Global family offices are defying the cautious global capital market trend by strategically increasing investments to alternative assets such as private credit, infrastructure, and private equity in 2024 to capitalise on long-term growth opportunities and tax-efficient capital generation, KKR & Co. Inc.’s Henry McVey said.
McVey, who is KKR’s chief investment officer (CIO) and head of global macro and asset allocation, said in the firm’s annual family capital survey report, “Loud and Clear”, shows that in 2024, KKR’s network of family offices expect 52% of their portfolios to be invested in alternatives, up from 42% in 2022. The report surveyed more than 75 family office CIOs in North America, EMEA, APAC, and Latin America, overseeing more than $3 billion in assets on an average.
This trend signifies a strategic departure from traditional liquid investments in favour of higher-return opportunities found in private equity, real estate, and hedge funds. The growing comfort with the illiquidity premium suggests that family offices are willingly accepting additional risk for the potential of greater returns.
“Family offices can have a long-term focus, when it comes to allocating and as owner operated investment firms, they can embrace opportunities and dislocations to gain a competitive advantage,” the report said
Asset allocation strategies
Over 75 surveyed CIOs, with 60% managing assets between $1 billion and $5 billion, and 19% overseeing at least $5 billion, plan to increase investments in alternatives, according to McVey.
The motivation, cited by 93%, is the illiquidity premium for tax-efficient capital growth for future generations. Capital preservation is a priority for 44%, while only 35% focus on generating income for current generations.
Family offices are enhancing investment and risk management, seeking partnerships in regions lacking expertise, reflecting a proactive and diversified asset allocation strategy.
Cash positions, though still significant, have decreased, indicating a shift towards higher-risk investments, particularly in private credit, infrastructure, and private equity, notably in Japan, Korea, and India over China.
Family offices are also adopting a contrarian approach by showing growing interest in oil and gas and industrial sectors for value-based opportunities. In Europe and Asia, there’s a focus on climate and energy transition funds, aligning with socially responsible investing mandates. However, those in the US and Latin America are leaning towards traditional energy assets, anticipating a rebound due to cheap valuations, strong cash flows, and a prolonged shift to renewables.
Investment strategies
The survey reveals a nuanced investment preference split among family offices, with established ones favouring alternatives, especially private equity, while newer entities explore diversification.
Newly-established family offices lean towards higher cash balances and a cautious approach to hedge funds and private equity, while mature offices show lower cash and a greater allocation to private equity, signaling a more aggressive stance.
The preference for real assets like data centers and warehouses reflects a strategic shift to inflation protection and alignment with post-pandemic themes. McVey emphasises a dynamic nature in family office investment, noting increased illiquidity and diversification across asset classes as a strategic response to current market conditions.
This signifies a broader shift in the investment philosophy of family offices towards long-term growth, risk management, and sectoral diversification.
The report also highlighted the increased concern over geopolitics over inflation as a primary risk factor for family office CIOs, with over 40% emphasizing it, compared to about 25% focused on inflation. Outside the US, heightened awareness of geopolitical tensions is noted due to global pressure points.
With a growing focus on both inflation protection and geopolitics, more CIOs plan to allocate to Infrastructure in the coming quarters.
Asian family offices
Asian family offices show a tendency to underweight cash compared with counterparts in other regions, with cash comprising around 3% of AUM, compared to more than 10% globally. CIOs in Asia are believed to rely more on liquid securities, especially fixed income, for liquidity needs
“Indian family offices are also leaning towards investing more in alternative assets rather than keeping a significant portion in cash,” said Deepak Padaki, president of Catamaran, the family office representing Infosys cofounder N R Narayana Murthy.
“Global family offices that are exploring investment opportunities in Indian companies and India-focused funds will target expected returns ranging from 15% to 22% in dollar terms depending on the investment stage,” Padaki said.
Noting the steady rise in allocations to alternatives, Rakshat Kapoor, chief investment officer at private credit platform Modulus Alternatives Investment Managers Ltd, said the uptick is driven by the attractive yields offered and the emergence of new products in credit and debt businesses falling under the alternative category.
“With India experiencing a robust nominal growth rate of 7.3%, the overall economic expansion suggests a promising 20-25% growth trajectory for the alternative investments segment, from a debt perspective,” Kapoor added.
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