Family offices surveyed by J.P. Morgan Private Bank last summer claimed they were eager to invest in artificial intelligence, fortify their portfolios against inflation, and crystallize succession plans. Their intentions might have been good, but many family offices aren’t doing much to achieve those things.
“We continue to see a bit of a disconnect, or a delta, between our clients’ stated objectives or concerns and the actions that they're actually taking,” Elisa Shevlin Rizzo, head of family office advisory at J.P. Morgan Private Bank, said in an interview with Modus about the bank’s second biennial family-office report released today.
The report was based on a survey from May to July last year of 333 single-family offices from 30 different countries. The respondents were connected to families with an average net worth of $1.6 billion.
The majority of family offices (65%) said they intended to prioritize A.I. investments, but their portfolios didn’t reflect that. Many had yet to build exposure to growth equity, venture capital, or infrastructure, all asset classes that are central to the A.I. revolution, J.P. Morgan says.
According to the survey, 57% of family offices had no exposure to growth equity or venture capital, either through funds or directly in companies. At offices that were invested in them, those asset classes represented an average of only 3.3% of portfolios, an allocation similar to those found by other banks’ family-office surveys.
While the small average allocation to growth equity and venture capital still translates to billions of dollars invested in those asset classes by the wealthiest private investors, J.P. Morgan says it isn’t enough. If family offices want to invest in A.I., this is where meaningful returns can be had.
“Equally important is private market exposure, where the top ten A.I. companies are already valued at around $1.5 trillion, underscoring that much of A.I.’s future value is still being created outside public markets,” Christophe Aba, international head of investments and advice at J.P. Morgan Private Bank, said in a statement about the report. The gap between family-office desires to invest in A.I. and their efforts to do that through other private markets is even wider.
Of the offices surveyed, 79% had no investments in infrastructure, transportation, or other real assets. Those assets accounted for an average of just 0.7% of portfolios. “To fully capture the A.I. opportunity, investors should look beyond the mega-cap leaders and focus on the enablers driving the supply chain — from semiconductors and power infrastructure to networking and cooling systems,” Aba wrote.
Another delta exists between worries about inflation and changes to portfolios to minimize its impact.
Inflation, both structurally higher and more volatile, was among the top concerns at 61% of U.S. family offices. But not all offices are reacting the same way. Offices that reported inflation as a primary risk said they had allocated almost 60% of their portfolios to alternative investments, roughly 20% higher than the average. These offices leaned especially into hedge funds and real estate, with an average combined allocation of 25%, double the average across all offices.
Most family offices, or 57%, also told J.P. Morgan that preserving values, governance and legacy were key objectives. But, again, not nearly as many were taking action.
In the U.S., an estimated $124 trillion is expected to pass from Baby Boomers and the remaining Silent Generation to their heirs by 2048. At family offices, which are often created to navigate this transfer of wealth, the stakes are especially high. U.S. family-office wealth is at least an estimated $2 trillion — that’s only a sliver of the generational inheritance pie slowly getting divided up and served over the coming decades. But that portion is shared among a relatively minuscule number of people, and there are an estimated 3,550 single-family offices in North America.
Families are acutely aware of this shift, J.P. Morgan says, and 27% of offices reported a need for additional support to address governance and succession planning.
Shevlin Rizzo, a leader among nearly 100 specialists at the bank who often work with family offices, said she and her colleagues are constantly keeping up with trends and operating structures for family offices and encouraging clients to actually make the succession decisions they talk about. She’s seeing a lot of succession issues happening simultaneously in both the family and their office.
“The leaders are all of the same age cohort and there's not necessarily a deep bench in the family office behind those top executives. And there's not necessarily a lot of work being done in some of these families to prepare the next generation to either step into roles in that family office, become the leaders themselves, or to be ready to be strong board members overseeing the governance and setting the strategy for that family office,” Shevlin Rizzo said.
Once those choices are made, offices have a better framework for hiring, for their investment portfolio, and involving and preparing whoever will be the stewards of the wealth in the future.
Nonetheless, Shevlin Rizzo does not anticipate the percentage of offices formalizing succession plans to rise quickly. “You're asking people to confront some of the issues that are really hard around longevity. When we talk about transition planning or succession planning, that means somebody's no longer with us or no longer in the role that they are today. That's profoundly uncomfortable for many people,” she said.
More families should also think about their offices as a business and treat it as such, Shevlin Rizzo added.
“I've had executives and outside advisors tell me, ‘Well, it's not a family business, it's a family office.’ And I would counter that given the amount of wealth that's being controlled by these family offices and the institutional mindset that's taken to the portfolio construction. By and large, it is a business. And for the executives and employees of that family office who have been hired by the family, it's a business. I mean, they're deeply committed to the family. And that's one of the wonderful things about family offices, that real commitment to the family, real understanding and alignment of goals and priorities,” Shevlin Rizzo said.
“Just because it's a family office doesn't mean it should be treated with less formality than you would treat a small operating business.”
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