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The sector has expanded from a small number of groups to about 15,000 offices worldwide and an estimated $5.9tn in assets

The family office, which handles the investments of the ultra-rich, has become one of the fastest generators of wealth in the world from the US to Hong Kong and Singapore. An institution that dates back more than 150 years — when American financier John Pierpont Morgan first came up with the term to describe the personal investment arm for his growing art collection — has become a cornerstone of the financial system.

The sector has expanded from a small number of groups in the 1980s to about 15,000 offices worldwide with an estimated $5.9tn in assets, according to a report in January by US media group Forbes, citing the Economist Intelligence Unit and DBS Private Bank.

Some wealth managers expect the number of offices to grow further, enriching both the ultra-rich individuals they serve and the global economy. “We are extremely bullish on the family office,” says Hannes Hofmann, head of the family office group at Citi Private Bank. “Wealth of the [ultra-rich] sector is being generated at a very fast rate and that is a good thing for the world economy and the financial system.”

As these offices have become bigger and more sophisticated, their reach has extended to corners of the world economy that were previously no-go areas because they lacked the financial firepower and expertise. Now, they offer services to small and medium-sized companies in markets in Latin America, such as Mexico and Chile, and Asia, where high interest rates and undeveloped financial sectors make it hard to raise capital from local banks.

Although the industry is diverse, ranging from single-family units with a handful of staff to multi-office groups representing several families and managing hundreds of millions of dollars, it faces a number of risks that could check growth.

First, the vast transfer of wealth to the next generation — estimated by data provider Wealth-X at $18.3tn by 2030 — may prove less than smooth. Some families could suffer from the so-called third generation curse, where money is lost because of infighting and poor decisions, as the founder and wealth creator becomes less involved in the business.

Second, family offices are increasingly investing in riskier private markets in search of higher yields, moving away from the traditional safer approach built around balanced portfolios. According to Citi’s Family Office and Investment Report for the first quarter, there were larger allocations to private equity across all regions.

A survey of 54 private banks around the world by Professional Wealth Management, published in March, also showed 88 per cent expected to increase their level of investment in private equity for their clients this year, while 90 per cent said they would increase or maintain levels in private debt. Equity (94 per cent) and fixed income (91 per cent) remain popular too, but the growing appetite for higher-yielding private equity and debt comes with risks as well as rewards in markets that can deliver both big winners and big losers.

Third, the world has become a much more dangerous and uncertain place, with wars in the Middle East and Ukraine, and simmering tensions between China and Taiwan. UBS’s Global Family Office Report for 2024 points out that the risk of a significant geopolitical conflict is a big concern for family offices, both in the near and medium term. At two large family office conferences in Singapore and London hosted by Deutsche Bank Private Bank, attendees said geopolitics was the theme most affecting asset allocation decisions. It is clearly a threat that could disrupt markets and upend some portfolios.

There are other risks, such as inflation and cyber attacks, but some wealth managers shrug them off. They say families are better equipped for succession and the transfer of wealth as they have improved governance and oversight and set out defined investment goals, which in turn should help them navigate riskier private markets and deal with geopolitical dangers. “There have always been geopolitical tensions in the world and family offices are largely diversifying to manage those risks,” says James Whittaker, head of UK at Deutsche Bank Private Bank. 

Gerard Aquilina, a family office adviser, stresses that greater professionalism and financial experience means most groups are equipped to make the right investments, as they have diversified their holdings and hired top bankers and asset allocators to manage their portfolios.

Citi’s Hofmann adds: “Family offices are becoming smarter. They are employing good people and they are diversifying. There is always a risk with any investment, but family offices can continue to be a success story and benefit the world economy.”

Asset managers and advisers admit there are risks, but in the main they still expect the sector to continue growing. They believe family offices will play an increasingly important role in the financial system and create more wealth for their ultra-rich owners, while at the same time boosting the global economy by providing capital and financing for companies and institutions. 

Labour urged to boost budget for new offshore wind projects

Power generator RWE says government risks securing ‘less than half’ of new capacity needed under current support scheme

The UK’s largest electricity generator has urged the government to boost the budget for supporting new offshore wind projects if it wants to meet its stretching targets for decarbonising the electricity system. 

Tom Glover, UK country chair for RWE, said ministers risk securing “less than half” of the new capacity needed, in the latest annual auction round for state support contracts.

“We would urge them to increase [the budget] significantly and ensure they’re getting all the advice of all the relevant experts to work out how to do that,” he added. 

The lobbying from RWE and others marks a test for the new Labour government as it seeks to show it is serious about meeting its ambitious climate goals, and avoid repeating a flopped auction round last year.  

A Labour spokesman said Ed Miliband, the secretary of state, would “carefully consider” whether to increase the budget after assessing the applications it has received. 

It comes as the new government has taken several steps within a week of taking office to push forward its energy strategy, including allocating £7.3bn of funding to help build ports, gigafactories and other infrastructure, and easing planning rules for onshore wind projects in England. 

It hopes that such measures will unleash investment from private sector companies such as RWE, which aims to invest about €8bn in Britain between now and 2030, on top of the €3bn it has invested since 2021. 

