The global gamble: How family offices are navigating the challenges of cross-border investments

To diversify their portfolios and pursue greater returns, family businesses are increasingly moving outside their home markets, with a projected US$5.9 trillion in assets under administration globally as of 2024.

Cross-border investments are now a crucial component of family offices’ business strategies as they increase their global presence. To diversify their portfolios and pursue greater returns, these organisations are increasingly moving outside their home markets, with a projected US$5.9 trillion in assets under administration globally as of 2024. Cross-border ventures, however, come with several challenges, from complex legal frameworks to volatile exchange rates and geopolitical unpredictability.

Geopolitical Risks and Uncertainty 

One of the most significant risks for family offices investing internationally is geopolitical instability. The political climate in a foreign country can impact asset performance, especially in emerging markets where governance may be less stable. Regional conflicts, sanctions, or sudden regulatory changes can turn an otherwise lucrative investment into a liability overnight.

To mitigate these risks, 85% of family office deals in 2023 (Link) were conducted through consortiums. These shared-risk investments enable Family offices to pool resources and knowledge, minimising exposure to any single geopolitical event. Consortium investments also allow family offices to access markets that would otherwise be too volatile or complex to navigate independently.

Political risk Insurance (PRI) can protect investors against government expropriation, political violence, currency inconvertibility, and breach of contract. PRI policies from organizations like the World Bank’s Multilateral Investment Guarantee Agency (MIGA) can provide a safety net.

Complex Tax Regulations 

Tax compliance is another major hurdle for cross-border investors. Every country has its own set of tax laws that can impact capital gains, income tax, and inheritance tax, adding layers of complexity to managing a global portfolio. Family offices are increasingly relying on third-party advisory services, with 34% of family offices planning to increase this reliance in 2024 (Link). These advisors specialise in navigating the intricate web of international tax regulations, ensuring that Family offices maximise their returns while remaining compliant.

Family offices are also adopting sophisticated risk management strategies to handle tax-related challenges. However, a survey conducted by FINTRX in 2023 showed that only 35% of family offices actively use comprehensive risk management strategies (Link), highlighting an area for improvement.

Currency Fluctuations and Hedging Strategies 

Currency volatility can erode the value of international investments, particularly in markets where political and economic conditions are less stable. In response, many family offices are employing hedging strategies to protect their portfolios. These strategies include using currency swaps, futures contracts, or holding assets in multiple currencies to spread out risk.

The next generation of family office leadership is driving change by adopting emerging technologies to manage these risks. With 78% of family offices likely to invest in AI and machine learning over the next two to three years (Link), these technologies can provide real-time data analytics and predictive models to anticipate currency fluctuations and geopolitical events. This shift towards data-driven decision-making is helping family offices stay ahead of potential risks before they materialise.

Seizing Global Opportunities 

Despite these challenges, the rewards for family offices that successfully navigate cross-border investments can be substantial. Private equity, for example, has become a focal point for many family offices, with allocations increasing from 22% in 2021 to 30% in 2023 (Link). This shift reflects a growing appetite for higher-yield opportunities, particularly in emerging markets where valuations are more attractive.

The fastest-growing region for family office capital allocation is the Asia-Pacific, where dynamic economies and a rising middle class are driving investment opportunities in sectors such as technology, healthcare, and real estate. Family offices are particularly interested in venture capital, which accounted for 87% of family office deals by volume in 2023. These high-potential start-ups offer a unique opportunity to achieve significant returns, albeit with higher risks.

The Importance of Comprehensive Risk Management 

While opportunities are vast, the need for comprehensive risk management has never been more critical. Family offices must adapt their strategies to focus not only on portfolio risks but also on broader concerns like cybersecurity, inheritance-related tax management, and reputational risks. The next generation of family office leaders, who are more comfortable with data analytics and technology, is well positioned to drive this transformation.

Technologies such as AI and blockchain are poised to play a pivotal role in the future of family office risk management. By leveraging these tools, family offices can implement predictive analytics, real-time monitoring, and automated compliance checks, thereby reducing both financial and operational risks.

Prepare for exit plans

Define clear exit criteria for scenarios where significant risks, such as abrupt political shifts, regulatory changes, or economic downturns, may arise. Allocate a portion of assets to liquid or semi-liquid holdings to enable swift adjustments or exits as conditions evolve. Regularly evaluate exit strategies to ensure flexibility and prevent capital from being confined to markets with escalating risk levels

Conclusion 

As family offices continue to expand their global presence, they face an increasingly complex landscape of risks and opportunities. Geopolitical instability, tax regulations, and currency fluctuations are just a few of the challenges that accompany cross-border investments. However, by embracing consortium investments, third-party advisors, and advanced risk management technologies, family offices can successfully navigate these obstacles while capitalising on global opportunities. With the next generation of leaders driving change, the future looks promising for family offices as they adapt to an ever-evolving global investment landscape.

https://www.financialexpress.com/business/industry-the-global-gamble-how-family-offices-are-navigating-the-challenges-of-cross-border-investments-3680036/?ref=hometop_hp