Family offices are increasing their exposure to illiquid investments, even though they often lack the expertise to properly assess private market opportunities.
That is the common thread running through a series of recent reports on family offices worldwide, published in recent weeks by private banks, asset managers, and advisory firms. Investment Officer reviewed a total of nine reports from the likes of Blackrock, BNY, Citi, Goldman Sachs, and Morgan Stanley, which examined the challenges facing the world’s wealthiest families.
Family offices turn to private markets
The search for yield and protection against inflation is driving family offices toward private credit, infrastructure, and direct investments. According to Blackrock, the share of alternatives in the average portfolio has increased from 39 percent last year to 42 percent this year.
At the same time, liquidity and flexibility remain key priorities for both single and multi-family offices, according to the reports. That focus appears to conflict with their growing exposure to illiquid assets.
Several reports note that the rising illiquidity of family office portfolios exposes certain vulnerabilities. Campden Wealth, for example, finds that six in ten family offices experience shortcomings in risk assessment and reporting. Three-quarters say they lack sufficient expertise to properly evaluate private market investments.
To manage this tension, many offices maintain larger cash buffers and apply stricter deal selection. Blackrock observed fewer transactions, but with higher ticket sizes.
Some family offices are turning to external managers to oversee part of their portfolio. Others are building specialized due diligence teams to evaluate investments and risks, or forming co-investment structures to access deals, share risks, and reduce costs. “A hybrid approach combining internal and external expertise is essential,” said Campden Wealth.
Changing compensation structures
On the business side, several consultants note a shift in the compensation structures within family offices. These are increasingly moving toward performance- and participation-based models. Meanwhile, family offices are expanding their investment teams and operating more like “boutique investment funds,” according to PwC. The consultant refers to this trend as an “institutionalization of family offices”. In some cases, family offices are using external capital or taking the lead investor role in joint deals.
Within the investment portfolio, the influence of younger generations is growing. The reports show that younger heirs place greater emphasis on sustainability, technology, and impact investing—topics that are becoming increasingly important within family office portfolios.
AI creates new opportunities
Interest in technology and AI is also rising. According to Blackrock, 60 percent of family offices see opportunities to use AI for risk monitoring or portfolio analysis, while 20 percent already do so.
At the same time, the reports stress that effective implementation of AI in a family office setting requires a solid data infrastructure and sound governance. Without robust systems and processes, human interpretation of data remains crucial.