the appeal of alternative investments – including real estate, commodities, and hedge funds – as effective hedges against inflationary pressures.

“Remarkably, family offices do not seem particularly enthusiastic about increasing their exposure to private markets, in contrast to other indications from the survey,” Jessa says. “Additionally, I would say they remain unconvinced by the arguments advocating a shift from growth equity to value equity investments.”

In 2021, nearly half of North American family offices in the survey (48%) said growth was their primary strategy. But the agony in public markets during 2022 prompted a cautious pivot in 2023, when just 38% of family offices in North America were primarily in growth a growth strategy; 44% adopted a balanced investment strategy, while 18% favoured wealth preservation.

From risks to opportunities

When asked about the financial market risks they expected to come forth in 2023, a 59% majority of respondents cited the risk of US recession, followed by continued US-China tensions (47%) and excessive tightening by the Federal Reserve (42%).

While family offices are taking a cautious stance in 2023, that’s not expected to last. The survey found that by 2028, 46% of family offices are planning to implement growth as their primary investment strategy.

“Artificial intelligence has garnered substantial attention, with a net 31% of family offices seeking to increase their involvement and 14% intending to initiate exposure,” Jessa says. “Fifty-seven per cent invested in AI through their private equity portfolios, and family offices have found themselves involved with exciting emerging businesses that harness cutting edge technologies. Private equity funds, in particular, offer family offices a comprehensive exposure to a range of these innovations.”

One key trend that Jessa says will shape family offices in 2024 is an increased focus on cybersecurity, particularly with the increased recognition of digital assets and information as key pieces of the wealth puzzle. The report also confirmed a continuing focus on the generational wealth transfer: with respect to succession planning, respondents said the most important factors for success is to introduce the next generation to family values (92%) and encouraging them to interact with the family office and family leadership (84%).

“I expect we’ll see more of a focus on global diversification, as well as responsible investing – how to be a good citizen of planet earth. How does that align with their investment policy statement?” Jessa says.

According to the report, 41% of family offices in North America were actively engaged in responsible investing in 2023, compared to 37% the previous year. RI still represents a small slice of portfolios at 17%, though that’s expected to grow to 28% in the next half-decade.

“There’s also the potential for family offices to become more and more professionalized operationally – that's a space to watch,” Jessa says.

“You see the longevity of these family offices, whether they’re family members or trusted third parties. They’ve gone through these market cycles, and can run through a few more,” she says. “The expertise and learning capabilities they can bring to the families they represent, and may represent over the next five to 10 years, is invaluable.”