A review of 2022—it's been a real corker
A year ago, in the wake of the worst days of the pandemic and with the economy on the rebound, you could be forgiven for assuming that 2022 would be calm, stable and profitable. And January started off well, with manufacturing expanding and trade levels once again reaching all-time highs.
But then Russia invaded Ukraine, rattling the economy and spiking prices for gold, crude oil and natural gas. That, in turn, set off a roller-coaster ride of a year, marked by market volatility, the collapse of crypto, more supply chain bottlenecks, doggedly high inflation and soaring mortgage rates.
Family offices responded by pulling more money out of equities and getting into the private markets, largely avoiding crypto, focusing on recession-proof industries, adjusting their philanthropic approach and preferring impact investing over ESG.
Here are the 12 most important developments in the family-office world in 2022:
1. FROM PUBLIC TO PRIVATE
More family offices shifted their portfolios from the public markets into private assets — such as private equity, direct deals and private credit. The average share of private equity in a family-office portfolio rose from 22% in 2021 to 27% in 2022. The trend should continue into 2023, with 46% of respondents saying they plan to allocate more to private equity funds and 41% to direct investments, per the recent RBC/Campden Wealth survey of North American family offices. Much of this move is driven by concern over stock market turbulence and inflation. In October, Duquesne Family Office CEO Stanley Druckenmiller said factors that cause a bull market are reversing and predicted that “the Dow won’t be much higher in 10 years than it is today.” Then in September, Blue Pool Capital — the family office of Alibaba co-founder Joe Tsai — sold off almost all of its U.S. stocks, including Alphabet Inc., Microsoft Corp. and Twitter Inc.
2. CRYPTO COLLAPSE
Skeptics were proven right about many cryptocurrency investments in a series of collapses of high-flying companies, from BlockFi to FTX. Bitcoin plummeted around 75% from its November 2021 all-time high; and even some supposedly safe, dollar-pegged stablecoins went south. However, the market will fight on for the time being. Bitcoin stabilized around $16,000 and a market cap north of $300 billion in December, and advocates continue to push for a future in the market. Family-office investments vary. Kent Swig of Swig Equities told Crain Currency in December that he would continue to invest in his gold-derivative crypto effort, DigAU. And more than half of the family offices in major financial hubs such as Hong Kong and Singapore said they bought crypto in 2022, with 70% of them saying they are “moderately or highly interested in digital assets.”
3. BONDS ARE BACK
An entire generation has grown up in a low-yield environment. But thanks to the Fed’s raising rates, we’re now seeing bonds offering yields at levels more typical of the 20th century. That opportunity to achieve several percentage points in return at relatively low risk has raised the stakes for every other kind of investment to produce returns great enough to outweigh the potential loss of capital that they bring. “At the very highest end of the market, the family offices are very engaged in this — very engaged,” David Bailin, chief investment officer at Citi Global Wealth, recently told Bloomberg.
4. REALLOCATING TO 'RECESSION-PROOF' INDUSTRIES
Reallocating to “recession-proof” industries: With inflation spiking throughout the year and with prices increasing on everything from gas and milk to Rolex watches and luxury goods, family offices focused on industries that remain largely immune to those headwinds. Druckenmiller’s family office bought up consumer discretionary and health stocks in the fourth quarter, pulling back on IT, energy and materials companies. Another big target is real estate, as some investors try to buy the dip. Tiger 21 founder Michael Sonnenfeldt told the Financial Times that “residential real estate is still a core strategy.”
5. PATAGONIA DONATION HIGHLIGHTS CHANGES IN PHILANTHROPY
Patagonia founder Yvon Chouinard and his family donated their ownership of the $3 billion outdoor gear company to a combination of a trust and a nonprofit, meant to ensure that earnings are used to combat climate change. The move, revealed in a New York Times article in September, will place 2% of the company and all of its voting shares in a trust and 98% and the vast bulk of the earnings in a 501(c)4 nonprofit that is allowed to make political donations. The move followed news that Leonard Leo had donated $1.6 billion the year before to fund efforts on the other side of the aisle — to forestall action on climate change.
6. MUSK'S TWITTER DEAL
Musk’s Twitter deal: In what is almost certainly the largest family-office-led acquisition of 2022, Elon Musk, at the time considered the world’s wealthiest man, purchased Twitter for $44 billion. Musk put up $22.4 billion at purchase, with investors chipping in $7.1 billion and banks financing an additional $13 billion. Because Musk’s liquid wealth is heavily derived from loans against his shares in Tesla, he was essentially buying Twitter on margin. As of December, he’d already been pushed to sell several billion dollars in additional Tesla shares to stay current with those accounts. And this month, Jared Birchall, the managing director of Musk’s family office, Excession, reached out to potential new equity investors.
