Building a Portfolio

Impact Investing by Family Offices Is on the Rise

Impact investing by family offices is seeing new support from younger generations. And because of their ability to make large investments without some of the pressures faced by venture capitalists and other institutional investors, family offices may be uniquely positioned to make the shift to impact investing.

“[F]amily capital seems very well placed for allocation to impact investments, especially those early-stage, higher-risk undertakings that might not otherwise be in a position to take investment from more mainstream investors,” Robert J. Shakespeare, an attorney with the law firm Squire Patton Boggs, recently wrote. “Unrestricted by investment mandates, return targets, and fund life spans, wealthy families generally have the freedom to determine their own requirements as far as the ROI is concerned, both economic and social.”

In fact, family offices saw a 4.2 percentage point increase in impact investment participation in 2017, according to the UBS Global Family Office Report 2018. This means that one-third of family offices surveyed are now making impact investments, and more than half said that they would increase their impact investing allocations in the next year.

The report shows that private equity is the most common route for impact investing by family offices, followed by equity and real estate. Education remains the top area for impact investing by family offices, while housing and community development jumped from ninth place last year to second.

More than half said that they would increase their impact investing allocations in the next year.

Some Family Offices Remain Hesitant

Still, nearly 70% of family offices are not yet engaged in impact investing. The report notes several potential reasons for this reluctance, including lack of awareness or understanding of impact investing, a preference for making a difference via philanthropic means, and concerns about financial underperformance.

Family offices say that impact investing still has its challenges, too. Chief among them is the ability to measure the social and environmental impact of investments, cited by more than half of family offices. Additionally, 43% of those surveyed said that there are due diligence challenges when it comes to impact investing, and 40% reported challenges around deal flow and finding attractive deals.

“I still think there’s a stigma around returns, and the research isn’t there yet to be able to build a full portfolio of sustainable investments,” one executive vice president for a multi-family office in North America was quoted in the UBS report as saying. “At the end of the day, you want to do good, but you also want to perform. The families need to know that their investments are performing in order to provide for the longevity of the family wealth.”

The Desire to Do Good May Ultimately Outweigh Doubts

That hesitation could abate as a new generation of investors—one that’s more dedicated to “doing good” with their money than their parents—ascends into decision-making roles.

A separate study by U.S. Trust found that 87% of high net worth and ultra–high net worth millennials agreed that a company’s environmental, social, and governance (ESG) track record is an important factor in deciding whether to invest in it. That compares to 65% of Generation Xers and 48% of baby boomers.

Seven in 10 family offices surveyed by UBS said that they projected a wealth transfer over the next 10 to 15 years. And nearly 40% of those surveyed anticipated that when the next generation takes control of their families’ wealth, the allocation toward impact and ESG investing will increase.

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