Family Office 3.0: how to futureproof your investment office

Having worked with Family Offices (FOs) for years, I have seen firsthand the challenges they face and the measures they are taking to overcome them.

FOs are diverse in size and complexity, often spanning different countries and tax jurisdictions. In Europe, while there are major hubs like London and Zurich, we have built deep networks across the Continent, from Milan to Stockholm and Madrid to Athens.

I’ve seen FOs of 30 investment staff managing $20 billion of assets and others with just two people managing the same amount. I’ve visited small FOs with lavish offices looking out over Monaco, and others managing the same assets from farmland in central Germany. Some use cutting-edge technology to manage complex investment portfolios; others are working with little more than Excel spreadsheets.

At BlackRock, our dedicated team partners with over 600 European family offices¹, including single family offices, non-commercial multi family offices, family-run businesses and private foundations.

We often hear in the market that no family office is alike. However, in my experience and having met over 150 FOs in 2024 so far, clear patterns and shared philosophies have emerged.

The family office in 2024 and onwards

The family office industry is at an inflection point. In a market regime characterized by heightened volatility, inflation above targets and macroeconomic uncertainty, a more hands-on approach is required. This has led many family offices – regardless of their size or sophistication – to adopt more active investment strategies. FOs are adapting to market conditions and capitalizing on short-term opportunities in various ways, including:

1. Being more tactical with portfolios. In our 2023 Family Office survey², nearly 50% of FOs indicated they are looking to make more tactical changes to their portfolios – this is notably higher than in the past. This was evident in early August as we got a lot of incoming queries from FOs looking to capture the sharp intraday dislocations, i.e. a 12% fall in the Nikkei index. They are increasingly using ETFs as precision instruments to go long or short. They are also earmarking pools of opportunistic allocations, which are tactical in terms of entry point but can have long-term hold times.
2. Building deep knowledge. FOs are developing deep expertise in specialized niche areas, from agribusiness to healthcare, and in more liquid instruments such as collateralised loan obligations and specific types of hedge funds. Creating these centres of excellence allows them to make the most of their time and really go the extra mile to find unique deals in the industry.
3. Establishing strategic partnerships. For areas outside of their expertise, FOs are increasingly delegating to external managers so they can free up time and resources. These partnerships can also offer support for internal staff and act as an extension of their in-house team. More and more, we are managing strategic and tactical portfolios for FOs who want to devote time on private markets and vice versa; but still want to use BlackRock to get access to some of the best managers in the world.

In 2024, family offices are adopting new asset classes

Family offices are expanding their investment horizons by incorporating new asset classes. Cryptocurrencies is gaining focus. Fixed income investments are rising again, offering higher yields with less risk. Private credit, especially direct lending and opportunistic credit is becoming more attractive. Interest in infrastructure investments is surging, driven by decarbonisation, decentralisation and digitalisation. Family offices are also diversifying into uncorrelated assets like music royalties, sport and space financing and litigation finances.

Cryptocurrencies

As family offices increasingly explore new asset classes, cryptocurrency has become a prominent focus. Cryptocurrency ETFs, for example, offer FOs convenient and secure access to Bitcoin and other cryptocurrencies through a familiar ETF structure. Unlike direct investment in cryptocurrencies, which involves setting up an account with a crypto exchange, these can be bought through existing brokerage accounts, simplifying the process.

As cryptocurrencies’ role as a store of value grows, these ETFs align with certain family offices incorporating digital assets into traditional investment strategies.

Fixed income

Historically I’ve had few conversations with family offices about fixed income, simply because the return profile of the asset class hasn’t been compelling enough. However, sharp interest rate rises have put fixed income back on the agenda. Today, families can build liquid fixed income portfolios that yield over 4% while taking significantly less risk. From 2010 to 2021, virtually all assets that yielded over 4% were higher-risk fixed income instruments (high-yield or emerging markets). Today, over half is ‘lower-risk’ (investment grade or government bonds).

Private Credit

Within private credit, we see clients focused on two areas:

1. Direct lending: high-quality European direct lending can generate around 10% yield. In addition, lenders can achieve stronger protections with tighter covenants and credit documentation. Interesting fact: our direct lending funds have lent money to some family-owned businesses and families who wanted to collateralize some company shares they had locked-up!
2. Opportunistic credit: Opportunistic credit is less reliant on a floating rate spread to generate returns, appealing to those concerned about rate cuts impacting direct lending yields. We see less appetite for distressed assets, as clients can achieve equity-like returns with credit-like risk in the opportunistic part of the market.

These trends align with the broader changes identified by the BlackRock Investment Institute regarding the future of finance, one of the five mega forces we track. Evolving financial architecture is transforming how companies seek funding, with a shift from traditional bank loans to capital markets and private lending. Regulatory changes, fintech innovations and the end of zero interest rates are driving this shift, creating new opportunities for private credit investors.

Infrastructure

We have seen a surge in interest in infrastructure from family offices, rising from almost no interest to notable significant levels today. Our 2023 survey results indicate that infrastructure is now the top alternative asset class in which FOs intend to increase investment.

The nature of the asset class has evolved. The infrastructure of the future will differ from that of the past, shifting from traditional assets like toll roads to modern ones such as data centres. Governments carry higher debt loads than in the past and corporations face more pressure to focus on their core businesses. More private capital will be needed and these dynamics have not gone unnoticed by FOs who can step in. In the US, public-private partnerships account for just 1%-2% of infrastructure spending, compared with as much as 20% in some developed countries so we believe there could be some interesting opportunities. When partnering with a corporation on a project like a fiber-to-the-home network, a Family Office could purchase the asset outright, collaborate with the company in a joint venture, or invest via other structures such as mezzanine financing or preferred equity. Co-investment is one way we offer exposure to this asset classes, but Family Offices may prefer private markets funds such as the Decarbonization fund we launched jointly with Temasek, infrastructure exchange traded and alpha-seeking strategies.

