Family Offices

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Family offices. Suddenly, that term is showing up on a regular basis in the investment community as family offices are seen more and more regularly on company schedules for investor meetings at conferences, NDRs and other investor events. In fact, the popularity and presence of family offices has increased to a point where some have described family offices as “disruptive force entities” within the investment world.

According to the EY Family Office Guide there are now more than 10,000 family offices worldwide, a number that has grown exponentially since the estimated 1,000 in 2008. 

What is a Family Office?

The family office was originally conceptualized and set up to serve as a wealth and trust management vehicle for high net worth families, with family being defined as a multi-generation family businesses, as well as high net worth individuals who may have come into inheritance or independent wealth. There are several different forms a family office can take:

  • Single Family Offices (SFO) serve the investment needs of one family
  • Multifamily Offices (MFO) are structured much like an asset management firm, providing wealth management and planning to a group of families and/or high net worth individuals who are not necessarily connected to each other
  • Embedded Family Offices (EFO) are usually an informal structure that exist within a business owned by an individual or family when the family considers private assets as part of their family business and therefore extends private wealth management to employees of the family business.

SFOs and MFOs are distinct legal entities and manage assets that are completely separated from the family or the family business. While some MFOs are exclusive to a few families, most are commercial, in that they sell their services to other families. Due to their success, SFOs often become MFOs, driven by additional families desiring to participate in the success. Economies of scale are also often easier to achieve through an MFO structure, prompting some families to accept other families into their family office structure.

Because EFOs are tied in with the family business, EFOs can lack confidentiality and efficiencies.  As such, increasing numbers of entrepreneurial families are separating their private and business wealth and are moving the family office functions outside the family business into SFOs or MFOs.

Family offices do not have to abide by fixed investment regulations, but instead follow their own internally-set investment policies, because, unlike banks and other financial service providers, family offices are generally subject to the more relaxed regulations that apply to companies, trusts and foundations. However, it should be noted that the degree of regulation for family offices increases with both the level of services provided by third parties and the number of families served by the family office.

The Growth of the Family Office

Family offices are one of the fastest-growing – if not the fastest growing – investment vehicles in the world today for several reasons, including:

  • There is an increasing concentration of wealth globally among private families
  • Family offices tend to be more flexible and return-driven than typical investors, which leads to higher potential returns
  • Family offices essentially give investor-families complete control of their money. Many of the wealthy families are entrepreneurial and sophisticated in understanding how to run their own money
  • Reduced fees are driving families to set up their own investment vehicle. The structural simplicity of a single client and one office can streamline negotiating processes, create efficiencies and lessen costs in a family office structure
  • Confidentiality is ensured under the family office structure, as wealth management and other advisory services for the family members are under a single entity owned by the family
  • Family offices do not have to be licensed or registered
  • Family offices allow for separation, or at least a distinction, between the family business and the family’s wealth or surplus holdings.
  • Family offices can also coordinate other professional services, including philanthropy, tax and estate planning, family governance, communications and education, to meet the family’s mission and goals

Recent Trends in Family Offices

The increasing concentration of wealth held by very wealthy families and rising globalization are fueling the growth of the family office. And as their presence and importance to the investment community grows, family offices are becoming more ambitious in their investment activities, taking on activities that were historically conducted by larger companies and PE firms. They are forming partnerships to enable participation in buyouts and acquisitions, financing early stage businesses and business ideas, purchasing distressed debt, real estate and insurance products and they are generally becoming more aggressive and riskier in terms of the types of investment vehicles they embrace. A growing number of family offices are also teaming up with private equity funds, hedge funds, and even co-investing with sovereign wealth funds.

According to the UBS Global Family Office Report, nearly half of the average family office portfolio is now allocated to alternative investments, as the family office portfolio managers pursue higher yields for their holdings.  And likely as a result of these more aggressive approaches, and a drive towards higher risk, investment returns of family offices have increased significantly in recent years. According to Campden Research, family offices returned 0.3% in 2015, which increased to 7% in 2016 and more than doubled to 15.5% in 2017.

Indeed, family offices are on the rise as global wealth increases and the wealthy, entrepreneurial families are driven to find ways to protect and build their money. Put off by the high fees and sometimes weak performances of Wall Street money managers, families are shifting to investments they can pursue directly and aggressively through family office structures.

To learn more about family offices and the impact they may have on your company, contact us.

Debbie Kaster, Managing Director

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