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The next generation of family office leaders is likely to use more debt, invest in more alternatives and focus on different philanthropies, according to new studies.
As family offices prepare for a sweeping generational transfer, with baby boomers and older generations handing over the reins to Gen Xers and millennials, their investments and priorities are set to change. The shifts could have profound implications for the more than $5 trillion in assets managed by family offices.
According to a survey by Bank of America, a quarter of family offices have had a generational transition in the past decade and more than a quarter have principals (chief wealth holders) who are baby boomers.
Preparing the next generation is often the top worry and mission for family offices. "Educating the family" is the top challenge listed by family offices, tied with "managing estate tax exposure," according to the Bank of America survey.
Yet the transition is unlikely to be smooth. In many family offices, dominant patriarchs are reluctant to cede control to their children. Among family offices with a potential next-generation principal, or family leader, 84% say the existing principal will be involved in the family office even after the transition. When asked about their greatest governance challenges, the top response was "complexity of family dynamics."
The upcoming generations also have their own ideas on investing and giving. Younger principals are far more likely to favor alternatives. Among family offices with a potential next-generation principal, 79% say alternatives will represent a larger portion of the overall portfolio. Private equity and venture capital are the top two categories expected to receive more investments among Gen Z and millennial principals, at 41% each.
"I think there's a different risk tolerance for the next gen," said Elizabeth Thiessen, head of family office at Bank of America Private Bank.
They are also more likely to invest in sports. Among family offices run by millennial and Gen Z principals, 27% are currently invested in a sports team, compared to 16% of family offices run by boomers.
Younger investors are more likely to use debt as well. Among family offices with next-gen family members aged 30 to 45, 84% say they're interested in leveraging credit to build wealth.
New family offices created in the past decade also have different risk and investment profiles. According to a family office survey from BlackRock, newer family offices favor different types of alternative investments than family offices now serving second, third or even fourth generations.
Among family offices established more than 20 years ago, nearly half have alternative allocations above 40%, compared to 32% for newer family offices, according to the survey. BlackRock said many newer family offices are still sitting on large piles of cash from a business sale, IPO or exit that they have yet to fully deploy.
"Newer wealth generation tends to be from private company founders and holders of concentrated positions," said Jessica Bulen, head of U.S. family capital, endowments, foundations and healthcare at BlackRock. "They've got real concerns around the risk that is still with them day to day. So they're really looking for a very liquid portfolio or investments that can generate liquidity. Older family offices have been invested for decades."
Armando Senra, who leads BlackRock's institutional business across the Americas, said liquidity is key in determining a family office's chief goals, no matter what generation may be in charge.
"Understanding the liquidity needs is probably the most important factor in conversations you may have around the portfolio," he said. "Once you understand the liquidity needs, then it leads you to a deeper conversation on what it is they are trying to achieve."
A common saying among wealthy families is that they "want to pass down values not just money." Yet when it comes to philanthropy, family offices are set for a significant change in values and philanthropy with younger heirs. More than three quarters of family offices with a next-generation principal said they will support "different charitable causes than their predecessors," according to the Bank of America survey.
Several studies suggest Gen Z and millennial heirs are more likely to focus on systemic causes, like climate, health, human rights and international development, while boomers and Gen Xers tended to focus more on local institutions. Since women place a greater emphasis on philanthropy, and more family fortunes are passing to women, philanthropy is likely to become more central to family offices.
Fully 40% of family offices with female principals have written philanthropy mission statements, compared to only 29% for family offices overall, according to the Bank of America survey.
"The next generation is navigating how they can honor their existing family legacy while creating their own philanthropic identity," Thiessen said.