Alts winning out as family offices evolve their strategies

A new report from global investment firm KKR sheds fresh light on the evolving strategies of family offices to favor alternative investments.

The report is based on a proprietary survey of more than 75 chief investment officers managing an average of more than $3 billion in assets.

According to KKR, that rarefied segment of the ultra-high-net-worth space is putting more of its portfolios in alternative assets, with an average of 52 percent of assets now invested in alternatives, up from 50 percent in 2020.

Henry McVey, chief investment officer of KKR’s balance sheet, who’s also its head of global macro and asset allocation, highlighted the accelerating trend of strategic diversification across asset classes among family office investors.

“[These investors are] using better hedging techniques and increasing both their desire and ability to lean into dislocations, strengths that we believe will position them to be at the winner’s table at the end of this cycle,” McVey said.

Among the CIOs it surveyed, KKR found a common focus on tax-efficient capital growth and investments in areas such as supply chain disruption, industrial automation, artificial intelligence, and security. Geopolitical concerns have emerged as a major risk, surpassing inflation, with more than 40 percent of CIOs flagging the former as their primary concern.

Similarly, a recent global study by Citi found inflation, interest rates, and geopolitical concerns were the top three areas of concern for family offices.

Despite the move toward alternatives, the report indicates cash positions among family offices remain high at 9 percent, suggesting a cautious approach to market risks. However, there is also a clear trend toward increasing allocations to private credit, infrastructure, and private equity, at the expense of public equities and cash.

KKR’s analysis also exposed key differences in asset allocation strategies between newer family offices established post-Covid and those that were already up and running before the pandemic, with the latter typically holding less cash and allocating more to private equity.

The report also notes significant regional differences in asset allocation, with US family offices being less inclined toward traditional private equity compared to their counterparts in Latin America, Asia, and Europe.

"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," McVey said.