The investment house talked to over 50 ultra-high net worth clients, including family offices, to get an understanding of how they feel about alternative investments such as private equity. There are some challenges ahead, it said.

Renowned US private equity buyout and investment house KKR has brought out a study of alternative assets that draws on interviews with scores of ultra-high net worth investors, arguing that this form of money management has “come of age”. However, the report also warns of potential storms for investors.

The study is called The Ultra High Net Worth Investor: Coming of Age, written by Henry H McVey, KKR’s head of global macro and asset allocation and Jim Burns, who heads up the individual investor business for KKR. KKR defines ultra-high net worth as an investor with $30 million or more in investable assets.

“As our client base has diversified, we are not only engaging with allocators who serve as fiduciaries for large pensions but also with sophisticated individual investors, many of whom have or run large family offices,” Henry McVey said. “Not surprisingly, the investment objectives of KKR’s average UHNW investor can be quite different from the objectives of the traditional pension, endowment, or foundation,” he continued.

The authors carried out a proprietary survey of and interviewed more than 50 KKR UHNW clients, including several family offices. 

While returns have been strong in some cases, there are some headwinds ahead, the authors said.

“Current UHNW asset allocation positioning appears to make more sense for the environment we just left - and not necessarily the one to which we could be headed,” the study said. “Beyond potentially lower absolute returns, the Sharpe ratio, or return per unit of risk, could be poised to fall. Many UHNW investors appear over-indexed to their local markets, the US in particular,” it said.

"Key to our thinking is that our future expected return forecasts for many asset classes suggest lower returns across the board, including many of the asset classes where our UHNW investors have particularly large concentrations. If we are right, then we estimate that the return for UHNW portfolios could fall to 5.3 per cent from 9.3 per cent unless portfolios are repositioned for the environment we think that we are entering. As such, we think that Ultra HNW investors must find new opportunities to harness complexity and dislocation to their benefit, allowing them to earn better returns than what typical indexes may deliver during the next five years. At the same time, they must also be able to select managers with products that can truly deliver top-tier performance," the study continued.

More positively, the report said: “These investors are using increasingly sophisticated products, becoming more global, and learning to leverage their competitive advantages in the marketplace. Coupled with strong growth, this market should remain a dynamic one for the coming years. And if we are right about the macroeconomic backdrop that we laid out in our Outlook for 2017: Paradigm Shift, then ultra-high net worth individuals and family offices are in an excellent position for the paradigm shift we are envisioning.”