Here at Capital Hedge, via our FINTRX Platform, we’re always on the lookout for family office investment trends. One such trend recently is family office activity in direct investments. According to an annual survey by the Family Office Exchange released Wednesday, about 81 percent of offices have at least one full-time employee sourcing and evaluating direct investments. The average family office surveyed reported a 7.2 percent return last year and there's less conviction that stocks, bonds and hedge funds will provide stellar returns. Driving this push is the perceived lack of returns elsewhere, said Kristi Kuechler, president of the organization’s private-investor center.
Interestingly, those surveyed reduced their allocation to hedge funds on average in 2016 and most don’t plan to increase it this year.
Direct investing in companies has become increasingly popular among wealthy families that see value in sidestepping private equity firms' fees, which typically are 2 percent for annual management and 20 percent of profits.
The strategy requires manpower to find opportunities and investigate their financials, and then complete the transactions and manage stakes. In some cases family offices are teaming up on deals, which is becoming a trend, said Kuechler. It also means family offices need to ramp up their deal-making expertise.
Said David Druley, chief executive of Cambridge Associates, which advises investors including family offices: “These firms need people that are good at manager selection, that are good at strategy selection and understanding where to deploy capital and how to be effective.” Druley spoke Tuesday at the Milken Institute Global Conference in Beverly Hills, California.
In 2016, family offices allocated an average 12 percent of their portfolios to private investments, 7 percent directly and 5 percent through private-equity funds, according to the report. On the hedge fund front, family offices dropped their average allocation to 10 percent in 2016 compared with 12 percent in 2014, said Kuechler.
Natural resources, including commodities, had the best return last year for the respondents, averaging 15 percent. Domestic equities followed with a 13 percent return, compared with a total return of 12 percent for the S&P 500 index. Real estate investments by families returned an average of 9 percent, according to the survey.
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