The family office model
Interview by Marco Capponi, Milano Finanza
During periods of market volatility and turbulence, wealth management’s high-net-worth clients are increasingly recognising the potential of private markets within their portfolios as genuine shields against the volatility and downturns of listed markets. However, their weight remains marginal and, according to Elif Aktuğ, a Managing Partner at the Pictet Group, there is significant scope for growth. This could potentially lead to private markets representing between 10% and 40% of total allocations, depending on the specific investor profile (with the higher figure applicable to single-family offices). Which areas are most attractive today? Elif identifies two, which are also relevant to Italian investors: on the one hand, European mid-market companies, and on the other, hedge funds, for the specific purpose of keeping volatility in check.
Which trends currently stand out for you in terms of the preferences of high-net-worth clients?
Overall, high-net-worth clients remain underexposed to private markets, particularly when compared with certain single-family offices, which may have an allocation of up to 30 or 40% of a portfolio. Relative to this level, which may represent a target for the most sophisticated clients, current exposures are still modest, amounting to only a few percent. However, this is an asset class that demands ‘staying power’: time, rather than market timing, is what is required. Hence once the allocation has been set, it is essential to build it up progressively through regular commitments year after year.
What role do private assets play in portfolio construction for high-net-worth clients?
The central role of this asset class is, first and foremost, to provide diversification: the returns and types of investment opportunities available in private markets differ significantly from those in their public counterparts. Another key aspect is curbing the portfolio’s volatility arising from exposure to listed markets.
And what is their weighting?
Allocations depend on several factors such as portfolio size and any existing exposure to private markets (for example, through a family business), and wealth objectives, such as succession planning. All these elements feed into portfolio construction. So there is no one-size-fits-all approach. Having said that, I would suggest that the appropriate range to consider lies roughly between 10 to 15% and 30 to 40%.
Which segments offer the best opportunities?
We hold a strong conviction regarding the European mid-market. In the US, there are approximately 50,000 private companies in the mid-market segment, whereas in Europe there are around 75,000 potential targets in this segment. This represents an investment opportunity roughly 50% larger in size. Conversely, while approximately 190 private equity firms actively focus on the American mid-market, there are only about 80 such firms in Europe. This implies that penetration of the European mid-market is around 70% lower than in the US equivalent, providing greater potential for generating alpha.
Hedge funds are another interesting topic. Recently, many private investors in Italy have rediscovered this asset class. What is driving this trend?
The current environment, marked by rising volatility and increased market turbulence, has been a supportive factor. The ability of hedge funds to limit losses during downturns – a characteristic already observed in the early 2000s and during the 2008 financial crisis – is particularly relevant today. In the present context, incorporating exposure to hedge funds therefore makes sense from both a diversification and volatility-management perspective. This is because they afford exposure to market upswings during positive phases while simultaneously offering protection during downturns, should volatility occur. Looking at our hedge fund strategies over a 30-year horizon, we see average performance of 6.2% with volatility of 5.4%. In positive years for the markets, such as last year, returns reached 14%.
How should the largest wealth transfer between generations in history be addressed when managing the portfolios of high-net-worth individuals?
The scale of the wealth transfer will be extraordinary: globally, it is estimated at between USD 80 trillion and USD 120 trillion over the next 20 years. In Europe, over the next five years, figures of around EUR 200 billion have been cited for countries such as Switzerland, and over EUR 300 billion in assets are expected to change hands in Italy. However, this phenomenon requires advance planning, given that each family has a specific profile and specific needs. In Italy, where family-owned SMEs account for 85% of the business landscape, the coexistence of multiple generations on boards of directors is an increasingly crucial factor. This entails creating an environment that fosters innovation, growth and continuity, with the aim of achieving a handover that is as smooth and seamless as possible.
