Every business and every family office should be prepared for some level of disruption. During the height of the pandemic, liquidity was at the front of mind for family offices. As confidence begins to return, the focus now for many is making the most of a strong rebound. But moving away from cash and redeploying assets could leave families cash poor and unprepared for possible future disruption. Thus, maintaining liquidity should continue to be a priority.
Every business should be prepared for some level of disruption. Very few, however, are likely to have been completely ready for the lockdowns, staff quarantines, supply chain disturbance, frozen inventories and drops in demand that resulted from Covid-19. As a result, maintaining liquidity becomes an almost universal priority for family offices.
With confidence beginning to return following the continued rollout of mass vaccination programmes and economies start to reopen, family offices are likely to re-examine their strategies. Many will be looking for a strong rebound based on redeploying assets and potentially moving away from cash investments.
This strategy risks leaving families cash poor. While, according to Credit Suisse, global household wealth was not significantly impacted by the pandemic and returned to roughly 2019 levels by Q2 2020, the broader effects of the pandemic are likely to persist for longer. As a result, BlackRock recently issued a warning to family offices to not treat 2020 as “simply short-term volatility” and instead plan for a long-lasting impact on growth, interest rates and corporate fundamentals. These effects are likely to lead to structural shifts across asset classes.
So what asset allocation strategies should family offices be pursuing in the current climate?
The 2020 UBS Global Family Office Report highlights that liquidity is moving down the list of priorities as family offices chart a course towards recovery in the wake of the pandemic. While 20% of family offices view liquidity risk as a major concern, respondents also plan to reduce cash investments by an average of 26% over the next two to three years. In addition, according to BlackRock, 55% plan to increase their allocation to private equity, 38% to hedge funds and 62% to infrastructure.
Competing interests and priorities can add additional complexity onto already difficult decisions. The personal and financial needs of family members are rarely fully aligned. Any strategy needs to make sure all parties can meet their financial obligations while maintaining the desired quality of life. The capital needs and condition of the family business is another important factor. A return to growth may provide companies with new opportunities to increase market share or diversify, which bring new funding requirements and potential risks.
Favouring other asset allocations over cash could drive significant growth for family offices and businesses over the next few years. But tipping the scale too firmly away from liquidity could also create some vulnerabilities to shocks and disruptions. Especially if BlackRock’s predictions about the pandemic’s long-term impacts prove to be accurate.
It is not only external sources of disruption that families need to be prepared for. It is also important to ensure everything is in order if a family member or important stakeholder should pass. With public health issues firmly rooted in public consciousness and people spending more time at home, many of us have been thinking more about the future. According to the 2021 Knight Frank Wealth Report1, 60% of family offices have reassessed their succession plans during the pandemic.
The loss of a key stakeholder can be hugely disruptive to a family or business. There can be sustained periods of inactivity as the details of succession are worked through. In these situations, liquidity is essential. Assets can be frozen for some time for probate or if inheritance tax is due, leaving families facing additional financial pressure when they are going through a distressing time.
When it comes to prioritising liquidity or other asset allocations, it is not a zero-sum game. The goal should always be to build flexibility into wealth creation and management strategies. Growth without secure foundations can easily be washed away by unforeseen events.
28% of family offices place intergenerational wealth transfer in their top three worries. 23% see it as an exciting opportunity.
2021 Knight Frank Wealth Report
Wealth creation and financial security
Succession is a process that every family business and office must face. It is a time of uncertainty, but also one for consideration. This split in thinking is highlighted in the Knight Frank report1, where 28% of respondents placed intergenerational wealth transfer in their top three worries. On the other hand, 23% see it as an exciting opportunity.
Flexibility is the key to be able to achieve both sustainable wealth creation and financial security. Liquidity is one part of the equation but it also needs choosing products and solutions that promote choice rather than limit options. Using our high life cover solution, for instance, allows clients to make the most of investment opportunities but still be confident that their family can access liquid assets when they need them most.
As we emerge into the post-pandemic world, we will start to see which of the changes made by necessity will last. More of us may choose to work remotely, and internet sales will continue to grow. It remains to be seen whether the ways family offices think about wealth creation, and succession are changing. But for now, they should make sure they have the flexibility they need to recover securely.
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