With the global economic growth of the past several decades, and billionaires minted every other day in Asia and within the international technology sector, the family office has risen to grand prominence as more super-rich seek close, sustained management and successful transfer of generational wealth.
As might be expected by the name, a family office is a private, nearly in-house wealth-management shop for a high-net-worth family. There are also “multifamily” offices that serve several families.
Family offices do not have to register anywhere, so no authoritative tallies of the number or size of family offices globally exist. Nevertheless, insights can be gleaned from industry surveys: 311 family offices responded to a 2018 survey by Swiss investment bank UBS, and of those more than two-thirds had been created since 2000. Only a sliver of present-day family offices existed before 1990.
The average amount managed by a family office in 2017 was $1.1 billion, and a typical single-family office has a full-time staff of 11 and a part-time staff of four, reported UBS.
THE SWELLING RANKS
There are “at least 10,000 single-family offices in existence globally, and at least half of these were set up in the last 15 years,” reported EY, the accounting and financial services giant, in a 2017 study. If the typical shop has $1.1 billion under management, as found by UBS, then we can extrapolate the global family-office business has about $11 trillion under management. Though an eye-popping number — enough to run the U.S. federal government for nearly three years — it is not outlandish or unbelievable, given the scale of modern finance. Asset manager BlackRock, for example — a single firm — has about $6.32 trillion under management.
Not only has the global economy grown, but tax codes worldwide and in the United States have been altered over the past 40 years to enhance the accumulation of wealth. Offshore tax havens, if controversial, have multiplied. As a result — and no doubt also through the intelligent, sustained application of capital — the family office has moved into the financial big leagues in the past 10 years. And for all the current size and scale of the family office sector, nearly all observers contend the future is much larger.
“The number of ultra-high-net-worth families will continue to rise for the foreseeable future as emerging markets, primarily led by Asia, continue their economic ascendance,” according to Empaxis, a financial industry services firm. In 2016 there were 187,500 ultra-high-net-worth families globally, defined as those controlling more than $30 million in assets. By 2025, that number is expected to grow to 263,500, an increase of more than 40 percent.
Already, some family offices are weighty financial powers in their own right. The largest U.S.-based family office is the Bessemer Trust, with more than $140 billion of assets under management. Bessemer Trust is billed as a multifamily office, following the decision in 1974 by the founding Phipps family, which still owns the business, to provide family-office services to other families. Founded in 1907, today Bessemer Trust also services foundations and endowments, often started by the same people served through the family offices.
But plenty of new money can be found in family offices, too. Recently deceased Microsoft Corp. co-founder Paul Allen, Google co-founder Sergey Brin, and former Google CEO Eric Schmidt have set up family offices that collectively manage more than $100 billion, according to Bloomberg. And in 2016, the famed Koch brothers, David and Charles, formed a family office, 1888 Management, to help handle their $100 billion fortune.
REAL ESTATE TO THE FORE
With the close oversight of assets provided by family offices, the potential for a migration from passive to active investing is amplified, and indeed more super-rich are planting flags in real estate, including through direct ownership. The low returns of the past several years in global bond markets, especially safe sovereigns, have helped the property push. German 10-year bonds offer a trifling 0.37 percent annually, for example.
“In the search for higher returns, many [family offices] are taking a more hands-on approach to investment, and increasing their exposure to higher-yielding assets, like real estate,” reported Knight Frank, in a recent issue of The Wealth Report.
In recent years, more than 90 percent of family offices have invested in real estate, according to Deloitte Touche Tohmatsu, the professional services firm, in a 2018 report on the industry. The acquisition of operating businesses, often those in property development that own operating properties such as hotels, resorts and storage facilities, is becoming popular.
“While many families in prior years have taken a more passive approach to their investments … families are directly buying and operating companies as part of their investment portfolio,” Deloitte reports, based on 79 percent of survey respondents claiming to be doing exactly that.
Quick on the uptake has been the famed Wharton School, which now offers a commercial real estate investment course designed for “institutional investors, family office professionals” and others “who do not have a background investing in real estate.”
Direct investing, of course, can provide an opportunity for larger returns, certainly when compared with the soggy bond market, notes Deloitte. Also, many younger family members are willing to take risks and “have the desire to make an impact and strive to achieve repeated success.”
