Family Offices and Foundations

The World Ahead
The Family Office Collective Intelligence Video Series
Investing with an Impact: The New Frontier
Caroline:
I’m Caroline Brady, Product Strategist for Impact Investing at BlackRock.

2020 represented a watershed moment for sustainable investing in Latin America and the world. Looking back over 18 months ago, sustainable was viewed as more of a ‟nice to have.” Today, it is part of every conversation we discuss – and arguably, it is now time for Family Offices to move from learning about sustainable investing to actively incorporating it. Simply put – sustainable investing is here to stay.

In BlackRock’s ‟Inside View” Survey, one of the three key themes that emerged was an increasing interest in sustainability - 80% of Family Office respondents indicated that they are starting to engage in some form of sustainable investing but overall allocations within portfolios remain relatively low: with 22% in EMEA, 14% in the US, and a mere 3% of portfolios in Latin America, as of today.

The intent to ‟do more” is driven by the interest and demand of the next generation of family members in addition to a growing recognition and proven data that pursuing positive social, societal and environmental outcomes through investments does not compromise returns.

Today, we’re joined by Eric Rice, Head of Fundamental Equities Impact Investing at BlackRock and the Portfolio Manager of the Flagship Global Impact Fund. 
Eric, with your wealth of knowledge and many years of expertise in the field, being known as the ‟Architect of Impact Investing and Public Equities”; how does investing solve for the investment needs of family office investors?

Eric:
What we’ve realized, Caroline, is almost a decade ago when we started looking at this, we were hearing from families that they had this dilemma: How do I do something with my wealth that is going to generate positive measurable impact outcomes? You know, in social or environmental solutions to the world’s biggest problems but at the same time ensure that I’m getting a return, that I’m maximizing the alpha on my wealth.

And as you think about that ESG pops up as a sort of an answer; but this is not ESG investing. ESG investing is about how companies operate, you know, so you can imagine a company like Coca-Cola, a very highly rated ESG company because they treat their employees well, because they have good environmental practices, but what we’re talking about is not how companies operate but how companies do.

We’re investing in companies whose goods and services are solving the great social and environmental problems of the world. That’s the big difference. So, examples in Latin America of our impact companies are, for instance, MRV, the affordable housing developer in Brazil, or Mercado Libre from Argentina, or Orbi Advanced in Mexico all of which have strong returns over these last year and are part of our universe of more than a thousand companies globally.

Caroline:
Thanks, Eric. You’ve touched a such an important point. Impact investing is being focused on maximizing long term returns. So, what in your eyes makes a company impactful and how to create a universe?

Eric:
We have some very clear criteria for this. The first thing is: are these companies aligned with our Impact Themes? And those are themes around people - like access to education, access to healthcare, safety and security or around the environment; cleaning up the mess of the environment, renewable power, electrification, digitization, there are more than that, but we have a set of themes that we identify and that is what you might consider a ‟Thematic portfolio”. 
Which makes an ‟impact portfolio” is, first of all, materiality. Which means that every company in there has to be at least 50% oriented toward those impact goals. And, as well, what we call additionality. Additionality means that if it weren´t for the fact that this company existing, that problem wouldn’t be getting solved. And so typically, that comes from the company either having new technologies or new business models or bringing that to a population that hasn’t been served before. And through that, we have companies that are real agents of change in the world.

Caroline:
Thanks Eric. So just to drill down a little bit more on to the financial returns and elements of impact investing; how do you think about return generation as a Portfolio Manager?
Eric: 
I’d say two parts. One is being really disciplined about what each company that would go in the portfolio is going to achieve. So, we have an overall target of MSCI ACWI, the Global Equities Index plus 4%, so we have to be very disciplined that every company is, by our forecast, going to achieve that hurdle rate or more.

The second part of that is that we have very different companies. So, if you have a very early stage company, a company doing electric vehicle charging stations; you’re going have to look for that company to achieve an even higher hurdle rate ex-anti, because you want to be sure that portfolio as a whole gets you to Global Equities plus 4%.

The other thing that we focus on is Risk Management. We have a multifaceted approach to risk management. It goes from the fact that having different stage companies, having a broad range of geographies, and also statistically keeping track of every aspect of the risk. And I think that’s the reason why we’ve been able to have an alpha-oriented portfolio over such a long time.

Caroline:
And it’s true this type of approach delivering strong returns alongside measurable impact that has contributed to a large optic and asset gathering across impact investing in the last year. But with Family Office clients that we’ve being working with we are now in the implementation phase. However, we are still in relatively early stages of this switch.

At BlackRock, we're working tirelessly to keep up with client interest, learnings, and demand. And in 2020 alone, our platform doubled in assets under management, and we were close to doubling the number of strategies available for our clients. As we look toward 2021 and beyond, we will continue to focus on innovating and leading in this space – together with you, our clients.

