Private lending, real estate among family office priorities for 2024
Private lending and distressed real estate are shaping up as popular investment choices for family offices in 2024, advisers say. Many families will also continue to hold funds in fixed income and cash as geopolitical and economic concerns keep weighing on markets, they said.
A Citi Private Bank survey conducted this year found that fixed income has been the most favored asset class for family businesses in 2023, followed by private credit, private equity, then cash. Crypto was last. Those trends are likely to continue into next year, said Hannes Hofmann, global head of Citi’s global family office group.
“If you like fixed income, you like private credit and you like cash, you’re actually in a pretty safe place,” Hofmann said. “I think folks, broadly, in every region have positioned their portfolios in ways that they could deal with higher inflation."
Turmoil in the Mideast “creates an additional layer of complexity and risk,” Hofmann said. But those who are invested in fixed income and private credit are in many ways positioned to weather a turn in events like an oil price shock, he said.
Meanwhile, a pullback in bank lending over the past year has led to higher demand for private lending, particularly real estate and construction loans, advisers and investors said. “We’re seeing a huge number of private lending funds come into the breach,” said Martin Gross, founder and president of Sandalwood Securities, a family office that offers alternative investments to other family offices and financial advisers.
“Yields in the private lending space are upward of 10%,” so it makes sense for investment managers to step in where banks won’t, said Steven Karsh, senior adviser at Ulrich Investment Consultants.
More loans are coming due, and property owners who are unwilling to refinance at current rates are turning their properties over to banks, which don’t want them on their balance sheets, Karsh said. “This creates interesting investment opportunities to buy assets at a large discount,” he said.
“Opportunistic” real estate investments and “high-quality hedge funds” will also be popular alternative investments next year, Gross said.
Family offices can be a little more patient
Family offices are uniquely positioned to take advantage, advisers said.
“As long-term investors with perpetual capital, family offices are able to have higher allocation to the illiquid markets,” said Trish Halper, chief investment officer with Northern Trust Corp.’s global family office group.
Because of their longer investment horizon, family offices can be “a little bit more patient” than retail investors and “tend not to overreact” to market moves, said Halper. They also may be able to invest in “more esoteric” opportunities with potentially lucrative results, Karsh said.
That’s true for Josh and Tara Joseph, whose Big Plan Holdings invests in areas including cannabis, entertainment, hospitality and sports. The Josephs parlayed an early cannabis investment into real estate and entertainment after selling their company to Curaleaf Holdings for more than $875 million in 2019, and they’ve been expanding into related areas. They’re in the process of opening two celebrity-endorsed bars in Nashville.
“We’re very fortunate that we can jump on things that are very unique and that we have interest in,” said Tara Joseph.
Big Plan intends to stay the course in 2024, looking at distressed assets in cannabis and entertainment in particular, the Josephs said. “I don’t think we’re going to change up too much of our narrative,” said Josh Joseph. The plan is to continue investing in the cannabis industry, where “there’s a significant amount of distress,” as well as entertainment, he said.
“Wherever there’s distress, there is also opportunity,” Josh Joseph said.
End of Fed’s rate-rise cycle
Investors hope for more clarity on interest rates in the coming year. The Federal Reserve’s indication that its rate-rise cycle is coming to an end will enable investors to make more informed decisions about capital allocation, said Alex Horn, managing partner at BridgeInvest.
“We believe private credit will be the primary focus of family offices heading into 2024,” Horn said, as current high rates “can provide equitylike returns with significantly less risk.”
In recent years, family offices have shifted to alternative assets, particularly private equity, though “largely as remote participants” in limited partnerships, said Ashley Whittaker, president of global sales for the software analysis firm FundCount. “There is now an increasing trend to find, invest and manage investments directly, cutting out the expensive general partner,” Whittaker said.
Family offices have unique advantages but also unique concerns. They need to consider the family’s cash needs, and that can complicate investment plans, Citi’s Hofmann said. Only half of family offices surveyed for the firm’s report had an investment policy statement, he said.
“There is room for more governance and professionalization of family offices,” Hofmann said. “Some families are very clear about what they’re focused on, but some families need more clarity.” Families increasingly recognize this and are working on it, he said.
“This is the right time to do these kinds of things,” Hofmann said. “In times of uncertainty, you need a cool and clear head."
“Often a family has different interests,” and members “might react emotionally” to market moves, Hofmann said. “In the next year, the ability of the family office to follow a clear and logical path for the benefit of the family will be really important."