The 2019 Global Family Office Report, prepared by Camden Research for UBS, provides a superb insight into the strategies of multiple, global family offices. In the report we find this compelling summary:
Over half (55%) of family offices believe that we will enter a recession by 2020 and many of them are getting prepared. Just under half are realigning their investment strategies to mitigate risk (45%), increasingKey Survey Findings, Family Office Investments, Global Family Office Report (UBS, 2019)
their cash reserves (42%), and / or preparing to capitalise on opportunistic investments (42%).
One of the best ways to mitigate risk is to find an asset that is uncorrelated with your other assets. As Melissa Phipps explains at The Balance, “Asset correlation is a measure of how investments move in relation to one another and when those movements happen. When assets move in the same direction at the same time, they are considered to be highly correlated.” Figure 1 below illustrates the correlation between Amazon.com (AMZN) and Simon Property Group (SPG) is 0.11 and has moved in a range of -0.05 to 0.25 over the last five years.
Investors can test how correlated ecommerce and software as a service (SaaS) businesses are with other asset classes. Figure 2 shows a sample that illustrates the point. The correlation matrix compares Amazon.com (AMZN), Simon Property Group (SPG), Exxon Mobil (XOM), and Salesforce.com (CRM).
Note how Amazon and Salesforce have a higher correlation to one another (0.66). The correlation between Simon and Exxon is higher (0.63) than how those two companies correlate with Salesforce (0.34 and 0.35, respectively).
As single family offices and multiple family offices reorganize their investments portfolios to mitigate risk or search for new opportunities, they often move to alternative investments akin to the portfolios suggested by model portfolios. As Richard C. Wilson outlines in his book, The Single Family Office, families that have a large concentration of assets in real estate, commodities, or equities often then turn to diversification via venture capital, private equity buy-outs, higher yield debt, and currencies.
Venture capital is perhaps the highest risk and highest return asset class. Family office members and chief investment officers have several options for how they can participate in venture capital (VC). The first tactic is by participating in seed rounds as an angel investor. The point of entry into this world ranges from word of mouth and family/friend introductions to joining an angel investor group to partnering with start-up incubators.
Another approach is to register as an investor on one or more of the crowdfunding platforms. These platforms take advantage of new securities regulations to enable start-ups and emerging growth companies to raise permanent capital through a variety of financial instruments. The regulations also provide a pathway for non-accredited investors and the growing ranks of accredited investors to support these entrepreneurs.
The more institutionalized approach is to become a limited partner in a VC fund. At this stage you are turning over the investment decisions to a VC firm and its partners. These funds begin to invest in Series A or later rounds and can help start-ups scale quickly, improving their offering, sales and market reach, support infrastructure, and strategic partnerships.
Family Offices are another form of professional investor. They have the resources to evaluate and participate in a wider range of assets. There are entire industries catering to their investment needs. Paying attention to surveys that summarize their investment insights and upcoming strategies offers a lens into how a sample of successful business people are reading the investment landscape.