Thank you.

Roque Calleja: Hello, my name is Roque Calleja and I’m the Head of BlackRock Alternative Specialists for Latin America.  Today, BlackRock manages $55 billion dollars for Family Offices globally . According to the most recent UBS Global Family Office report, Family Offices worldwide have an average allocation to Alternatives of 35%, and the COVID-19 pandemic has just fueled demand for this asset class, however Family Offices have encountered several long-standing hurdles limiting the full potential of the role Alternatives can play in investors’ portfolios, including:

Lack of transparency, data is disparate and limited. Many Family Offices find that while Alternatives may be the best client solution, proving this through clear, insight driven data/monitoring is a challenge both short and long-term. Bottom-line – always make sure clients understand what they own. The importance of sourcing. We hear you - closing deals or investing in a private equity offering is tough since FO’s do not necessarily have a broad base of opportunities, contacts nor the experience. It’s important to partner with a manager that can provide you unique access and differentiated sourcing capabilities 3) Investment processes and results that aren’t always easy to decompose and compare consistently. We have found that multiple FOs find that showcasing the journey and “telling” the story of Alternatives is complicated and sporadic. 4) Alignment and focus on long term outcomes with special interest on sustainable investing can be tricky to instigate, yet is a trend we cannot ignore, with the fact that in  five years 35% of family offices expect to allocate 25% or more to impact themes. BlackRock’s recently conducted Global Family Office Survey Report executed by Juniper Place showed ESG is fast becoming a topic of long-term interest.

With these obstacles in mind, at BlackRock we have built a platform to help our clients achieve your goals and to help you navigate through these hurdles. At $26 billion in assets as of October 31st 2020, BlackRock is the fourth largest Alternatives Asset Manager in the industry, with a diversified platform across Private Equity, Private Credit, Real Assets, and liquids- across Hedge Funds and Liquid Alternatives.

So, how is BlackRock addressing these challenges head on for Family Offices?

We know that we’re inclined to believe in and root for the things that we know best. While this may be human nature, home-country bias limits an investor’s universe of available opportunities. We collaborate and scale with our people around the world so we can solve problems faster and with a greater precision. Our goal is to provide access to high-quality opportunities through our deep and wide global sourcing network, which allows us to select the best quality deals for clients. As of 2020, we have 70 offices in 30 countries, and can combine the benefits of worldwide reach with local service and relationships.

We also instituted a global team that focuses sole on sourcing and origination in Alternatives, our BlackRock private capital markets. What that means is that any transaction that is coming into BlackRock Alternatives, be that debt, equity, corporate or asset backed lending, is handled by a dedicated team that understands the different portfolios or requirements of our investment desks, and can actually start to partner with organizations offering deals and try to find them the right contact at BlackRock.

Importance of transparency through data and technology. Recent studies show that over 80% of FO are concerned about keeping up with the latest technology, and 75% of them need more information on how technology will help them run their businesses and optimize portfolios. For that reason, BlackRock has been carefully building technology into the heart of our Alternatives offering.  Our Aladdin platform has long set the industry standard for public market analytics and now, our acquisition of eFront adds best-in-class capabilities in private markets.  

eFront helps manage private assets in portfolios, understand risk and performance attribution, and gain transparency into every level of your investments. This year we worked closely with a Family Office that was starting their Alternatives program and did not know how much to invest in each asset class to achieve their target in a few years. As you know, not all capital calls are done at the same time and it´s complicated to manage cash flows in Alternative investments. Therefore, we worked closely with our Private Equity Partners Team and utilizing Aladdin´s technology to deliver an illustrative cash flow and NAV projection exercise, enabling them to understand how much they should really be committing to achieve their target Alternatives program growth rate and NAV, while at the same time, getting a better idea of what the cash flows might look like . This is only one of the many examples of how we use technology to help our investors navigate the asset class, think through a portfolio construction lens and achieve their goals.

It’s still too hard for investors to know what they own within private asset classes, and to make relative value judgements across private asset classes. For example, in a recent eFront survey of 179 LPs, 53% of them rated themselves as low proficiency in position monitoring.

This leads us to the next challenge BlackRock is looking to address.

How to compare alternatives with the rest of your portfolio? Portfolio rebalancing is nothing more than regular maintenance for your investments. It’s like going to the doctor for an annual checkup or getting your car oil changed. However, our recent annual survey of family offices showed that close to 70% of them struggle with how to view and rebalance their portfolio every year, and over 50% of them feel like they´re not keeping up with the right trends or information to do so

A common language to uncover overlapping exposures and risks becomes critical to achieving investment objectives. In our conversations with clients on their increasing allocations to Alternatives, family offices are looking for ways to:

(1) Efficiently own Alternatives (2) Understand the underlying characteristics and risks of this product set (3) Manage Alternatives effectively.

