Wealth Strategies

Family Offices Keep Smiling On Alternatives, Heavy With Cash – KKR

Tom Burroughes Group Editor February 14, 2024

Family Offices Keep Smiling On Alternatives, Heavy With Cash – KKR

While unsurprising perhaps that an investment firm specializing in alternatives says that family offices are even keener on the asset class, the study sheds light on what preoccupies investors for ultra-HNW clients.

Family offices are allocating more to alternative assets, with 52 per cent of assets allocated to areas such as private equity, hedge funds and private credit, according to a recent study by Kohlberg Kravis Roberts, aka KKR.

The exposure to alternatives has, in percentage terms, risen 200 basis points since 2020, KKR said in a note from Henry McVey (pictured), chief investment officer of its “balance sheet” and head of global macro and asset allocation.

Within the overall “alternatives” space, there has been a significant rise in holdings of real assets, McVey wrote.

KKR’s report was based on a proprietary survey of more than 75 CIOs in charge of more than $3 billion in assets, on average.

Among other findings, McVey said cash positions are “high” at 9 per cent of all holdings, which McVey said proves KKR’s thesis that many investors are “under-risked for today’s markets.”

Such a comment might be controversial in some eyes, because rising interest rates have encouraged a flood into money market funds and certain types of bonds over the past year. Recently, Northern Trust Asset Management said the influx into the alternatives space – which has been going on for over a decade – was slowing, and may even halt. Furthermore, areas such as venture capital have seen a fundraising slump as interest rates have risen. Since 2008, a decade of ultra-low interest rates encouraged a rush for illiquid assets offering superior yields, but the math has gotten less compelling since rates started to rise after the pandemic. 

Loud and clear
“We hear the message ‘Loud and Clear’ that this segment of the market is changing – and for the better,” McVey said. “These investors are diversifying across asset classes and, as they mature, they are getting better at harnessing the value of the illiquidity premium to compound capital. They are also using better hedging techniques and increasing both their desire and ability to lean into dislocations, strengths that we believe will position them to be at the winner’s table at the end of this cycle.”

McVey said there are parallels between the asset allocation objectives of KKR’s balance sheet and those of the surveyed CIOs. These include a focus on compounding capital in a tax-efficient manner to build wealth and investing behind themes such as supply chain disruption, industrial automation, artificial intelligence and the “security of everything.” 

In other findings, family offices plan to allocate more to private credit, infrastructure and private equity at the expense of public equities and cash.

There is also a split between older and younger family offices, McVey said. 

“We continue to see notable bifurcation in the asset allocation approaches between family offices set up within the last five years and those that had already scaled before Covid, with more seasoned family offices typically holding less cash and allocating more to private equity,” he wrote.

“There are pronounced regional differences in asset allocation. US family offices allocated less to traditional private equity compared to counterparts in Latin America, Asia and Europe, while Asia-based family offices had relatively heavy allocations to real estate,” he continued.

Investment chiefs are also defying conventional wisdom to find value in private markets, such as in the oil, gas and industrial sectors. (Editor’s note: Such a finding suggests that enthusiasm for “green” investing isn’t so strong that it trumps a desire to find profitable value where it exists.)

The war in Ukraine, the Israel-Hamas conflict, and attacks on shipping in the Red Sea area off east Africa have propelled geopolitics up family offices’ worry list. Geopolitics is now ahead of inflation as the main concern for CIOs. More than 40 per cent of respondents said this was their main worry.

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