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According to a new report from Goldman Sachs, family offices are increasing their allocations in stocks and real estate, have plenty of cash to deploy, and have fallen out of love with crypto.
The "Eyes on the Horizon" report, which polled 166 family offices at the start of the year, found a group of investors ready to take on risk in a quickly-moving market environment. The survey results revealed the following trends:
Family Offices Reduce Cash Holdings
Family offices currently have 12% of their portfolios in cash and cash-equivalent holdings, high compared to other investors, but that is expected to fall this year as 35% of respondents plan to deploy more on new opportunities.
This is partly because of the opportunity set across public and private markets, but also a result of the changing cash equation in a higher interest rate environment.
Some of that cash will go into public market investments, with typical stock holdings down to 28% from 31% in 2021, showing just how far family office attitudes are removed from the traditional 60/40 portfolio of stocks and bonds. Almost half of respondents plan to increase exposure, with healthcare and IT sectors of most interest.
Reduced Interest in Crypto
The interest in cryptocurrencies among family offices has seen a significant increase compared to 2021, with 26% of family offices now invested in cryptocurrencies, up from 16%. However, the report reveals a decline in potential future interest, as only 12% expressed interest in cryptocurrencies going forward, down from 45% in the previous year.
This shift can be attributed to the extreme volatility experienced in the crypto market over the past year, leading to a cooling of interest among family office investors. In contrast, the broader digital assets ecosystem remains a focus for family offices, with 32% of them currently invested in digital assets.
The primary reason cited for this investment is their belief in the transformative power of blockchain technology. This indicates that while cryptocurrencies may have lost some appeal, family offices still recognize the potential of digital assets and the underlying technology.
Increasing Focus on Alternatives
Family offices have a strong focus on alternative asset classes, with an average portfolio allocation of 44%, significantly higher than other high net worth individuals.
This emphasis on alternatives reflects the return hurdles, sophistication, and multi-generational investment horizons of family offices, as well as the potential for higher returns in private markets. It also indicates their increasing role as limited partners in new fund raises and as co-investors in attractive private investment opportunities. According to Sara Naison-Tarajano, Global Head of Private Wealth Management Capital Markets, consistent commitment to alternative investments can lead to outperformance and help navigate market cycles.
In terms of real estate, residential/multifamily real estate continues to be attractive to family offices, with approximately one-third planning to increase their exposure to this sub-sector in the next year. Another 30% intend to maintain their current exposure.
On the other hand, commercial real estate, especially office and retail, is less appealing, with only a small percentage of family offices looking to increase their exposure to these sectors.
While private credit currently constitutes a small portion of family offices' allocations, 30% of respondents expect to increase their allocation to this asset class over the next 12 months.
This trend is driven by the withdrawal of banks from direct lending activities, which will likely be exacerbated given the current banking issues, creating an opportunity for family offices to step in as private lenders. Rising interest rates and subdued traditional financing markets further adds to the attractiveness of private credit investments.
Private Equity & Credit Becoming More Popular
Private equity was the most popular target, with 41% of respondents planning to increase exposure. The second-biggest area of alternatives interest was private credit, where current allocations run at 3% but 30% of respondents planned an increase.
All of these findings suggest that family offices are eady to go "risk-on" in a quickly-moving market environment. This is partly due to the changing cash equation in a higher interest rate environment, but also due to the potential opportunities across public and private markets.
Key Takeaways
The Goldman Sachs' 2023 Family Office ‘Eyes on the Horizon’ Report revealed a shift towards "risk-on" allocations among institutional family offices.
Family offices are increasing their allocations to public and private equities while adding fixed income exposure for higher rate opportunities.
The report highlights a declining interest in cryptocurrencies among family office investors, but continued interest in multifamily real estate.
It's clear family offices have plenty of cash to deploy, and they are ready to move quickly. These savvy investors know that they can capitalize on distressed or undervalued assets now and that the time to move is when most people are sitting on the sidelines.
This reflects our views at Blue Lake Capital and it's why we're continuing to keep our deal flow active. We believe that will allow us to get valuable, institutional quality properties at terms that will enable us to continue delivering market-beating returns for our investors. (Shameless plug, have you seen our newest acquisition yet?)
The next 12-18 months should be a very interesting and potentially very profitable time for active investors.
As always, Be Bold, Be great, and Keep Pushing Forward!
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About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.