We advocate for a holistic, whole portfolio view at BlackRock, particularly when taking the long-term investment approach Family Offices tend favor. Portfolio construction is key in helping to understand portfolio construction decisions, risk factors driving portfolio and relative value decisions as family offices deploy capital.

We help our clients to have a deeper understanding of how their Alternatives investments impact the rest of their portfolio through a complete portfolio view. This is based in our experience managing across both public and private markets.

Speak to your Relationship Manager if you are interested in a consultation from our MAPIC Portfolio Construction Specialist team, and we will help you analyze your portfolio.

Alignment with long term goals. Finally, investors need a investment structure better aligned with their long-term horizon and situated at the intersection of converging industry trends. We bring sophisticated overall alignment with our clients, providing solutions that give access and efficiency, with an enhanced focus on areas such as sustainability, specific deal structures, fund terms and economics. For example, in BlackRock’s recent Global Family Office Survey we shared that 80% of Family Offices now include some sort of sustainable investing within their portfolio – a trend that is likely to continue, and we see 75% of Family Offices expecting to increase their exposure in the coming year.BlackRock has put ESG at the forefront of all processes on our platform in addition to specific strategies focused on the opportunity set. As an example, our infrastructure platform has been investing on renewable energy for years and we will soon be launching an upcoming PrivateEequity fund that focuses on impacting investing.

Sara Litt: In this next portion, we will touch a bit more on a few trends we are seeing with Family Office adoption.  For background, my name is Sara Litt and I lead our Latin America Wealth Alternatives efforts.

So, what are the trends we are seeing in how Family Offices across Latin America are adopting Alternatives?

For those Family Offices just starting to shape their programs, we are seeing them gravitate towards asset classes such as private equity and private credit with a strong emphasis on j-curve management and an efficient ramp up of their program.

Many Family Offices take a barbelled approach to portfolio construction, heavily relying on index investments for liquidity and private markets for higher return seeking strategies, with primary objective being capital growth for multi-generational wealth.

For those families with longer-standing programs, we see a continued demand in a few areas:

The first being direct investment. There is a strong preference of certain Family Offices to invest directly where they have the in-house resources and expertise and with the right resources, they have more efficiency from a fee standpoint, and Family Offices appreciate the involvement in operating assets.

Co-investment opportunities is another one that is very appealing for Family Offices as they offer direct access to deal opportunities and doing so alongside leading GPs that have efficiently sourced and diligence these assets. 

Sustainable investing, we think will be the new standard for investing and where BlackRock is placing strong emphasis, especially when it comes to the pressing need for ESG integration in private markets.

There are many interesting dynamics happening here with Family Offices and their focus on sustainable investing. To share some statistics, one in three Family Offices engage in sustainable investing. Currently, climate change and health are the top two themes within the ESG world that are top of mind for Family Offices, in 5 years, 30% of Family Offices expect to allocate 25% or more to impact themes.

Lastly, we are seeing Family Offices take advantage of opportunistic strategies.  A prime example of this is what we´ve seen in 2020. Many family offices sought to capitalize around market dislocations and take advantage of attractive entry points in select strategies such as Private Equity Secondaries, Distressed Credit and Thematic Equity investments in healthcare and technology.

So, how can BlackRock partner with you to conquer the full power of Alternatives? BlackRock has a best in class Alternatives platform with a strong focus on technology, risk management and sourcing.  We have strong solutions to offer across asset classes, geographies and liquidity spectrums, but understand that our partnership goes beyond this. We know our Family Office clients have different needs and are at different stages in their Alternative investment journey. For every client and at any level, we can partner to provide value-added services and best practices to help you implement or enhance your alternatives programs.

Gerardo Orendain: “Welcome to The World Ahead, BlackRock’s first ever Family Office Video Series– launching in Latin America from the heart of Mexico City. This is the space where we bring to Your Family Office our “Collective Intelligence”: stories that cover the span of topics we know family offices care about. At BlackRock, we place great importance and emphasis on the needs of the Family Office community, bringing experts in over 25 markets that trust us with over $50 billion dollars of Family Office global assets. Now we know that every family can be or is at a different stage in its journey, and therefore are presented with both amazing opportunities but continuous challenges. We believe it is important for all Family Offices to adapt and take action to “make their mark” in the world and to evolve in order to stay relevant. This space is a tailored, interactive – and at times personal – channel created specifically for you - to suit your needs and continue for us to partner in your investment journey and professional objectives. So, for now, let’s start a conversation. Let’s listen to each other. Let’s create together!”