Major shifts in private markets are converging, with the rise of NextGen prompting greater innovation in structuring and a fresh approach to investment strategies, writes Zara Campbell, Private Client Director at Hawksford.
Major shifts underway in the private markets, driven by innovation in both structuring and technology, are giving rise to new products and solutions, available to a wider investor audience than ever before.
While wealthy families once focussed on traditional ‘bricks and mortar’ investments, now they are looking to allocate increasingly to alternative asset classes, such as venture capital and private equity funds, across their portfolios.
Although only 5% of family offices and high-net-worth individuals (HNWIs) currently allocate to alternatives, over half (53%) plan to increase their exposure, according to research by JP Morgan and Bain.
This growing desire among family offices and HNWI investors to increase their allocations to private market assetsworks well for managers too, as they look, in a challenging fundraising environment, to diversify their investor base away from a traditional reliance on large institutional investors.
Despite their appeal, navigating the world of alternative investments remains challenging for an investor base that may not have a huge amount of experience in this area, with opportunities often being opaque, complex or seemingly expensive with high thresholds to entry. Accessing the alternatives opportunity, therefore, requires careful planning, expertise and the right strategic partnerships, to ensure a shift in direction is appropriately managed, supported and structured for long-term success.
Strategic shifts
The shift to alternatives is having a number of practical repercussions on the investment strategies adopted by families.
One way in which families and HNWIs are empowering themselves to access the alternatives market and meet access levels, for instance, is through pooling capital using a co-investment approach.
By pooling capital across different families, they are able to pursue larger opportunities that may previously have been out of their reach, access a wider range of asset classes, and avoid the fees typically associated with traditional investments. This approach not only enhances potential returns but also helps ensure that investment decisions remain aligned with shared family values and long-term objectives.
Pooling resources enables families to make meaningful equity investments while benefiting from greater diversification, steady income streams and the potential for higher returns. In many cases, these assets are also less time-intensive than traditional holdings such as real estate.
In addition, we are also seeing the move into alternatives resulting in a more integrated approach to ESG and impact investment considerations within their portfolios – guided by a family’s values and with the future interests of the NextGen in mind.
This is embedding a more sophisticated take on ESG and impact investment, where strategies target impact while also aiming to achieve competitive financial returns – often backed up by a greater use of technology to evaluate data and performance.
Structuring for success
These shifts in strategy, of course, need to be backed up by good, appropriate and robust structuring.
Against that backdrop, special purpose vehicles (SPVs) and private investment fund structures are proving increasingly attractive options for families pursuing greater exposure to alternatives, and particularly those wishing to pool capital.
In Jersey, for instance, the Jersey Private Fund (JPF) has become especially popular – a total of almost 1,500 JPFs have been established since they were launched in 2017, reflecting their appeal for private capital.
The JPF’s flexibility is a major advantage. It can be tailored to support a range of investment models, whether pooling resources through a club deal, establishing a ‘fund of one’ for a single family member/office or participating in co-investment opportunities. This adaptability is invaluable in a fast-moving financial landscape, enabling families to respond quickly to new opportunities.
Enhancements to the JPF introduced this year, including allowing an unlimited number of investors who meet the widened criteria to access the fast-track regime, have strengthened their appeal further. It’s a structure that is perfectly aligned with the direction of travel in the family office investment landscape.
Meanwhile, recent UK tax changes, affecting offshore trusts and non-domiciled individuals, have prompted an increase in the use of Family Investment Companies (FICs) as an alternative to offshore trust structures to plan for the transition to NextGen.
While offshore trusts remain valuable for clients seeking robust asset protection and long-term succession planning, many families are now turning to FICs to achieve their objectives in a flexible and bespoke manner. We are also seeing families opting for private trust companies and foundations as part of their structuring to transfer their wealth in a controlled manner.
Such structures allow founders – often parents – the preservation of control; by issuing different share classes, parents can hold voting and income-bearing shares, while children receive non-voting shares. This allows for a gradual and controlled succession process, ensuring wealth is transferred at the right time and in line with family intentions.
FICs can also provide a useful layer of asset protection; in larger family groups, separate FICs may be established for different asset classes, helping to ring-fence risk. Alternatively, a single FIC can be used as a consolidation vehicle to hold a diversified portfolio, supporting more efficient management of family wealth.
Jurisdictional stability
Where these structures are housed, of course, is also a vital consideration, with families increasingly taking the opportunity to reflect on how their jurisdictional partners are supporting and adding value to their shifting strategies.
A strong legal and regulatory framework, political and economic stability, robust corporate governance and an appropriate approach to confidentiality are all important considerations for families making Jersey highly attractive due to it being well established and highly reputable. As well as the ability to offer a broad range of structuring options in a well-regulated environment
Jersey has a track record as a specialist alternative funds hub, Jersey continues to offer families the blend of flexibility and control they need as they continue to evolve and future-proof their investment strategies.
How we can help
At Hawksford, our family office team is well placed to guide you through the complexities of structuring and managing family wealth, whether you are considering FICs, offshore trusts, or other bespoke solutions. Working closely with investment managers and counterparties, they can help to ensure family wealth strategies run smoothly, transparently, and in line with best practice.
Complementing this, our dedicated funds team can support by offering formation services, as well as delivering ongoing administration, governance, and reporting for JPFs and other fund structures.
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