Demystifying the Family Office
In a follow up to our primer on Venture Capital, we’re diving into the increasingly talked about world of the “Single Family Office.”
Single family investment offices have become more visible for the role they play in managing, allocating and preserving the wealth of an individual family. While the name suggests a “model”, a colleague of ours likes to joke that “if you’ve seen one family office, you’ve seen one family office.”
These businesses can vary greatly in levels of sophistication, from the investment account of a High Net Worth individual to a robust business with multiple analysts, executives and investment committees. The only common string between all single-family offices is that they exist to manage the assets of a single family or individual. They have no outside investors or external stakeholders. Because of this, they are totally customized around achieving the objectives of the family they support, which means in that in the investment world, the behave very differently from a typical private equity or venture capital fund.
In this article, we'll explore the unique characteristics of family offices, their investment strategies, and the diverse range of investment options they pursue. If you’re pursuing an investment and think a family office might be the right partner for you, hopefully this article will shed some light on who they are and how they operate.
Purpose
Unlike traditional investment firms, family offices operate with a highly personalized approach. They are built around individual families and exclusively serve their specific goals, preferences, and risk appetite. This customized approach allows family offices to align their investment strategies with the family's long-term vision, values, and financial objectives. Often this means their primary goal is capital preservation, versus absolute returns.
No two family offices are alike, with the vast majority actually being the investment account of a single high net worth individual or family. Those that “professionalize” and begin to include management (who may still be family members) start to look more like hedge funds or private equity funds, although with no external stake holders.
Lacking external stake holders means that when these businesses are often highly reflective of the attitudes and personalities of their family members. They may pass on investment opportunities which VC funds would clamour over because they don’t wish to “be known” for investing in a certain space.
Investment Strategies
The range of strategies deployed by family offices is endless. The level professionalization and sophistication can have an enormous impact on how a family office deploys capital, the investment review process, the expected returns etc. On the low end, this may be a high-net-worth individual meeting with a single investment advisor to allocate a portfolio of public securities which are invested through a corporation. They may make small direct investments or participate as a limited partner in a fund or two.
Larger asset bases may see the introduction of “management”, family or otherwise, in the same way as a traditional investment fund might approach asset allocation. There may be multiple portfolio managers (in house or otherwise), a wider variety of investments in diversified assets (real estate, art, vehicles, etc.), direct or indirect private equity, mortgage funds, direct or indirect venture investments. This family offices may have an investment committee or a management team but are always going to reflect the wants and needs of the family itself.
Illiquid investments will make up only small percentages of their overall portfolios however and just because a family office has made one direct venture investment does not mean they will continue to do so.
The range of strategies makes approaching family offices for investments difficult because of their often unclear investment thesis or guidelines as to what drives an acceptable return. Broadly, family offices are far more interested in preservation and the parabolic returns of venture capital (for example) are not a requirement for them to invest in any particular area.
Investment Options
Family offices have the advantage of exploring a wide range of investment options. Unlike venture capital funds, which primarily focus on equity investments in start-ups, family offices can consider long-term investments, such as real estate properties, direct investments in private companies, or even philanthropic endeavors. This broader scope allows family offices to take advantage of opportunities that might not fit the traditional venture capital or private equity mold. They will spread their investments around, either making them directly or utilizing a network of brokers and asset managers are different firms to make their investments.
When they make direct private investments, they are likely to approach with caution and look to make investments in industries or sectors in which the the family has a “reason to win”, perhaps the industry where the wealth was initially created. Illiquid investments will make up only small percentages of their overall portfolios however and just because a family office has made one direct venture investment does not mean they will continue to do so.
The Rise of Family Offices
In recent years, the number of family offices has witnessed a significant increase globally. Wealthy families are increasingly seeking greater control over their investments and a more hands-on approach to wealth management. According to a study conducted by UBS and Campden Wealth, the number of family offices grew by 38% between 2017 and 2020, reaching an impressive count of 7,300 offices worldwide.
If you are considering an investment from a Family Office or think that transitioning your business to a family office structure might be right for you, Peninsula Road is here to help.