Labour wants to quadruple the UK’s offshore wind capacity by 2030 as part of its plan to cut emissions from the electricity sector to net zero by then. 

Offshore wind has been a success for the UK, supplying about 17 per cent of its electricity in 2023. It is second only to China in terms of installed capacity. 

But the sector ran into difficulties last year owing to the rising costs of goods and financing. No offshore wind developers bid for UK state support contracts, known as contracts for difference, arguing the support on offer was too low.

Last year, the Conservative government increased for this year’s auction round both the maximum electricity price the state is prepared to guarantee developers, and the total budget.

The budget does not determine how much developers will actually receive in state support, which will depend on unpredictable future wholesale prices

Instead, it is an estimate of how much could be paid out under the contracts each year, used in the auction to restrict how many projects can be awarded contracts.

RWE and others argue the current budget of £800mn will not be enough to secure the vast numbers of new offshore wind turbines needed, given the government’s estimates on wholesale prices which it believes are flawed.

RenewableUK, the trade group, has said the government should raise the budget for offshore wind to £1.5bn to “increase investment in shovel-ready projects”. 

A spokesman for the Department for Energy Security and Net Zero said applications for the auction round are “currently being assessed and the secretary of state will then carefully consider whether to increase the budget”. 

He added: “Investing in clean power will cut bills and make Britain energy independent, which is why we will double onshore wind, treble solar and quadruple offshore wind by 2030.

There has been a marked change of signals from Ankara on economic management

For emerging market investors, there has been a marked change in the signals from Turkey. A set of reforms has placed it back in the universe of countries with investable local currency assets.

For years, heterodox policies that combined low interest rates and state-led credit expansion led to high inflation and a very vulnerable lira. Consequently, Turkish local assets became a structural underweight position for emerging market investors.

However, after Recep Tayyip Erdoğan’s 2023 re-election as president, this radical policy stance pivoted. Bringing in technocrats to manage the central bank and Mehmet Şimşek as finance minister, meant a much-needed return to monetary and fiscal orthodoxy began.

The lira depreciated 38 per cent between March and July 2023. Then to anchor the currency and runaway inflation, which reached 75 per cent in May 2023, the central bank hiked interest rates from 8.5 per cent to 50 per cent in nine months, adjusting macroprudential policies to further tighten credit conditions.

A sharp decline in inflation ensued. This June, month-on-month inflation dropped to 1.6 per cent (which equates to 21.6 per cent if annualised), which is likely to become the new normal, in our view. Inflation steadying at these levels would bring the Turkish real interest rate to around 20 per cent.

Steadier prices are crucial for lira stabilisation, encouraging further de-dollarisation from locals and inflows from foreign investors.

Indeed, currency depreciation and high interest rates have already brought the current account deficit from 5.5 per cent of GDP in the first quarter of 2023 to 2.8 per cent in the same period this year, with tourism revenues set to provide a further boost over summer.

Alongside the central bank tightening, the finance minister is pushing for a fiscal consolidation. In 2023, utility prices and consumption taxes were hiked to this end, which alongside lira depreciation, exacerbated the inflation problem in the short term.

However, new tax measures are focused on direct taxes, which tend to be disinflationary. Deficit reduction will also include some tough measures, like freezing public servant wages for the coming years.

After many false starts in the past, the question on whether Erdoğan will “U-turn” on these orthodox policies remains. This time, however, the reforms seem to be based on solid ground. In our view, Erdoğan understands that lira stability is now correlated to his popularity.

Despite his previously unorthodox stance, the president is no stranger to the positive impact of orthodoxy on GDP.

During Erdogan’s first decade in power, to 2012, sensible monetary and fiscal policy supported a large surge in foreign investments. During the period, the economy expanded 64 per cent in real terms, leading to an increase in GDP per capita by 43 per cent.

This history can offer clues to the path forward. The 2002-12 growth bonanza happened after structural changes to the Turkish economy that took place post 1999 IMF-led reforms. The reforms were initially successful, allowing for a good trading opportunity.

But capital outflows from emerging markets during the dotcom bubble, coupled with local political instability, lowered confidence that the reforms would be fully implemented.

The true turning point happened at the end of 2001, after Turkey’s IMF programme expansion improved investor confidence. This coincided with the dotcom bubble deflation, driving capital away from the US and towards emerging markets, including Turkey.

Importantly, Turkey’s macroeconomic issues are much less acute than in 1999. Then, the country budget deficit reached 12 per cent of GDP, and currency depreciation was coupled with a large stock of short-term dollar debt. Today, Simsek’s measures aim to consolidate the deficit from a more manageable level, and most public debt is in lira.

The benign path entails Erdoğan convincing foreign investors that Turkey is once again an attractive investment opportunity. Taking steps to normalise relations with the EU, enforcing the rule of law and strengthening institutions would help do this.

More recently, Turkey has strengthened its connection with investors in the Gulf, who have increased their deposits with the Central Bank and provided other sources of support.

For now, it is too early to say whether the reforms will lead to long-term structural growth. But the signs are positive and for emerging markets investors like Ashmore, it is good to be back.