The business of predicting outcomes didn’t go so well in 2016 - Donald Trump won the US presidential election and the UK voted to exit the European Union, despite what pretty much all mainstream commentators and pollsters predicted before these events. OK, some of the more micro-predictions about equity, currency and bond markets might have been more successful, but forecasting more than a few months ahead with any certainty today is a mug’s game more than ever. So why discuss themes for family offices in 2017? Well, they are themes and not necessarily predictions. But one, or even two of them might just have some relevance in 2017. Take them, depending on their relevance to the success, or otherwise, of your family office, with a pinch of salt...or a few grams of beluga caviar.
A slowdown in private equity investing…?
There is no evidence of this yet, and family office appetite for investing in private equity, whether direct, or through funds, is as strong as ever, as Family Capital documented on numerous occasions in 2016. But here’s a thought that might just ease that demand in 2017, at least at the margin - renewed interest in public markets. Of course, that renewed interest began in 2016, with a number of the major global indices rising by double digits in percentage terms last year. But if president-elect Trump commits to his promises on cutting corporate taxes, deregulation, and increased infrastructure spend, public markets should see further impressive growth in 2017.
Of course, there are many caveats to this idea - not least the fact that more and more knowledgeable commentators are talking about public markets, particularly in the US, being overvalued and a correction is due this year. But if the current rally has more steam in it, chief investment officers might just be concentrating more of their efforts on public markets in 2017 than they did in 2016. And that will leave less time for private equity.
Recruitment - top talent wants to work at family offices
Last year, very discreetly, more talented investment specialists moved over from asset managers, private equity groups and hedge funds to work for family offices. Family Capital reckons this trend will continue in 2017 - indeed, accelerate. Here’s why. Family offices look, and to a large extent are, more entrepreneurial than much of the rest of the financial services sector. This more entrepreneurial attitude has its appeal to an increasing number of investment managers. That’s hardly surprising - many institutionalised asset managers are now more bureaucratic than ever, and private equity groups and hedge funds have lost much of their swagger post the financial crisis of 2008. In contrast, family offices still have swagger - indeed, they are one of the few parts of the financial sector where real entrepreneurial zeal still flourishes.
Outsourcing of indirect investing will gather pace
Family Capital has written about this trend before and reckons it will remain a relevant theme in 2017. There are an increasing number of multi-family offices and private banks pitching to family offices about their abilities to run the more straightforward asset management functions of a family office. Does it make sense for a single-family office to outsource these functions? That will depend on the size and nature of the family office. But more compelling offerings from third parties like MFOs will probably lead some SFOs taking the plunge and outsourcing part of their asset management functions in 2017. Many will reckon it makes sense financially and will free up time to concentrate on making direct investments in private equity and venture capital - to many, the more sexy part of the investment process.
Fintech...does it add up for family offices?
The jury is still out for fintech. Could fintech be like cleantech was around 10 years ago when family offices piled into the sector only to lose much of their money a few years later? Or could it be one of the big money spinners of the late 2010s? Of course, there’s two ways at looking at fintech for family offices - one as an interesting investment concept, and the other is a way of actually embracing fintech technology within their businesses to improve efficiencies. Family Capital reckons fintech will provide efficiencies within family offices - we’ve reported on some of these concepts in 2016. And if these efficiencies are realised on a larger scale, i.e. the entire financial services sector, than fintech offers some great investment opportunities. The challenge will be to find the fintech companies that will be at the forefront of creating these efficiencies, and discarding the ones that won’t be.
More adventurous investing - and out there theme
OK, here’s a very left-field-type theme. Impact investing, and fintech have prospered as ideas post the financial crisis, but even they are beginning to look a bit dated. Family offices are in the unique position to take extreme risks in some of their investment decisions - that’s why many of them, especially in the US, are big investors in startups. They can afford to lose money on these ventures as their liabilities aren’t structured as rigidly as most institutional investors liabilities. Of course, family offices do have liabilities - beyond their staff costs and the immediate costs for the family, these are the provision for future generations of the family.
And here’s how they can be particularly adventurous - betting on the extreme long-term for future generations. Not for just for the next 10 years, but the next 20, 30, or even 50 years time. As someone told Family Capital last year, why not invest in coastal property in Somalia - which might seem outlandish today, but potentially much less so for future generations of the family. One never knows...