Family offices have long borrowed money to boost investment returns, but more of them are expanding how they use leverage — the latest sign of their increasing sophistication.
Leverage is already an important tool at most family offices, according to a first-ever report about their financing published this month by Deutsche Bank Wealth Management. In a survey this past summer of 209 offices, 61% said that leverage was “discussed by the investment committee and directly affecting risk and return targets” or “an important topic for risk and positioning.” Only 35% of respondents said that leverage was “not a consideration at all” when they invest.
Offices haven’t changed their leverage or borrowing capacity much either. Over the past 12 months, 60% of offices kept it the same, 20% increased it, and 19% decreased it.
But how offices use leverage is changing.
The Deutsche Bank survey found that more offices worldwide were planning to establish lines of credit well ahead of when they might need or want the cash, for a variety of uses. They are also borrowing more against less liquid collateral.
“This more institutional approach allows family offices to avoid overallocation to cash, rebalance leverage proactively within their portfolio, and build a ‘war chest’ for opportunistic investing. The traditional use of leverage, with the aim of enhancing returns, is still an important practice for most family offices globally, though in some places there is more reluctance to borrow for cultural or macroeconomic reasons,” the report says.
Deutsche Bank surveyed family offices that were and weren’t clients of various sizes (13% had investment portfolios valued at less than $100 million, 25% between $100-$250 million, 27% between $250 million and $1 billion, and 35% valued more than $1 billion). Sixty-five percent of the offices were based in Europe and the rest were spread across other regions.
In addition to opportunistic investing, offices are also preparing to borrow money to support their businesses if other credit lines come under pressure, help themselves ride out short-term volatility, and hold onto investments they might otherwise have to sell, according to the bank.
Private-equity firms are leaning on more creative ways to return capital to their limited partners while deal activity remains in a multi-year lull. But family offices, like other end investors, still aren’t getting the cash they might have expected. For that reason, offices are turning to leverage to avoid selling assets they want to keep, Stefanie Rühl-Hoffman, head of UHNW clients at Deutsche Bank’s private bank, explained in the report.
“This has been a significant factor in recent years, as private investors look for alternatives to the secondaries market for LP interests and other illiquid investments. Rather than taking a substantial haircut on an asset and losing the potential upside of holding the position, many are looking to borrow against an illiquid investment while eliminating opportunity costs. We work with lenders who are happy to extend credit in this space for qualified borrowers at a price that doesn't introduce sticker shock. We're seeing a lot of momentum here,” Ray Denis, a longtime banker who in 2023 founded Sandbox Wealth, a cash management, credit and analytics platform used by family offices.
The economic and investment context matters in every conversation about leverage, and right now, it's a tailwind for opportunities powered by it, according to the report. Deutsche Bank’s private bank expects rising global equity markets and modest falls in borrowing costs over the coming 12 months, “a future market environment where leverage may be an increasingly appealing option.”
Family offices have invested more in private credit in recent years (the average allocation is expected to grow to 5% this year), and the Deutsche Bank survey showed that some are using leverage to achieve that. Among the offices that increased their leverage over the past 12 months, 20% did so for private equity or private credit funds, and 9% cited direct credit. The most common purpose, at 74%, was for real estate.
Offices have always borrowed against their luxury assets, especially art, although just 20% of respondents said they did.
While some family offices will always be debt-averse, Denis says there is a healthy subset that is interested in and can take advantage of modest leverage. As offices continue to invest as much or more in private markets, the importance of debt capital to manage the illiquidity associated with those investments will only grow, he added.
So, should more family offices be using leverage? To Denis, it’s a hard question to answer.
“I wouldn't necessarily be prescriptive with how many more families should be borrowing — it's ultimately a deeply personal decision — but the decision to borrow ought to be informed by understanding the risks and potential returns,” Denis said.
“Ultimately, I view the role of debt as being an option on liquidity. A family that borrows can often be more strategic in how they allocate their assets while maintaining the flexibility of being able to deploy capital quickly.”
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