KKR’s Henry McVey Says Leading Family Offices Plan to Allocate More to Alternatives in 2024

Rhea-AI Summary

KKR released a new asset allocation report titled 'Loud and Clear' based on a survey of 75 Chief Investment Officers, revealing family offices' growth ambitions. The report highlights diversification across asset classes, increased allocations to Alternatives, Private Credit, and Infrastructure, and a shift away from Public Equities and Cash. Family offices are focusing on compounding capital, leveraging illiquidity premium, and investing in key themes like supply chain disruption and artificial intelligence. Geopolitics is a growing concern for CIOs, surpassing inflation as the main risk.

Financial Analyst

The shift in asset allocation strategies among family offices, as highlighted by KKR's report, indicates a significant trend towards diversification and alternative investments. The increase in allocations to Alternatives by 200 basis points since 2020, with 52 percent of assets now in this category, suggests a strategic move away from more traditional, liquid investments. This pivot could be driven by the search for higher returns, which are often associated with alternative assets such as private equity, real estate and hedge funds. The illiquidity premium refers to the additional return investors demand for committing their capital to less liquid investments and family offices seem to be increasingly comfortable with this trade-off.

High cash positions, despite an uptrend in alternative investments, indicate a cautious approach amidst market uncertainties. This could be a hedging strategy against market dislocations, providing liquidity to capitalize on investment opportunities as they arise. The regional differences in asset allocation, particularly the lower allocation to traditional private equity by U.S. family offices, could reflect differing regional economic conditions, regulatory environments and investment opportunities. The increased concern over geopolitics over inflation as a primary risk factor also merits attention, as it may influence future investment decisions and risk assessments.

Market Research Analyst

The report's findings on family offices' growing interest in sectors like Oil & Gas and Industrial signal a contrarian approach to finding value-based opportunities in markets that may be overlooked by other investors. This inclination towards sectors that are currently out of favor could be a strategic differentiation point and may lead to above-average returns if these sectors recover or outperform market expectations. Moreover, the noted increase in allocations to Real Assets suggests a move towards investments that can potentially offer inflation-hedging characteristics, an important consideration given recent inflationary pressures.

From a market research perspective, the differentiation in asset allocation strategies between newer family offices and those established pre-COVID could imply a maturation curve in investment strategies as family offices evolve. More seasoned offices might be leveraging their experience to make more aggressive allocations, which could affect the dynamics of capital flows in the private markets.

Economist

The report indicates that family offices are planning to allocate more to Private Credit, Infrastructure and Private Equity at the expense of Public Equities and Cash. This trend may have broader economic implications, such as increased capital availability for private sector projects and businesses, potentially driving innovation and economic growth. However, the shift away from Public Equities could also reflect concerns about market valuations or potential volatility in the public markets. The growing emphasis on geopolitical risks suggests that family offices are factoring in the potential economic impact of international relations and political stability on their investments, which could alter the flow of investments across borders and influence global economic trends.

New Asset Allocation Report Based on Proprietary Survey Highlights the Growth Ambitions of Family Offices

NEW YORK--(BUSINESS WIRE)-- KKR, a leading global investment firm, today released “Loud and Clear,” a new Insights piece by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA).

Based on a proprietary survey of more than 75 Chief Investment Officers (CIOs) who oversee over three billion dollars in assets, on average, the report examines how family office CIOs are leveraging their longer-term focus and owner/operator mentality to create a sustainable competitive advantage.

“We hear the message ‘Loud and Clear’ that this segment of the market is changing – and for the better,” said McVey. “These investors are diversifying across asset classes, and as they mature, they are getting better at harnessing the value of the illiquidity premium to compound capital. They are also using better hedging techniques and increasing both their desire and ability to lean into dislocations, strengths that we believe will position them to be at the winner’s table at the end of this cycle.”

In the report, McVey notes several key parallels between the asset allocation objectives of KKR’s Balance Sheet and those of the surveyed CIOs. These include a focus on compounding capital in a tax efficient manner to build wealth and investing behind key themes such as supply chain disruption, industrial automation, artificial intelligence and the ‘security of everything.’ Other key takeaways from the survey included:

• Family offices are allocating more to Alternatives, with 52 percent of assets allocated to Alternatives on average, up 200 basis points since 2020.
• Within Alternatives, there is meaningful diversification including a significant jump in allocations to Real Assets.
• Cash positions are still high at nine percent, which further confirms our thesis that many investors are under-risked for today’s markets.
• Family offices are planning to allocate more to Private Credit, Infrastructure and Private Equity at the expense of Public Equities and Cash.
• We continue to see notable bifurcation in the asset allocation approaches between family offices set up within the last five years and those that had already scaled before COVID, with more seasoned family offices typically holding less cash and allocating more to Private Equity.
• There are pronounced regional differences in asset allocation. U.S. family offices allocated less to traditional Private Equity compared to counterparts in Latin America, Asia and Europe, while Asia-based family offices had relatively heavy allocations to Real Estate.
• CIOs are going against the grain to find value-based private market opportunities, especially in the Oil & Gas and Industrial sectors.
• Geopolitics is eclipsing inflation as the main concern for CIOs, with more than 40% of respondents identifying geopolitics as the single most important risk today.
• There is growing concern that more resources are required to support both the growth in assets under management and the increase in diversification across asset classes.

Links to access this report in full as well as an archive of Henry McVey's previous publications follow:

• To read the latest Insights, click here.
• To access the 2020 Family Capital survey, click here.
• For an archive of previous publications please visit www.KKRInsights.com.

About Henry McVey

Henry H. McVey joined KKR in 2011 and is Head of the Global Macro, Balance Sheet and Risk team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet, oversees Firmwide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Global Operating Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a Managing Director, Lead Portfolio Manager and Head of Global Macro and Asset Allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVey here.

About KKR

KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at www.kkr.com. For additional information about Global Atlantic Financial Group, please visit Global Atlantic Financial Group’s website at www.globalatlantic.com.

The views expressed in the report and summarized herein are the personal views of Henry McVey of KKR and do not necessarily reflect the views of KKR or the strategies and products that KKR offers or invests. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This release is prepared solely for information purposes and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This release contains projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and neither KKR nor Mr. McVey assumes any duty to update such statements except as required by law.

KKR’s Balance Sheet refers to that portion of KKR’s corporate balance sheet that is primarily used to support KKR’s asset management business, including the general partners of KKR’s investment funds and other controlling interests.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240213746598/en/

Media:

Julia Kosygina

212-750-8300

media@kkr.com

Source: KKR

FAQ

What is the title of the new asset allocation report released by KKR?

The title of the new asset allocation report released by KKR is 'Loud and Clear.'

How many Chief Investment Officers were surveyed for the report?

The report is based on a proprietary survey of more than 75 Chief Investment Officers.

What percentage of assets are family offices allocating to Alternatives on average?

Family offices are allocating 52 percent of assets to Alternatives on average.

What are some key themes family offices are investing behind according to the report?

Family offices are investing behind key themes such as supply chain disruption, industrial automation, artificial intelligence, and the 'security of everything.'

What is the main concern for Chief Investment Officers according to the report?

Geopolitics is eclipsing inflation as the main concern for Chief Investment Officers, with more than 40% of respondents identifying geopolitics as the single most important risk today.