Inside the Portfolio: What Australia’s Leading Family Offices Are Really Investing In
Unique families with unique challenges
For most people investing usually involves some property transactions, blue chip shares and penny stocks if they’re feeling adventurous. For family offices however their reality is vastly different. Investments must grow their wealth, protect their capital, outpace the effects of inflation, minimise tax where possible and offer protection against sovereign risk.
For Australia’s approximately 2,000 family offices (as mentioned by the AFR and KPMG) making money isn’t only the goal, they must also manage generational changes, which can make or break a family dynasty. Some of these families will simply opt to preserve their wealth with passive investments (via fund managers and safe property investments). Whilst others like many of our clients will aggressively pursue growth by being active investors and specialising in certain asset classes.
In our experience, those that excel have developed unique investment strategies that achieve asymmetric returns to the level of risk that is involved. In other words, they can generate higher returns, without taking on additional risk. Typically, this is achieved through their ability to underwrite risk (more below).
From the family offices we work with, and from friends in other families, we’ve put together a list of some of the real moves these families are making.
Thematic changes in family offices
Public markets vs private investments
A number of high performing family offices are increasingly moving a larger portion of their wealth from public equities to private credit and direct private equity investments (which we go into more detail below).
Building in house capability
Several family offices are moving to take an active role in managing their own investments and building in house capabilities. One example is the xxxxx family office, who have established their own private credit lending fund for construction loans. The family have recruited external investment managers and built an in-house team that is managing loans.
Sovereign risk is at front of mind
Recent anti-Jewish sentiment, the threat of a currency reset, higher taxes, big government, and geopolitical conflicts is causing several families to look for offshore safe havens to relocate, and to minimise tax. This isn’t just an Australian family office phenomenon, but a global one. One family office we worked with, has now permanently moved their base to the UAE after civil unrest in their home country. A second Australian family is creating a new base of operations in emerging Asian markets. A third family is moving a significant portion of their wealth to the UAE, using it as a base from which to do other investments and reside.
Property isn’t the safe haven it used to be
What is the easiest thing for government to tax? The answer is property! Increased land taxes in Vitoria, the threat of unrealised gain taxes on SMSFs and the possibility of it being applied to other SPVs. Has several of our family office clients on red alert.
Furthermore, luxury property investments abroad no longer command premiums in certain blue chip cities, as crime rates and social fabric deteriorates.
This has a number of family offices in Australia concerned, and a number of them are moving capital from property into private businesses that can operate globally.
How family offices are achieving asymmetric returns to risk
What is patient capital?
It is capital that isn’t forced to act due to market forces, debt positions nor is it relied upon for income.
When family offices directly fund private credit transactions to businesses, they can afford to be inconvenienced. In other words, should a business get into trouble they can afford to wait for it to rehabilitee its situation (whilst charging penalty interest) and or deploy further capital to remedy the situation.
When it comes to property developments or equities, family offices have the luxury that should the market take a dip they can afford to hold onto assets and sell during more favourable times (without pressure from a bank).
What does it mean to be able to underwrite risk?
Family offices can take on riskier investments charging a risk premium, whilst simultaneously underwriting the risk involved to derisk their position, and in effect earn an alpha return.
A good example of this is the 2nd mortgage loans we have originated. A family office will take a second mortgage position with second mortgage returns. Simultaneously they have the capacity that in the event of default by the borrower, they can payout the first mortgage holder. In effect this means they can convert their position from a second mortgage, to a first mortgage, and gain control of the asset, rather than being at the mercy of a third party. This is something that most second mortgage lenders can not do.
We go into many examples of these types of transactions in our article The hunt for alpha: Real world strategies for private credit.
Unique family office investments
The below list outlines investments that some of our family office clients have taken as well as friends from other families who have shared their positions.
Data centres and industry specific land
A small number of families have moved into buying land, that is located within the right distance of main power station hubs to develop data centres. Data centres have very specific power requirements and must be within the right proximity of electrical infrastructure for a site to qualify.
Commercial and industrial property development
One of the families we work with develops properties built to major retailer specifications, with a develop to lease strategy. Providing higher yields than residential property and capital stable returns from good tenants, that banks are happy to also fund.
Land banking investments
One of our overseas family office clients made a significant amount of their wealth from land banking in Victoria prior to the windfall gains tax. Typically, an acquisition and hold strategy was adopted until zoning changes were implemented, with further works being done for land subdivision.
Private Credit Investments
Private credit investments have been a favourite of family offices for decades. Primarily because they offer security for their funds and they can earn a significant margin above the bank rate, with similar security to what a bank would take.
Mortgage backed lending
Mortgage-backed private credit is a capital stable investment for family offices, as property security is taken. Usually, these transactions are in the form of a first mortgage with returns varying from 8% to 14% p.a. depending on LVR, property type, transaction type, quality of the borrower and whether the family office is investing in a fund or directly lending themselves. Most families will deploy a portion their funds into managed funds, as well work with originators such as us to earn higher net returns.
Financial warehouse facilities
A few family offices we originate for are now funding warehouse facilities for smaller lenders, that can’t not obtain a financial warehouse from a major bank. This typically involves either creating a new loan book or taking an existing loan book as security. Deal sizes are usually $5m to $15m and returns are usually north of 12% p.a. LVRs are typically up to 70% of the loan book, with the remaining capital being from the lender. The main benefit is that capital is loaned out on set parameters, and an entire loan book is taken as security (reducing concentration risk).
Second mortgage private credit transactions
Family offices have typically stayed away from investing in 2nd mortgage loans. However, a small number are quietly appreciating the fact they can gain 20% p.a. plus returns, using their underwriting capacity to mitigate risk.
Private corporate debt
As more and more businesses find it harder to deal with banks, a number of them are resorting to private corporate debt. The Smorgon family are keystone investors in Arrowpoint, which is a private lender the specialise in corporate transactions. This allows family offices to take similar security to what a bank would, whilst also making a higher margin than banks. The main befit to borrowers is they don’t have to meet the stringent conditions of banks to get the capital they need to facilitate corporate transactions.
Private equity done differently
A few family offices are directly taking control of private equity transactions themselves instead of going to fund managers. The key difference however is these families invest in businesses, that are either vertically or horizontally linked to industries they are involved in.
Meat distribution, abattoirs and cattle farming
One overseas family office invested in a business client of ours that was vertically integrated in the meat supply business from farming to distribution. The family office themselves had similar businesses overseas.
Vertical integration in construction
A number of very wealthy families in the construction industry are actively purchasing sub-contractors and suppliers (or a major shareholding). Not only does this help to reduce costs, make greater margins, but it also allows them to develop economics of scale.
Israeli tech startups
Two major family offices that we deal with have invested in Israeli startups, whose primary focus is fintech, stock trading platforms and news media.
Final words on family office investments
The portfolios of Australia’s leading family offices don’t follow trends — they follow principles: active control, capital preservation, unique investment strategies and moving with market demands.
If you're still stuck with managed funds, public market noise, and volatile yields, maybe it's time to take a page out of their playbook.
To learn more about our private credit investments click here.
