Family offices likely to add risk, debt and alternatives under the next generation

Family offices are preparing for a sweeping generational transfer, with baby boomers and older generations handing leadership to Gen X and millennials. According to CNBC, the shifts could have profound implications for the more than $5 trillion in assets managed by family offices. A Bank of America survey found that a quarter of family offices have undergone a generational transition in the past decade, and more than a quarter have principals who are baby boomers. "Educating the family" ranked as the top challenge, tied with "managing estate tax exposure."

The transition is unlikely to be smooth. Among family offices with a potential next-generation principal, 84% say the existing principal will remain involved after the handover, and the top governance challenge cited was "complexity of family dynamics." Younger principals are markedly more inclined toward alternatives: 79% of these family offices expect alternatives to make up a larger portion of the portfolio. Private equity and venture capital are the leading categories expected to attract more capital among Gen Z and millennial principals, at 41% each. Bank of America's Elizabeth Thiessen, head of family office at Bank of America Private Bank, said, "I think there's a different risk tolerance for the next gen." Family offices run by millennial and Gen Z principals are also more likely to hold sports team investments, at 27% versus 16% for boomer-led offices.

Next-generation investors are also more willing to use leverage. Among family offices with next-gen members aged 30 to 45, 84% are interested in leveraging credit to build wealth. A BlackRock survey indicates that newer family offices, typically founded by private company founders and holders of concentrated positions, differ from multigenerational offices. Nearly half of family offices established more than 20 years ago have alternative allocations above 40%, compared with 32% for newer offices. BlackRock noted that many newer offices still hold large cash piles from business sales, IPOs or exits. Jessica Bulen, head of U.S. family capital, endowments, foundations and healthcare at BlackRock, said these clients "are really looking for a very liquid portfolio or investments that can generate liquidity." Armando Senra, who leads BlackRock's institutional business across the Americas, said understanding liquidity needs is the most important factor in portfolio discussions.

Philanthropy is also set to shift. More than three-quarters of family offices with a next-generation principal said they will support "different charitable causes than their predecessors," per the Bank of America survey. Studies cited by CNBC suggest Gen Z and millennial heirs are more likely to focus on systemic causes such as climate, health, human rights and international development, while boomers and Gen Xers have tended to favor local institutions. Forty percent of family offices with female principals have written philanthropy mission statements, versus 29% overall, according to the same survey.