Alternative Investments: Family Offices Can’t Get Enough

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The rich got richer. The wealthiest 10% of Americans now own over 70% of the country’s wealth, per the Congressional Budget Office.

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The increase in wealth concentration has led to a rise in family offices, which are essentially private wealth management firms that oversee financial management, tax planning, philanthropy, and wealth preservation.

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From 2019 to 2023, the number of family offices worldwide tripled. Today, these roughly 4,500 family offices manage $6 trillion or more in capital.

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Family office investment portfolios typically include cash, equities, and alternative investments. One interesting trend is family offices have increased their alternative asset exposure while private equity firms, hedge funds, and other investment managers have shed their exposure.

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According to a KKR survey, 52% of family offices were invested in alternative assets in 2023, up from 42% in 2022. Their favorite alternative investments include, per CNBC:

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• Private Credit
• Infrastructure
• Private Equity
• Commodities

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While each alternative asset has its own unique risk and return profile, family offices are investing in alternative investments to take advantage of the current illiquidity premium – an incremental return that compensates an investor for owning an asset that is not highly liquid. Other investor types need liquidity given they have to pay back their limited partners, the groups that provided them the money to invest, while family offices don’t have those rigid timeframes whereby they need to exit an investment to generate a return. For example, venture capital firms, which often have 8-10-year fund terms, are selling their stakes in private companies at discounts since the IPO market has been quiet for startups, and they need to distribute capital back to investors to raise their subsequent funds.

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In 2024, expect family offices to continue to zag while others zig.