6. MUSK'S TWITTER DEAL
In what is almost certainly the largest family-office-led acquisition of 2022, Elon Musk, at the time considered the world’s wealthiest man, purchased Twitter for $44 billion. Musk put up $22.4 billion at purchase, with investors chipping in $7.1 billion and banks financing an additional $13 billion. Because Musk’s liquid wealth is heavily derived from loans against his shares in Tesla, he was essentially buying Twitter on margin. As of December, he’d already been pushed to sell several billion dollars in additional Tesla shares to stay current with those accounts. And this month, Jared Birchall, the managing director of Musk’s family office, Excession, reached out to potential new equity investors.
7. WAR'S IMPACT ON COMMODITIES
Russia’s invasion of Ukraine increased market volatility, sent gas prices soaring and disrupted agricultural exports from the region. It also increased interest in oil and gas development in the U.S. Overall, though, it forced family offices to review their options with greater urgency and reexamine their portfolios, especially when it comes to investments tied to autocratic regimes. For one family, the war forced them to reexamine their priorities. Former pro boxer Wladimir Klitschko, whose family office saw the 35% of its assets in Ukraine plummet in value, is on the front lines, fighting for his country in Ukraine’s reserve army.
8. SINGAPORE AND MIDDLE EAST ATTRACT INVESTORS, FAMILY OFFICES
The family-office business is booming in Singapore, with a substantial portion of that growth reportedly due to families moving assets out of China. And in Dubai, the family-office business is attracting new investment from Goldman Sachs.
9. FAMILY ART COLLECTIONS SELL AT AUCTION
The art collection of Microsoft co-founder Paul Allen sold for $1.5 billion at Christie’s. The sale “was an outlier in that there were five works that sold for $100 million each, which just doesn’t happen anymore,” Emily Thompson of Thompson Art Advisors told Crain Currency. Three other single-owner collections generated more than $100 million at auction: those of former Whitney Museum President David Solinger, the late Sir Joseph Hotung and real-estate mogul Harry Macklowe and his wife, Linda.
10. RISK AND REBALANCE
Investors overall fled from risky assets, sending the stock market down more than 25% from its cycle peak in December 2021, while Treasury yields rose amid rate increases from the Fed. Accompanied by similar trends in the private markets, family offices would find that “this year really tested your risk level,” said Sharon Olson of the Olson Wealth Group. Some family offices, reviewing their portfolios alongside an investment policy statement, may be “surprised that they took on more risk than they thought or have greater liquidity risk,” Olson said. More experienced families “were focused on how to handle [take advantage or mitigate] the dramatic change in interest rates on both sides of their balance sheet,” said Bill Woodson, the head of strategic wealth advisory and family services at Silicon Valley Bank. “They also worked to identify opportunities whether to rebalance across asset classes or entry points to increase exposures.”
11. IMPACT INVESTING > ESG
While skepticism about environmental, social and governance principles grows in some quarters — with some states taking on giant asset managers like BlackRock over such commitments — family offices continue to increase their positions in sustainable investing. One key difference is that family offices “are more interested in solving specific problems more than they are with complying with broad mandates,” Laird Pendleton, a co-founder of the CCC Alliance, a peer network of over 130 single-family offices, told ImpactAlpha. That focus was highlighted by billionaire Lukas Walton — who shifted the $1 billion endowment of his investing and philanthropy platform, Builders Vision, to mission-related investments.
12. TAKING THE LONG VIEW
Sometimes, it helps to be patient and have perspective, not getting caught up in impulse buys or sudden trends in investment. “UHNW families and their family offices, as well as the multifamily offices that serve this segment, take the long view, with strategic thinking that seeks to navigate years and generations versus quarter to quarter, as is seen in other wealth tiers,” said Thomas Ruggie, the founder and CEO of the Destiny Family Office.
Taylor Adams is a fifthå-generation family-office member and a consultant to family offices. He founded Noname Ventures, an early stage venture capital firm based in Los Angeles, after starting his first technology company as an undergrad at the University of Southern California. Adams invests across private equity, real estate and venture capital.
How is your family office structured?
Our family office was formalized in 1962. In each subsequent generation, at least one new entrepreneur or value creator took whatever legacy capabilities existed, retooled those and started a new type of business. Now, the office is four distinct family branches. Within my branch, there’s a lot of active entrepreneurship.
What was your path from family office to venture capital?
