Over the next 20 years, a generational wealth transfer of $84 trillion is expected. By 2045, this could leave millennials and Gen X controlling 80% of all private wealth. In preparation, many ultra-high-net-worth families increasingly are pursuing multi-generational strategies that address the needs and investment objectives of future generations.
In our second Goldman Sachs Family Office Investment Insights Report, "Eyes on the Horizon," based on a client survey of 166 family offices, 39% of families reported involving younger generations in their investment decision-making. Many UHNW families are educating their children and including them in succession plans for investment portfolios or operating businesses.
Family offices are in many ways a unique cohort of investors, with multi-generational investment horizons, a high tolerance for illiquidity and largely unconstrained mandates. These features necessitate robust estate planning, as well as exposure to sectors and investment themes that can endure business cycles and drive value over the long term. Many are investing in innovative early-stage companies with potential for positive societal impact.
It's essential to establish an early and ongoing focus on implementing estate planning structures. This can entail full utilization of lifetime gift, estate and generation-skipping transfer tax exemptions; establishing wealth transition frameworks with grantor trusts and dynasty trusts; and leveraging efficient long-term investing structures such as life insurance.
Diversification, particularly away from a concentrated single stock position—that might have been a life-changing wealth creation vehicle—is important to safeguarding the future. Families may also consider hedging strategies as part of their single stock risk management.
Additionally, institutional family offices often pursue high allocations to alternatives as a means to grow and preserve their wealth. With their long-term investment horizons and ability to bear more illiquidity risk, on average they hold more than 40% in private asset classes. Private equity is the largest allocation, at 27%.
In addition to historical outperformance versus public market benchmarks, many families pursue private market investments to access innovative themes earlier in companies’ lifecycles. They often focus on long-term secular growth trends, particularly emerging technologies.
Numerous family offices were founded by successful entrepreneurs and investors who engaged in innovation and disruption, often creating technological advances in fields such as computer hardware and software, social media, healthcare and biotech. It should surprise no one that their investment preferences frequently follow similar paths, even as new generations take over.
In our survey, 43% and 34% of family offices reported being overweight to the technology and healthcare sectors, respectively. Our conversations with family offices center on themes such as climate transition, biotechnology and generative artificial intelligence (AI).
Interest among family offices in climate transition technologies has increased significantly. The improved financial viability of electric vehicles and battery manufacturers, partly as a result of incentives offered to consumers and companies via the Inflation Reduction Act has created new opportunities. Younger generations also are interested in energy transition as it aligns with their personal values.
Clean energy is the most popular area for family offices interested in sustainable investments: 60% reported expecting to deploy capital in the space over the next 12 months.
Interest in disruptive healthcare technologies (such as precision medicine, cell therapy and immunotherapy) has similarly increased because of transformative breakthroughs in areas like oncology and autoimmune diseases. As private market valuations moved more in line with the downdraft in public markets—biotech stocks are down more than 50% from their early 2021 peak—family offices increasingly deployed capital into the space at more favorable entry points.
Involvement with healthcare often represents a convergence of what is important to families through investment and philanthropic lenses. Many families have established healthcare foundations while also deploying capital into innovative companies that can offer revolutionary improvements in disease prevention and cures.
Family offices are interested in AI, but with much of the innovative technology still nascent, they are focusing on understanding the opportunity set and potential implications for existing investments. For large investors, flexibility to seek AI exposure broadly will come via public equities, private funds and investments in private companies.
Anecdotally, we hear that initial interest is in opportunities directly linked to scaled AI deployment, and indirect plays where AI is likely to be highly disruptive, including financial services, logistics and cybersecurity.
Family offices have accumulated significant wealth since the Great Financial Crisis. Maintaining it will require educating the next generations and empowering them to make choices that can create worthy legacies.
Sara Naison-Tarajano is Global Head of Private Wealth Management Capital Markets at Goldman Sachs