UMB Private Wealth Management Co-Chief Investment Officer, Abdur Nimeri and Jacquie Ward, director of private investments for UMB Family Wealth, discuss the impact of private investment in the development of strategic asset allocation of single-family offices, and why a strategic allocation to private investment has increased for single and multi-family offices.

Please enjoy this rough transcript of the podcast.

We continue to see single family and multifamily offices shift meaningful assets to private investments. Can you give us some context or explain why the current transformation to private assets is taking hold in 2022?

If we think in terms of how single-family offices have traditionally constructed their strategic asset allocation, in many instances family office investment exposures come from an array of asset classes; public and private alike. In select cases we see an increase in utilization of derivatives and structured products to mitigate risk. With the onset of digital assets many are now considering tactical allocation of the new but disruptive asset class. Many of these shifts have been accelerated as a consequence of events in the past couple of years.

However, we continue to see a reorganization of the traditional 60/40 portfolio where the allocation is 60% public equities and 40% fixed income assets. Many single domestic or global oriented family offices are now shifting a sizable amount of assets away from fixed income into private assets. This reorganizes the concept of the 60/40 portfolio to be more 60% public equities and 40% private and or direct investment.

Many single-family offices now take into account three key considerations:

  1. Wealth transfer
  2. Near and long-term longevity needs
  3. Immediate liquidity

When considering the construction of client assets, we organize around the family’s goals specifically.  This is especially critical when considering deployment into private assets, as valuation and inflation can impact long-term valuation creation. My colleague, Jacquie, will give some thoughts as to how we address valuation in today’s market environment.

A balanced approach to deploying across the 40% private assets typically takes into consideration; duration, vintage, industry and deal structure (growth vs income). Direct investment or exposure to secondaries is an area that we focus on for many of our clients, as it provides direct investment opportunities to augment core private equity investments. This allows us the ability to tailor investment horizon with tactical secondaries for many of our clients.

Private real estate continues to be a go to asset; however, many families are branching into private natural resources and infrastructure due to price controls, strong income and quality.

ESG and sustainability

Environmental, social and governance (ESG) or sustainability concerns are also on the rise for many family offices as they reallocate capital towards themes that are sustainable either from the ESG perspective, climate consideration are starting to matter for many families so are social consideration and governance. G2 and G3 are certainly taking ESG into consideration are they deploy capital.

Portfolio positioning

Many family offices position their portfolios to account for several market bases cases; longer lower yielding environment; higher inflation; and higher volatility in equity markets. Many investors are bracing for higher policy rates; inflationary markets; slowing growth; and highly correlated equities and fixed incomes assets limiting the diversification benefits of the traditional 60/40 portfolio this has led many family offices to reallocate away from longer duration assets into private credit, infrastructure, and private equity assets, engineered strategies and derivatives strategies.

Are there current market forces or disruptions accelerating the move towards more alternative diversification?

The pandemic certainly has played a significant role in un-covering cracks in the system, most notably supply chain vulnerabilities. We are coming out of an era of:

  1. relatively strong growth
  2. accommodative monetary and fiscal policy
  3. low policy rates.

We are now moving into a regime where continued Fed tightening is likely in the near-term as the central bank attempt to control the parts of inflation they can without complete demand destruction and growth that is contracting.

Many of the family offices I speak with have a few major concerns:

  • Inflation is by far their greatest concern
  • Growth
  • Valuations

We are likely to see greater inflation in the foreseeable future relative to pre-pandemic times, due to cost factors. There is a substantial frictional cost for de-globalization and nationalization forces we are observing globally, this will certainly lead to a higher inflation anchor in the near future, and potentially the cost of housing. With geo-politics, the world is becoming more regional with a great obsession on local producers and supply chain related issues.

Many family offices are now seeking to have more portfolios that are global to take advantage of the different growth opportunities and expected rates in the different regions. Lastly on valuation, this is very much a worry especially in the U.S. and largely in part of the central bank increasing policy rates which weighs negatively on valuations.

This brings us to the nuance of direct and private investments. Jacquie, can you give us your thought on where valuation are today and what families should be considering?

For the past few years, we have seen elevated valuations in private equity driven by economic activity, low rates and availability of capital. Private equity assets under management (AUM) reached more than $9 trillion in 2021, up from $7 trillion in 2020, demonstrating the ability of funds to raise capital.

All of this led to 2021 being one of the most active years in both volume and deal values we’ve seen in some time. Coming into the last two quarters of 2022 we’ve started to see a drop off in activity but valuations remain strong – while rates are increasing and the economy is slowing down, the large amount of dry powder in the market ready to invest has kept valuations competitive. Many funds are using this time to pursue add-on opportunities to existing platform investments rather than starting new platforms – add-on activity reached a new high in 2021.

For family offices, this means the entry economics and valuation are of key concern going into the next phase of the economic cycle.  It also means that certain industries – healthcare, consumer staples, certain types of manufacturing/industrial activity – will be more attractive for investment. Structure also becomes more important, as do investor rights in the case of a downturn, as both can change the effective valuation of a company upon entry and exit. The most important factor is maintaining discipline around an investment strategy, which can mean walking away from good companies if the economics are not right.

I understand that your team works closely with the CIO’s office to construct and design SPV offerings that are value to families. Will you walk us through your process, thoughts and takeaways?

UMB Family Wealth has an extensive network that allows us to see opportunities across multiple industries and at many stages. This allows us to find and package opportunities for investors – ranging from single secondary opportunities to bundling private investments – that provide access to strong private investment opportunities that can be a part of an alternative allocation.

We study market insights and work with families to understand the exposure needs they have and can put together a solution that helps diversify their overall portfolio and meet their investment needs. Whether it’s a single holding or a group of investments that are industry or risk factor specific, we can assist in finding opportunities, valuing the investment and structuring it the most efficient way possible for clients.

Private investments are a mid to long-term hold that provide diversification to more volatile holdings in an overall portfolio, especially moving into the next phase of the economic cycle. Providing a solution for our clients is a key value proposition of our group as family offices look to grow, reallocate and protect their portfolio.

Lastly, to wrap us up, Jacquie and Abdur, what are you advising families to consider when reorganizing their existing holdings to involve more alternative investments?

As Abdur stated earlier, we’re seeing more family offices shift part of their 40% fixed income allocation to private investments. Research shows that private investments are less beholden to the ups and downs of the public markets and provide a more patient form of investment. They also tend to be more resilient in a recession, and outperformed equities in both 2000 and the 2007-2009 crisis.

When looking at protection of a portfolio reallocating a portion of the holdings to private investment, especially in this market, has the potential to reduce volatility and provide a diversification benefit not offered by traditional fixed income.

UMB Family Wealth is a multi-family office focused on delivering entrepreneurial investment strategies, sophisticated tax planning and generational wealth guidance to families with significant wealth. Our affiliate UMB Bank, n.a., and the Kemper family — who have been at UMB’s helm for five generations — have served clients for more than a century. We leverage that history and experience to deliver effective wealth strategies to our clients.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities or engage in any specific investment strategy. Statements in the presentation are based on the opinions of the author and the information available at the time this report was published. All opinions represent UMB Family Wealth’s judgments as of the date of this report and are subject to change at any time without notice.

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