In recent years, Australian family offices have increasingly turned to private investments as a way to diversify their portfolios and generate higher returns.
Family offices are private wealth management firms that manage the assets of high-net-worth families, and they have traditionally invested in public markets such as listed equities, managed funds and bonds. However, with interest rates at historic lows in recent years and stock market volatility increasing since the GFC in 2008/09 , COVID 19 and conflicts including Russia and the Ukraine and increasing uncertainty about trading relationships with China, many family offices are now seeking alternative investments in the private markets.
Private investments include a wide range of assets such as private equity, venture capital, real estate, and infrastructure. These assets are not publicly traded and typically require a longer investment horizon than traditional public market investments. Private investments can provide family offices with higher returns, greater control over their investments, and more opportunities for value creation.
According to a 2021 survey by UBS, Australian family offices allocated an average of 25% of their portfolios to alternative investments, with private equity and venture capital being the most popular. Private equity firms typically invest in established companies with the aim of improving their operations and generating a higher return on investment. Venture capital firms, on the other hand, invest in early-stage startups with high growth potential.
Real estate has also been a popular investment for Australian family offices. The country’s booming property market has attracted investors from around the world, and family offices have been no exception. Many family offices have invested in commercial real estate such as office buildings, shopping centers, and industrial properties. Others have focused on residential real estate, either as a long-term investment or for short-term rental income.
Infrastructure investments have also gained popularity among family offices in Australia. Infrastructure assets such as toll roads, airports, and power plants can provide stable cash flows and long-term returns. Family offices can invest in infrastructure directly or through infrastructure funds, which pool capital from multiple investors to invest in large infrastructure projects.
One of the advantages of private investments is that they are often less volatile than public market investments. Private assets are not subject to the daily fluctuations of the stock market and can provide a steady stream of income over the long term. This can be particularly attractive to family offices that are looking to preserve their wealth and generate income for future generations.
However, private investments also come with risks. These assets are often illiquid, meaning that it can be difficult to sell them quickly if needed. Private investments also require a significant amount of due diligence and expertise to evaluate, which can be a challenge for family offices with limited resources. As private investments are typically managed by the leadership team of the company, family offices need additional resources to understand how the private investment is tracking, as there isn’t a professional advisor (ie financial planner or stockbroker) monitoring the portfolio. It can also be challenging to report on investments, as unless a Family Office third-party provider such as ONDA Group is engaged, it is difficult to create a single view of a Family Office’s investments (as reporting is provided by a range of investment platforms which as challenging to consolidate).
Despite these risks, Australian family offices have been increasingly turning to private investments as a way to diversify their portfolios and generate higher returns. Private equity, venture capital, real estate, and infrastructure have all been popular choices, and this trend is likely to continue in the coming years. As family offices look for ways to preserve and grow their wealth in an uncertain market, private investments offer an attractive alternative to traditional public market investments.
From Chatham’s perspective, the increasing interest in private investments by family offices is a key reason why they our a first port of call when we assist a client with the sale of their business, or a division of their business. The reduced bureaucracy in terms of decision-making, longer-term investment horizon and (often) operational business experience, can make them an ideal fit for business acquisitions or as an investor via a capital raising.
We anticipate that in the next decade, family offices will become increasingly common not just among the very wealthy, but increasingly those Australian families who wish to preserve financial wealth in an investment vehicle that may have a better prospect of passing from one generation to future generations.
