How Family Offices Can Leverage Relationships and Data to Maximize Returns

16 May

How Family Offices Can Leverage Relationships and Data to Maximize Returns

According to a recent report from Capgemini, the assets under management of family offices in the U.S. alone has grown to about $1.2 trillion AUM. This means the importance of family offices in the institutional ecosystem continues to increase, and also helps family offices have more bargaining power with managers when it comes to fees, terms of contracts and access to vehicles.

Globally, eVestment has nearly 100 family office clients. Most utilize the platform as part of a two-pronged approach: conducting research through their network, while running an independent, data-driven due diligence process in parallel. This allows family offices to reach out beyond their existing network to find new opportunities.

Family offices seek to find the best manager that fits specific criteria by leveraging their network. This process is aided by having context from the industry, especially when it comes to fees. It is imperative to look at both listed and actual fees. By doing this side-by-side comparison of funds, the investment organization at a family office can make a more informed decision when selecting a manager.

Depending on the size of the family office, an external advisor or a consultant may be utilized to enhance in-house knowledge of an asset class or overall portfolio analysis. Having other sources of information when evaluating managers and the portfolio helps family offices ask better questions when discussing the recommendations from advisors.

Due diligence across asset classes

Family offices are continuing to increase allocations to private markets. That said, they still have a sizable portion of their portfolio in long-only asset classes. Based on a UBS survey from 2017, the average equity allocation for family offices was about 27%, while fixed income allocations averaged 15.1%, as seen in the chart below. The survey also found that the allocations to this asset class will grow going forward. As long-only continues to be a staple in family offices’ portfolio, creating a repeatable process for due diligence and manager validation is important. By comparing funds through the same lens, such as performance, risk, concentration and holdings, an investor can gain a holistic view of how different managers compare.

Average Family Office Portfolio

Source: UBS

Due diligence in private markets is very time-consuming because of its complexity. Private equity continues to have a prominent role in the portfolio of family offices, averaging about a 20% according to the UBS survey. Even though many are concerned about dry powder in the asset class, family offices are still looking to increase weights in search of returns. As most private equity investments happen via funds, having access to a private equity platform helps investors gain better context around the marketplace. eVestment has recently expanded its private equity database to include over 3,000 firm profiles with enhanced performance analytics to help investors with their private equity due diligence.

Source: eVestment

Hedge funds have significantly underperformed equity markets in past years, which has lead family offices to decrease allocations from 8 percent to 7.1 percent. That said, hedge funds are peaking interest for more investors based on flows. Per eVestment analysis in Q1 2018, hedge funds saw a total inflows of $14.33 billion while all of 2017 resulted in total inflows of $27.2 billion. When analyzing hedge funds, getting insights through various sources, including hedge fund databases and third-party data feeds, will enable the due diligence process to be more effective and quicker.

Increased ESG allocations

Based on the UBS survey, over 40% of family offices are expecting to increase allocations towards impact and ESG investments. As these investors are often working on creating a balanced impact portfolio across every asset class, getting consistent information in similar formats adds value to the process.

In this space, a lot of the activity is taking place through private investments, such as private equity. However, many family offices are also looking in the public space to find vehicles that suit their needs and philanthropic goals. By utilizing a database with various approaches to ESG investing, family offices can start making an impact through their long-only managers as well.

How to prepare for the future

Family offices will change significantly in the next 15 years as 69 percent of family offices undergo a generational transition. Granted, the investment portfolio is only a part of the equation, but it should be a key consideration when thinking about the transition plan. Having a great network is essential to how family offices invest, but creating a two-pronged approach which builds on both relationships and data establishes a process which can be more easily be replicated by future generations.

Learn how family offices are using eVestment for manager research and due diligence