Family Offices – An Overview
Family offices are becoming increasingly popular. They vary widely in terms of size and functionality, but essentially can be thought of as a firm or office that manages the financial assets and directly invests money on behalf of a family as their sole principal; as opposed to a more traditional institution that pools investment capital from third parties. A family office might be structured around a single family as a principal, or be a multi-family office, can range in size from a few million to many billions of dollars, and could consist of anything from a single advisor to a large team. The office might also handle other family-related financial affairs, for example advising on M&A, personal transaction financing, real estate acquisition and disposal and even arranging services such as education or art valuation.
Rather than place their wealth in traditional institutional investment funds with the associated significant fees, individuals and families have found that via a family office they can benefit from significantly lower operating costs while maintaining strong performance. The timeline can also be very different to that of an institutional fund, perhaps looking to future generations – the phrase “100 year wealth” comes to mind – rather than looking to exit in seven to ten years. The other consideration with respect to time is at the other end of the scale – a family office can generally operate much more quickly and flexibly than a traditional firm, in accordance with the principal’s wishes.
Another important factor is that the principal can have a level of control over their investments, which could be of particular interest if that principal has experience or expertise in a specific industry. Should the principal have such experience, this can obviously be a positive influence on the firm seeking investment partners. Alternatively some investments might not have a solely financial basis – a principal might wish to invest in a project for which they have a passion, for example a golf course, sports team or vineyard.
A family office might focus on simply preserving the wealth of the principal or indeed on growth. The strategy will depend on the wishes and requirements of the principals, on the sophistication of the principals with respect to financial matters, and the legacy of the capital involved. For example a family managing multi-generational wealth would likely have different requirements to a self-made individual, and an industrial magnate might well differ in his or her requirements to those of a hedge-fund manager.
As returns to capital – as compared to labour – continue to increase, so family offices will continue to become more widespread. It’s worth noting that service providers such as investment banks are spending time devising ways to provide turnkey solutions in order to encourage these families to work with them, a sure sign that this particular corner of the market is growing.