From wealth to purpose: how family offices are transforming to balance growth and sustainability

Despite lower overall deal volumes and values, there have been notable shifts between asset classes. Over the past decade, family offices have increasingly diversified away from real estate. At the same time, the share of family office deals allocated to direct investments such as startups and M&A has been rising steadily for several years, reaching a peak in the first half of 2022. Over the past two years, however, real estate deals have regained some ground as a share of total family office investments, reaching their highest level since 2019. Meanwhile, the share of investments going into funds has declined significantly since the end of 2020, falling to a decade low of 8% in the first half of 2024.

The decline in both the volume and value of direct family office transactions since the first half of 2021 has been accompanied by a notable shift towards smaller, rather than larger, deals. In the first half of 2024, more than two in three family office investments (71%) were small deals of US$25 million or less, although this share was down two percentage points from the previous half-year period. Meanwhile, family office involvement in medium (US$25 to US$100 million) and large (US$100 to US$500 million) deals increased by one percentage point each since the end of 2023, reaching their highest level since the first half of 2022, reflecting a gradual return to larger opportunities.

The total deal value of family office exits has generally exceeded their expenditure on new investments, indicating healthy returns. This cautious approach to making new investments differs from that of private equity investors, who have consistently seen more investment inflows than outflows, both in terms of deal volume and value. The constant pressure on PE firms to invest contrasts with the ability of family offices to park capital and wait for the best opportunities.

In terms of strategy, club deals remain highly favoured, with 60% of family office investments in the first half of 2024 involving co-investments with other investors. This structure allows family offices to take smaller stakes while sharing risk and leveraging the expertise of their investment partners.

The combined trends of a preference for smaller direct deals and a shift towards club deal structures for direct investments suggest a growing inclination among family offices to maintain their flexibility and to mitigate and share risk. This reflects a generally higher level of sophistication in the approach of family offices, which are becoming more institutional in their teams, in the way they assess opportunity versus risk, and in their approach to governance and process discipline.

The United States remain the top investment market for family offices. Between the second half of 2014 and the same period in 2023, the share of family office investments in Europe rose by 13 percentage points, reaching an all-time high of 35%. This narrowed the gap with the US, which held a 44% share. However, in the first half of 2024 the trend reversed. Europe’s share fell by 3 percentage points, while the US share increased by the same margin, reflecting a shift by European family offices towards US opportunities.

Startup investments by family offices followed a similar trajectory. The US share declined steadily, reaching a decade low of 46% in early 2023. Since then, it has rebounded, climbing to 50% in the first half of 2024. Currently, half of all family office startup investments are in the US, compared to just over one quarter in Europe.

Software and services dominate family office direct investments, leading in both total deal value and share of overall deal value. Over the past year, startup investments have been heavily focused on software-as-a-service (SaaS) and artificial intelligence/machine learning (AI/ML), which ranked highest in both deal volume and value. FinTech and life sciences followed in these metrics.

The leading sectors for family offices’ startup investments
July 2023 to June 2024

Driven by a growing sense of responsibility to address societal and environmental challenges, family offices are increasingly prioritising investments that generate a measurable positive impact alongside financial returns. This shift is being driven by next-generation leaders who value sustainability and see impact investing as a way to align their portfolios with their values.

Family offices have steadily increased their impact investing over the past ten years. In the first half of 2022, impact investments accounted for more than 50% of their total investments for the first time and have continued to grow since then. Education and renewable energy are the main areas of interest for family offices, accounting for 29% and 24% respectively of their total impact investments in the year to June 2024. Affordable housing, on the other hand, remains underrepresented, with just 4% of total impact investments.

Also in Switzerland, the shift in the investment focus of family offices away from real estate and funds towards direct investments in companies (startups and M&A) remains evident, although there is currently no significant growth in the number of their startup investments, and the volume of their M&A deals in early 2024 was below the previous year's level. It is no surprise that the sharp rise in interest rates in 2023, combined with a more challenging economic environment, has temporarily shifted the focus back to real estate investments. However, we expect the M&A market in general to recover, which would likely result in family offices identifying more attractive opportunities in direct investments (M&A).

Impact investing is playing an increasingly important role in Swiss family office deal flow, reflecting a clear shift within the global family office community away from traditional investments towards more impact investing.

The “NextGen effect” is also gaining momentum. This is not surprising, as we are in the midst of the largest wealth transfer in history. Members of the next generation of family entrepreneurs are increasingly interested in working within family offices, often more so than in running the operational family business itself. This emerging generation is also better informed and more familiar with new technologies, which helps explain the increase in startup investments. They also tend to prefer collaborative investments, often with contacts from their university days, which accounts for part of the rise in club deals. Moreover, this generation has a strong sense of responsibility for a sustainable future, which drives their growing interest in impact investing.