The world’s wealthiest families are looking to deploy a larger chunk of their cash pile this year including through M&A. Here’s where they intend to put it.
According to a recent report by Goldman Sachs, the aggregate cash balance managed by these families may have already dropped over the past two years. The investment bank’s 2023 family office investment insight report, Eyes on the Horizon, surveyed over 166 family office operators across the world, and discovered that the biggest change to their collective portfolio allocations was a drawdown in cash reserves between 2021 and 2023. The average cash balance fell from 19 percent to just 12 percent during this period.
Goldman says this indicates that this wealthy group of investors are seeing opportunities arise as central banks tighten liquidity, businesses slow down investments and banks pull back on lending. “Planned risk-on allocations tell us they see strong opportunities to capture added alpha,” says Meena Flynn, co-head of global private wealth management and co-lead of One Goldman Sachs Family Office Initiative.
Where is the cash going? Three key themes emerged from the survey responses.
Fixed Income Makes a Comeback
Thirty-five percent of family offices in the survey say they plan to decrease cash and cash equivalents on their balance sheets over the course of 2023. The report suggests a significant jump in allocations to fixed income securities. Thirty-nine percent of respondents say their allocations to fixed income could increase this year.
This shouldn’t be surprising, considering the trajectory of interest rates over the past two years. The yield on a two-year U.S. treasury note has jumped from 0.13 percent in early 2021 to 3.9 percent as of May 2023. The yield was even greater in February at 4.9 percent.
Treasuries now account for four percent of the portfolio of the family offices that were surveyed. Another four percent was dedicated to investment-grade bonds and two percent was deployed in high-yield bonds. Altogether, family offices now have nearly as much in fixed income securities as cash and cash equivalents.
This shift is expected to continue as wealthy investors rush to lock in attractive yields. “While the market is pricing in rate cuts next year, maybe even later this year, these families, by and large, I don’t know that they’re taking an active view on it,” says Flynn. “The biggest thing that they’re doing is really aiming to reach that duration target that they have for their fixed income as soon as possible.”
Equities Are a Top Priority
Family offices seem even more optimistic about equities, both public and private. Nearly half of the respondents say they will increase their allocation to public equities in 2023. Meanwhile, 41 percent say the allocation to private equity would increase this year.
Growth is still a focus but the perspective may have changed in recent years. “I would say that the environment for growth investing, particularly around information technology, has shifted,” says Sarah Naison-Tarajano, the global head of Goldman Sachs Apex and private wealth management capital markets, asset and wealth management.
“We see that given the dislocation in both public and private markets,” she says. “But we’re seeing that dislocation and we see families really employing a lot more discipline around how they invest in growth focused on more profitability, a clear path to profitability, margins et cetera.”
M&A Will Rebound
Some of the cash being deployed by family offices could find its way into the mergers and acquisitions market this year.
“We all know [M&A] activity levels have been down meaningfully year over year,” says Ken Hirsch, co-chair of the global technology, media & telecom group, and co-lead of One Goldman Sachs Family Office Initiative. “But [activity levels] are beginning to show an uptick in recent months and we expect activity to pick up as investors gain more confidence in the financial markets along with more clarity on key issues.”
Hirsch believes family office M&A is notably different from the broader M&A market because of the unique skills and perspective of family office investors. “Family offices are incredibly well-positioned when operating in the M&A market to uniquely understand the nuances of family-owned or founder-led enterprises, given their own direct experiences,” he says.
Meanwhile, family office buyers can also differentiate themselves by offering sellers unique advantages. “Certain sellers value an added layer of privacy or want to know that the new owner of their business will carry forward the legacy that their own family had created. And so family offices are keenly focused on the ability to leverage this advantage in the M&A market,” says Hirsch.
While family offices would gladly buy family-owned enterprises, they would prefer to sell their own business or assets to non-family buyers. Thirty-five percent of family offices surveyed say family-owned businesses were a top priority but only 11 percent say they would consider selling to a family-run firm.
“Forty-two percent of family offices indicated a preference for strategic or corporate buyers of their assets over other institutions or even other families,” says Hirsch. “Of course, this is tied to valuation because strategic buyers often have the ability to generate operating synergies with the family-owned target and thereby creating the perception they can pay premium valuations.”
–Vishesh Raisinghani
