Into Alts, Out of Cash
The strong equity returns in 2023 coupled with historically high valuations in the S&P 500 today have left many investors with a difficult decision when it comes to investment allocations. The historic levels of concentration in mega cap tech stocks within the S&P 500 may make these decisions more difficult.
Furthermore, some investors who were heavily committed to cash last year may have missed out on the current bull run in equities. More than $1 trillion poured into risk-free money market funds in 2023 amid near-constant recession predictions and a high interest rate environment.
As a result, many institutional investors have adopted a cautious approach over the past 12-15 months, refraining from investing in riskier assets such as alternative assets. But family offices, which fill an important role in the wealth management landscape by providing specialized investments and services to multigenerational ultra-high net worth clients, are planning to increase their allocations to alternatives this year.
Additionally, as global wealth continues to rise, the number of family offices has increased, with estimates reaching as high as 10,500 globally, and these firms are wielding considerable influence in the investment arena.
Against this environment, a study of family offices indicated how some CIOs intend to address these allocation difficulties by shifting to private and alternative assets.
KKR, a global private investment firm, polled more than 75 CIOs who manage an average of more than $3 billion in assets each and found that family offices are investing to grow wealth for future generations, with 93% reporting that this is a focus of their portfolios.
Furthermore, family offices allocated 52% of their portfolios to alternative investments in 2023, up from 42% in 2022, compared to 29% for foundations, 28% for high-net-worth individuals, and 23% for pensions.
Private credit is expected to benefit the most this year, according to the firm’s annual family capital survey report, “Loud and Clear”, with 45% of family offices aiming to raise their allocations to the asset class. Infrastructure comes in second at 31%, closely followed by private equity at 28%.
“The slowdown in high-yield and leveraged loan issuance, along with the pullback of traditional bank lending, has left private credit well-positioned to fill the shortage of capital across the traditional middle market,” said Andrew Krei, co-CIO of Barrett Upton Capital Partners.
These benefits, however, will come at the price of public stocks and cash, which are likely to see reduced commitments of 31% and 42%, respectively, according to KKR.
Cash positions are at 9%, down from 11%, although KKR noticed differences in methods between family offices that had previously scaled prior to the COVID-19 outbreak and those that were established more recently, with the former holding less cash and allocating more to private equity.
“We hear the message ‘loud and clear’ that this segment of the market is changing – and for the better,” Henry McVey, CIO of KKR’s $39 billion balance sheet and head of global macro and asset allocation, wrote in the report. “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.”
“Now is an interesting time to play offense, given that many others need liquidity, and we don’t. We are particularly keen on going direct, for example, in sectors where we have owned businesses in the past,” a CIO, who declined to be named, told KKR. “At the same time, we increasingly want to partner with GPs in areas where we may not have regional expertise or industry expertise to further build out our portfolio.”
According to a Goldman Sachs survey from last May, 41% of family offices intend to expand their PE holdings in the next 12 months, 30% plan to increase their allocation to private credit, and 75% intend to maintain their hedge fund exposure. Meena Flynn, co-head of global private wealth management and co-lead of its One Goldman Sachs initiative, believes family offices are taking a “consistent approach to more aggressive allocations as they seek superior returns.”
Much of this has come to fruition lately. Family offices are frequently mentioned as investors in funds across multiple asset classes, especially in recent weeks. CORE Industrial Partners secured $887 million in initial commitments for two different funds focused on middle market industrials. Lakemore Partners raised $560 million for its Aquatine V Fund, which invests in supermajority control equity investments in U.S. CLOs.
In addition, real estate firm Rockpoint raised $5.1 billion for its 7th fund with $2.7 billion in total equity capital, as well as an additional $2.4 billion for two single investor funds and one single-asset continuation vehicle. Banner Ridge Partners‘ Banner Ridge Secondary Fund V closed at $2.15 billion, and RidgeLake Partners‘ maiden middle market-focused GP stakes fund closed at $1.1 billion.
