Family offices increasingly attracted to private debt

Appetite for private debt among family offices is growing, despite few of them making changes to their overall asset allocations.

The inaugural BlackRock Global Family Office Survey of 185 family offices globally found that, despite market turbulence and a challenging economic outlook, less than a quarter (23 percent) of family offices intend to make material changes to their asset allocation, largely due to having a long-term investment horizon.

However, the survey found a shift in investor sentiment towards private debt. Historically allocations have been low, with 87 percent allocating less than 10 percent, but two-thirds of family offices indicated to BlackRock that they intend to increase their exposure in the future, having been attracted by the potential returns from dislocated markets.

The survey found that, where changes were made to allocations, finding a replacement for fixed income was the top priority for family office chief investment officers, while concerns around equity valuations and liquidity needs are front of mind.

The threat of inflation is also beginning to command greater attention from family offices. Despite the initial deflationary shock to markets from the covid-19 crisis, they are wary of the impact of the fiscal and monetary stimulus injected into the global economy and view inflation as a significant medium-term risk.

On average, family offices allocate approximately 35 percent of their portfolios to alternative asset classes, and within this allocate 10-25 percent to private equity. Over half (55 percent) of family offices told BlackRock they expect to grow their exposure to private equity further.

Other alternative asset classes are also in favour. More than a third of family offices (38 percent) stated an intent to increase their exposure to hedge funds, citing the potential to generate meaningful, uncorrelated risk-adjusted returns in a more volatile market environment or to act as a replacement for fixed income.

Infrastructure currently represents a relatively modest component of family office portfolios with 56 percent of those investing having an exposure of 5 percent or less. But there is a clear upward trend in appetite for infrastructure, with 62 percent intending to increase their exposure.

Over three-quarters (80 percent) of family offices surveyed said they currently have some form of sustainable investment exposure integrated within their portfolio strategy. Increasingly, there is an acknowledgement that sustainable exposure does not necessarily result in a trade-off between returns and core values. Over half (59 percent) do not believe they have to compromise financial outcomes to achieve their sustainable goals.