I joined the office out of college and was part of a direct private equity team, then worked on the real estate side of the business and then spent a few years inside the more administrative functions of the family office and realized my life is supposed to be about more than this.
I pivoted to technology and entrepreneurship. I started my first tech company when I was an undergrad at USC and found myself at a technology incubator helping three different founders raise seed capital. I realized I really enjoy working with entrepreneurs, so I naively started my first venture fund.
What’s your view of the current family-office model?
Family-office best practices are broken. Family offices prioritize the management of financial capital over the development of human capital. A family with origins in entrepreneurship goes from risk-taking and value creation to preservation and protectionism. I believe in empowering people to become value creators rather than default value consumers.
What’s the solution?
I advocate for a decentralized family office where you have the core office, but you empower individuals within the family to create their little satellites establishing their own vision and purpose. It might start with an empty LLC that serves as a developmental sandbox to experiment with an entrepreneurial or philanthropic idea. Next-generation leaders feel like because they’re surrounded by a culture of extreme success, they don’t have implied permission to fail. So they tend to be risk-adverse. Creating this sandbox where the purpose is for them to fail small and fail forward is incredibly empowering.
Biggest investing mistake you’ve made?
Taking an opportunistic approach for too long. Everyone starts investing in a new asset class opportunistically. Over a prolonged basis, an individual might be discouraged by the outcome, but it could be that the approach to the asset class is wrong, rather than the asset class itself.
Best investment decision you’ve made?
The best investment decision I’ve ever made is to build investment capabilities that can sustain and create value. When I established my first venture fund, it could have been fully capitalized from our family office, but I made the decision to raise outside capital. I wanted to have an outside smell test. If I was simply using my own or family capital, it might get tempting to overlook certain institutional-grade operating processes that are necessary in running a good investment strategy.
What’s your investment approach?
From a family-office perspective, I embrace programmatic investing, where you’re creating an investment thesis around a certain asset class or thematic thesis strategy. You’re building an investment capability to operate that thesis through cash flow modeling, management schedules and a portfolio construction model with performance, metrics, benchmarking and analytics. Programmatic investing is important on a multigenerational timeline because it’s a lot harder for future generations to blow through assets if they’re wrapped in a thoughtful strategy and operating structure.
I employ a blended platform approach, which combines different types of investing. In venture capital, it includes a certain allocation to fund-of-fund investments. The goal is market coverage, market credibility and benchmarking. The next bucket is single fund investments, with a goal of accessing insights and collaboration from fund managers. Those two buckets feed the third bucket, which is direct investment for differentiation and engagement. The buckets come together to create a powerful investment capability with value multigenerationally.
Amy Guttman, who conducted this interview, has been covering entrepreneurs and startups since 2014. She contributes to Forbes and has been a correspondent for the PBS Newshour, BBC, Associated Press, CBS News and others. Amy also is a podcast presenter and regularly participates in tech summits around the world, conducting fireside interviews, moderating panel discussions and speaking about how to tell compelling stories
Here’s what the next gen is thinking — and doing: A survey of 102 next-generation wealth-holders who have recently or will soon control family wealth or offices of more than $30 million and an average family net worth of $752 million found that:
44% have already experienced wealth-related family disputes.
82% are involved in philanthropy.
56% seek to use sustainability as a metric when selecting investments.
52% say they feel somewhat prepared for succession, and 37% say they feel very prepared.
Across a range of issues where they were asked to assess the degree to which they agree with or share the beliefs of their parents, the respondents asserted the highest levels of agreement on gender roles, how to run the family office and family business succession planning; and the lowest levels of agreement on cryptocurrency, what to invest in, what philanthropic causes to support and politics. The survey was conducted by BNY Mellon Wealth Management and Campden Wealth.
The share of family offices where the family member in charge of the wealth is female is expected to shift from 19% in the current generation to 30% in the next.
Revlon leaves Perelman family ownership: An agreement in bankruptcy proceedings for the cosmetics giant will take the firm fully out of the control of Ron Perelman, though daughter Debra will remain as CEO for at least the term of her current agreement. Ron Perelman acquired Revlon in a leveraged buyout in 1985.
“Lord of the Rings” backer’s new adventure: Bob Shaye, the Hollywood exec who bet big on J.R.R. Tolkien’s fantasy series, recently launched a family office, Lemoko Investments, based in Los Angeles. Joining the cast of this venture as chief investment officer is Erin Riley, who worked for a decade at Goldman Sachs researching tech stocks and working with family offices. The office describe its approach as “long-term and unconstrained,” Bloomberg News reported.