Why are family offices in a cautious climate making the move to 'risky' digital assets?

While the unsettling multiple whammy of COVID-19 pandemic, a global inflation spike, rising interest rates, geopolitical perils and potential looming recession have driven a reduction in investment risk towards a more conservative and balanced strategy, North American Family Offices have nevertheless developed a taste for tech.

As revealed by Campden Wealth and RBC’s North America Family Office Report 2022, a rise in asset allocation toward healthcare tech (with 71% of those surveyed allocating there), biotech (62%), fintech (59%), digital tech (52%) and green tech (50%), it’s clear that while the old faithful asset classes are very much here to stay, family offices still display great foresight when it comes to developing opportunities.

“While we see a desire to invest more into real estate, which has often been seen as a relatively safe haven for long-term investors, the need for portfolio diversification is always at play, and family offices’ highest returns have come from their more adventurous investments, such as within venture capital, which garnered a considerable 26% average return in 2021,” says Campden Wealth’s senior director of research, Dr. Rebecca Gooch. “In turn, while family offices are more cautious 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.”

Considering this culture of caution, it’s perhaps surprising that a large number of family offices continue to not only invest but increase their asset allocation in digital assets, including cryptocurrencies.

“Most family offices have invested into crypto in an indirect manner preferring to be the vendors of picks and shovels than the ones mining for gold,” says James Godfrey, senior vice president of international banking at GDA Capital, on learning The 2022 North America Family Office Report’s findings that nearly a third of North American family offices reported that they planned to increase their investment in crypto over 2022. “However with more appropriate investment products and vehicles becoming available, we are seeing more family offices prepared to have a dig for themselves and actually buy crypto directly and especially if some alpha can be attached on top.”

Having firmly dipped their toes into crypto, the wider world of digital assets is increasingly proving to be a draw for family offices around the world. 12% of those surveyed as part of Campden Wealth’s 2022 Global Family Office series said they invest in non-fungible tokens (NFTs) and a further 10% plan on allocating more to the unique digital identifiers over the coming year.

Crypto has had a lot thrown at it and yet it continues to flourish and the ecosystem surrounding it continues to become larger and more robust.

“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,” says Dr. Gooch

There’s clearly still some debate as to whether or not NFTs are a good long-term investment, but the fact that it’s still such a nascent asset class assures many investors there’s plenty of room to grow.

“The NFT space is still in its infancy,” says James Godfrey. “Do I personally advocate paying hundreds of thousands for a crypto punk, of course not. But it is an undeniably collectable new art medium.”

“Despite the scepticism over the speculative nature of NFTs, they have been increasingly used by major corporations,” says BitStacker.com analyst Kris Lucas. “Recently, brands such as Rolex, McDonalds, VISA, Jack Daniels and Ford have filed NFT and metaverse trademarks applications.”

“Someone managed to get me to understand it by saying that while recording tracks in the 1980’s, Dire Straits had recorded an incomplete song to finish at a later date but they never had,” says Godfrey analogizing the seemingly slow adoption of NFTs. “Would I like to own one of only ten digital, original copies. Is it logical for me to want it? You can have photographs of the Mona Lisa but they are not the original. As a medium for art, NFTs are here to stay!”

Where real estate remains to be perceived as safe haven for long-term investors, the report also discovered a growing demand for digital plots with one in four respondents investing in the metaverse and a further 13% planning on increasing their investment in the virtual world over 2023.

“The continued demand for metaverse products further illustrates the belief that investors have in a ‘virtual’ version of the internet,” says Kris Lucas. “Despite Meta laying off 11,000 of its staff amid growing costs, such moves have been made in a bid to afford the huge investment required to build the yet-to-be-developed digital world.”

“It is becoming clear that the next iteration of the internet will somehow be built around metaverses,” says James Godfrey. “We continue to see a lot of interest in the metaverse and we have bought several properties for high-profile international corporations and brands. While the initial euphoria has definitely died down, the global management consultants still contact us looking for free consultancy and it is obvious to us that every corporation and brand will need a metaverse strategy.”

As more and more family offices make the move to digital, a concerning fact is that over a third (37%) of North American family offices have experienced one or more cyber attacks over the past year. The report found that a further 31% do not have a cyber security plan in place, and another 30% feel insufficiently prepared to safeguard themselves from an attack.

“A family office should consider whether they would benefit from hiring an external consultant to conduct a cyber audit,” says Manju Jessa, vice president and head of family office and strategic clients at RBC Enterprise Strategic Client Group. “The first step is to determine what information makes up their ‘Crown Jewels’.  What is the information they most want to protect? This could be information related to identity, financial information, etc.

“Then they need to consider how this information is stored and how it is accessed. Is there enough security protecting this information? Is the data encrypted? Who has access to this information?  Are you regularly reviewing these security measures? If the family office was breached, would they know what to do next? Who would they call? The best plan is to have a plan.” 

While security issues will always need to be navigated, the future is undoubtedly looking bright for the digital asset class, with the inherent excitement that comes from the undiscovered clearly rubbing off on cautiously adventurous investors.

“The market is not without its problems but with the help of proper regulation these will all be overcome,” says Godfrey. “Our industry is definitely having its growing pains, but from where we sit we feel as if we are shaping a new era of financial markets. If bitcoin were truly going to zero, it would be well on its way by now. Crypto has had a lot thrown at it over the time since its birth and yet it continues to flourish and the ecosystem surrounding it continues to become larger and more robust and the innovation more startling.”

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