Family offices serve an important function in the investing world. Their sole purpose is to manage the wealth of one or more families to ensure that earnings on investments are maximized in order to pass inheritances down the line and maintain the portfolio for future generations. Family offices often employ several financial experts to manage different aspects of a portfolio. For instance, one person may manage the tax burden of the entire portfolio while another focuses on stocks and bonds and another manager dealing specifically with real estate holdings.
All family offices are different. They’re all managed like corporations, or limited liability companies, but that’s really where the similarities end. The corporate officers may all be members of the family or hired professionals to act in their interests. All of the investments in a family office portfolio are managed for the benefit of the family and usually represent the investing style of each person whose interests are represented, and that often takes into account multiple living generations.
The changing landscape of financial services worldwide is leading family offices to transform their investment strategies to incorporate the latest investment trends. The bottom line, however, is they still have to manage risk.
One current trend among family offices is an increase in real estate investments. There is a simple reason for this. In 2017, private equity investments returned a whopping 15.5 percent average return for family offices. Given what their mission is—to expand portfolios and increase earnings—that makes a lot of sense. If a particular investment’s returns are higher than average or yielding better-than-expected earnings, then it’s worth a look to see if that trend is likely to continue into the future. If so, then any savvy investor is going to consider increasing his asset allocation for that particular asset. Family offices operate no differently than any other private investor looking to maximize earnings.
Private Equity, Emerging Markets, and Real Estate Investments Among Family Offices
Specific investments that did well for family offices in 2017 include market-listed equities, including developed and developing markets, private equity investments, venture capital, private equity funds, and direct real estate investing. Developing market-listed equities topped them all with 38 percent returns. Developed market-listed equities returned provided 23 percent returns. Those are more than respectable, but family offices are looking at 2018 returns and beginning to plan for 2019 now.
In 2018, family offices expect the best returns to come from private equity and real estate. Private equity investments are expected to reach 13 percent average returns. Private equity funds will follow at 11 percent. Direct real estate investments are expected to return up to 8.4 percent.
Real estate investment trusts (REITs) have grown to be popular in the last couple of years, especially in the real estate crowdfunding sector. But family offices are shunning those investments for direct real estate investing instead. That’s understandable when you consider that there are other benefits to direct real estate investing besides above-average returns.
With direct real estate investments, family offices don’t have to share returns with the REIT manager. The high fees of REITs cut into the profits, but they also diminish the value of the underlying asset. Even real estate crowdfunding costs less than managed asset classes like REITs and, therefore, make better investments that protect family wealth and maximize earnings for passing between generations. Real estate crowdfunding also has the added benefit of allowing family offices to invest directly into real estate without the burden of managing the property. That’s two bonuses over REIT investment, and that’s why family offices are looking the other way for 2019.