Our planned acquisition of Global Infrastructure Partners has generated significant inbound interest. This deal will create a market-leading, multi-asset class infrastructure investing platform, with combined client AUM of over $150 billion.

How BlackRock is partnering with family offices to face the future together

It isn’t just short-term considerations that are in flux. Many family offices are also re-evaluating how they deliver on their longer-term strategic goals. For many, it’s a question of how to best position themselves to take advantage of the changing economic landscape.

Balancing these shorter-term goals with their longer-term focus remains an ongoing challenge for many family offices. Two of the most significant forces that FOs need to be mindful of is sustainability and technology, as we discuss below.

Sustainability

Aligned with the infrastructure trend mentioned earlier, the economy is undergoing significant transformation, driven by what the BlackRock Investment Institute identifies as ‘mega forces’. Over the past decade, sustainability has become a focus for the global investment industry, and family offices are no exception, particularly in the Nordics, Netherlands and Switzerland. FOs are very investment savvy, but often lack the resources to deeply analyse and fully capitalise on trends like the low-carbon transition.

We have seen widespread concern over how to manage the transition towards a lower-carbon economy, in particular how regulation informs this area. For instance, a small investment team might struggle to determine whether to invest in utilities, energy, low carbon power, logistics or digital infrastructure. Family offices are acutely aware of the risks they run if they don’t consider the impact of the low-carbon transition on their investment portfolios.

Fortunately, BlackRock has the expertise and technology to help family offices address concerns during this critical period, be it improving their sustainability profile or managing their exposure to the energy transition. We have over 420 sustainability and climate specialists³ who are eager to share their expertise and thought leadership with FOs.

Our Aladdin™ technology platform helps family offices understand the sustainable scores of individual investments or across the broad portfolio. For example, our analysis of an Italian family’s portfolio revealed how aligning their investments with the Paris Agreement (reaching net zero by 2050) could deliver financial benefits. This can be a way to help reconcile differing views between different generations of the family.

We have also helped develop tailored educational sessions. We recently ran a workshop for a French family to help them understand the economic risks and regulatory framework of the transition. We identified a range of scenarios and opportunities they could leverage through bespoke solutions and co-investments.

Technology

AI and emerging technology is reshaping the world around us. Thanks to its growing sophistication, along with the increasing use of algorithm-based tools, it has the potential to transform the way family offices run their operations.

Some family offices may be unaware of the technological leaps that have been made in recent years. Through initiatives such as the Palo Alto AI Lab, BlackRock has invested significant time and resources in developing its proprietary systems – and I’ve witnessed how rapidly these have advanced.

Our proprietary management software gives family offices an effective way to monitor portfolios holistically and understand how direct investments, private market holdings and liquid assets might perform in different market conditions.

For example, we have been working with a Spanish FO that was keen to understand the impact of changing commodity prices on its investment portfolio, as well as on direct family assets, which included gold mines.

We modelled this using our Aladdin™ technology, providing a view across the portfolio that the clients would not have been able to get elsewhere. Our recent agreement to acquire Preqin, a preeminent private markets technology and data provider, is a step towards transforming private markets data and unlocking new investment opportunities for FOs.

Smart risk-management tools are also crucial for family offices in 2024. We’ve met several families with limited to no risk management software. But in our volatile world, access to sophisticated risk systems and insights is more important than ever. By spending less time calculating risk, families can focus on managing risk and capturing opportunities.

Our global network

It isn’t just what you know, but who you know. Our position as one of the world’s largest asset managers means we are connected to a global ecosystem that family offices can plug into. This covers a wide network of trustees, lawyers, accountants, consultants and due diligence companies, as well as family office peers.

2024 has been a record year for BlackRock in terms of dedicated co-investments with family offices. We have presented exciting investment opportunities by leveraging the capabilities of BlackRock Capital Markets – a centralised team that sources directly from corporates, sponsors, banks and intermediaries (with around 2,200 deals in 2023 alone⁴). We have approached FOs with diverse opportunities, such as battery storage facilities, European TV production studios and dental clinics for underprivileged groups in the US. Our targeted approach involves proactively reaching out to family offices based on their sector, geography, asset class and allocation preferences.

In a challenging fundraising environment, families can step in and provide strategic capital to help get deals done, unlike other investor groups suffering from greater liquidity pressures. Families also see direct deals and co-investments as opportunities to add value, especially in industries where their wealth was created, or where the in-house teams have investment expertise. Family Offices will also approach us with exciting deals for BlackRock funds to co-invest alongside the family. For example, our investment in a European pharmaceutical company dedicated to acquiring established, off-patent originator brands from large pharmaceutical companies has seen great returns, was introduced to us by a family.

The future of family offices

Many family offices we work with have found niches that work for them and choose to specialise in these areas. However, many want to broaden their reach and delegate other areas of their portfolios to external providers.

This is where BlackRock’s scope, intellectual capital and proven track record help.

As the reins of family offices are handed down to the next generation, I’m confident our dedicated family office team can support them, navigating new challenges and improving investment outcomes.

BlackRock offers far more than just asset management. Our technology, thought leadership, tailored solutions, and connections ensure we remain consistently relevant to family offices seeking to enhance the growth and preservation of their family’s capital.

Your family office. Our connections.

¹ BlackRock, July 2024
² BlackRock, 2022-2023 Global Family Office Survey, May 2023
³ BlackRock, July 2024
⁴ BlackRock, July 2024