Indeed, the majority of family offices want to participate in direct buyouts, according to 118 such outfits polled by the Family Office Exchange, an industry service organization.
Many family offices are moving into property development but through the sensible arrangement of forming a joint venture with a knowledgeable developer, reports Julius Baer Group, the Swiss-based private banker. “The preference has been to enter into joint ventures with well-established local developers…. In forming these joint ventures, most families want to see their partners making a genuine co-investment in the scheme to ensure interests are aligned.”
NO SNOOPING AND LOWER FEES
Compounding the desire of the super-wealthy for improved profits, and entrepreneurial or operating success, is a greater need for confidentiality and privacy, reports Bloomberg Professional Services.
Ultra-high-net-worth families may move assets in-house to family offices, shunning the large investment management firms and banks where confidentiality might be breached, or perhaps even compromised by required regulatory compliance edicts. Chinese and Russian families are particularly sensitive regarding privacy, and inclined to creating their own fiduciaries and proxies within the United States, says Deloitte.
Another factor pushing ultra-high-net-worth families into family offices is the famously rich fees associated with hedge and private-equity funds, often running at 2 percent of assets and 20 percent of any profits earned. A family with $1 billion to invest could face core fees of $20 million annually, and then watch 20 percent of profits also go into hedge-fund or private-equity-fund managers’ pockets. Obviously, for much less money, a family office can be housed, handle investments, and negotiate legal, regulatory and tax hurdles as well.
On the other end of the scale, family offices are not averse to simply investing in very-low-fee exchange-traded funds that are indexed to major market metrics, such as the S&P 500, says Knight Frank. In general, family offices are migrating away from higher fee structures for external management of funds, say industry experts.
IMPACT INVESTING
As younger generations start family offices, or assume control over older family offices, the attraction of impact investing is growing. Impact investing is usually defined as one step beyond socially responsible investing, such as shunning cigarette companies or arms merchants. To qualify as an impact investment, the money invested must have measurable, beneficial social or environmental impact alongside a financial return. Many wealthy investors seek to preserve or enhance wealth, while also wanting to feel good about the byproduct of their investments, and the family office offers a vehicle for such inclinations.
Financial industry aspirants have noted this growing aspect of family offices. Among business school graduates, the family office has become one of the most desired job berths, according to the Financial Times, as freshly minted MBAs anticipate the opportunities to affect impact investing to work. Even the Stanford Graduate School of Business has created a Center for Social Innovation devoted in part to impact investing.
To be sure, when it comes to impact investing, family offices have greater latitude than venture capital firms or hedge funds, or other financial institutions such as pension funds that have fiduciary obligations to maximize returns. A family office can build legacies and concentrate on very-long-term time frames.
It is too soon to tell if impact investing has legs, or if there is a match between making money and doing good. Sustainably managed farmland leased out to like-minded tenants is on the family office radar, reports Knight Frank. Tree farms, which capture carbon dioxide and can provide steady employment for people in low-wage regions or countries, are another favorite, said one Los Angeles–area family-office operator. Sustainable energy and water projects are also in the impact-investing mix, as are programs to educate girls and women in certain developing nations.
Major financial advisers are moving into the impact-investment space. KMPG recently created its Global Impact Investing Institute to help advise participants. Given recent trends, family offices may emerge as global leaders in impact investing.
Of course, not every family has $1 billion to bandy about in sustainable investing, overseen by a crew of inspired family-office denizens. In recent years, many brand-name professional service firms such as Grant Thornton, KMPG and EY have started family office practices in which resources and costs are shared among many families. For that matter, one of the granddaddies of the industry, the behemoth Bessemer Trust, will take on families with as little as $10 million to invest. UBS oversees $125 billion through its family office program and says families with at least $150 million are ripe to set up family offices.
A TREND WITH STAYING POWER
Given rising global incomes, along with greater income and wealth stratification, it appears inevitable demand for family offices will grow for generations to come. Although Asia promises to dominate the family office scene in coming decades, plenty of family office formation is expected in North America and Europe as well, say industry experts.
Where wealthy generations of the past were perhaps content to entrust money to major financial institutions and form foundations, today’s better-off appear inclined to manage assets closely through family offices, to invest directly and actively, and to move into impact investing as a form of philanthropy.
Family offices are likely to increasingly make financial headlines for years to come.
Benjamin Cole (7continents7@gmail.com) is a freelance writer based in Thailand.