North America Family Office Report 2022: Risk reduction, a focus on private equity and a move towards sustainable investing

North American family offices have continued to see their collective wealth and investment returns grow despite the aftershocks of the COVID-19 pandemic and subsequent hike in inflation, interest rates and geopolitical risks, according to the North America Family Office Report 2022 by RBC and Campden Wealth.

More than half of the 179 North American family offices surveyed reported strong growth in their assets under management (AUM) in the year leading up to the economic downturn (collectively estimated at $182 billion), and more than three-quarters of families surveyed saw their wealth rise in 2021, to an average of $2 billion.

“Given concerns over inflation, rising interest rates and a potential forthcoming recession, North American family offices are moving more towards a balanced investment strategy, bucking a trend from last year where they shifted towards growth,” says Dr. Rebecca Gooch, Campden Wealth’s senior director of research. “That being said, the need for portfolio diversification is always at play and family offices’ highest returns have come from their more adventurous investments, most notably venture capital, which on average, produced a 26% return in 2021.

“In turn, while family offices are more careful about de-risking their portfolios this year, they are also likely to maintain a reasonable level of growth-oriented investments and to be on the lookout for opportunistic deals.”

Sixty-six percent of North American family offices employ an investment strategy focusing on wealth preservation or a balanced strategy incorporating wealth preservation and growth. This is up from 63% in the prior year. But there’s still a bias towards private equity and real estate. to mitigate the effects of inflation. This trend is likely to persist since 46% of those surveyed said they would allocate more to private equity funds and 41% to direct investments in 2023, with 35% planning to allocate more specifically to venture capital. 41% of family offices plan to allocate more to real estate.

As a result of this strategy, North American family offices have outperformed their peers with an average portfolio return of 15% in 2021, compared to 13% in Europe, 10% in Asia-Pacific and a 13% global average.

Despite the more conservative investment approach, North American family offices have reported increased portfolio allocation to healthcare tech (with 71% allocating), followed by biotech (62%), fintech (59%), digital tech (52%) and green tech (50%).

“Family offices have long been avid investors in technology, with healthcare tech, biotech and fintech being the three most prominent areas they invest in,” says Dr. Gooch. “However, family offices also represent a powerful pool of private funding for emerging areas within tech.

The benefit of having a family office is that wealth holders have their own pool of dedicated investment managers.

“This is the first year we have tracked family offices’ allocations to the metaverse, NFTs and Web 3.0, and it is fascinating to discover that roughly one-in-four family offices in North America invest in the metaverse, one-in-ten in NFTs and more than a quarter in Web 3.0, and that these are all areas that family offices plan on allocating more to in 2023.”

While family offices are venturing further into these new asset classes, the old faithful asset classes are still considered to be a vital part of a diversified portfolio.

“Following public equity, private equity has long been the second largest asset class family offices invest in and real estate the third. They have and will continue to be important parts of family offices' portfolios,” says Dr. Gooch. “With that said, family offices adjust their portfolios in incremental ways each year to respond to changing market conditions. 

“Previously, public equity was in the limelight after the stock market climbed in the final quarter of 2020 and this persisted into 2021. Today, current market conditions dictate a different approach. Our research reveals that private equity and real estate have come into favour in 2022, aided by solid financial returns. However, investor sentiment may be turning given more recent economic and financial market turbulence. 

“The benefit of having a family office is that wealth holders have their own pool of dedicated investment managers, who can flexibly respond to fluctuating circumstances, while keeping an eye on families' from a long-term, multi-generational perspective.”

Increasingly, sustainable investing is considered to be of great importance, with more than a third (37%) of North American family offices now engaging in sustainable investing, with a particular focus (77%) on climate change mitigation. This trend is thought to have been driven by next gens, whose influence continues to grow amid a major generational transition.

“As part of a wider trend, family offices have been adopting sustainable investing at a rapid pace in recent years, and it has long been understood that the next generation is a key driver behind this,” says Dr. Gooch. “We are in the midst of a major generational transition in which trillions of dollars are changing hands, and here is where we are really beginning to see the effects of this generation’s impact on society.

“It is the emerging generation which is going to feel the effects of climate change more than any that came before it, and this has become a galvanising factor among those who see sustainable investing, mixed with sizeable private capital, as a powerful vehicle to combat it.”

“As we stand at the centre of the multi-trillion dollar transition to the next generation, we are clearly starting to see their influence,” says Mark Fell, RBC’s head of family office and strategic clients.

Despite next gens’ greater investment sway, however, the report found that only 33% of family offices have a succession plan in place for senior leaders and 40% feel they do not have a next generation member qualified enough to take over. That said, an additional 30% of next gens were found to have already assumed control of their families’ operations – with another 27% expected to do so within the next decade.

“It’s essential to have important conversations about the family’s goals and values with the next generation to help preserve the family’s wealth and legacy for future,” says Angie O’Leary, head of wealth planning at RBC Wealth Management. “A succession plan is a must to adequately prepare the next generation to inherit wealth, and it must be revisited often to ensure it reflects a family’s changing needs, priorities and vision.”

“This year's findings strongly highlight how private equity has come into centre stage in the family office arena,” says Dr. Gooch. “It was the top performing asset class in 2021, delivering outsized returns which bolstered North American family offices' overall portfolio performance. Following suit, family offices expected to increase their allocations to private equity this year and into 2023. But that being said, valuations in private markets tend to follow what happens in public markets, and therefore family offices’ intentions might be reconsidered as 2023 unfolds.”

Click below to find out more about the North America Family Office Report 2022.