Long ReadFeb 21 2023

What challenges do family offices face?

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What challenges do family offices face?
(FT Money)
ByMark Hunter

Family offices are an increasingly important force in the financial landscape.

Family offices and their activities are, however, often poorly understood and frequently underestimated. This is partly because there is no single template for what a family office is and there is enormous variation in what they each do.

In essence the idea of a family office is for a successful family to bring certain functions or services in-house. This can be anything from concierge support through to accounting advice, financial reporting and investment activities.  

The competition is heating up

One of the most important recent shifts has been the professionalism of family office investment activities. The focus has been on managing capital built up, potentially over generations, sourcing direct investment opportunities and driving investment returns in a difficult landscape.  

Family offices are clearly competing with private equity houses, institutional investors and other investors to gain access to the best direct investment opportunities, the most promising venture capital funds and the strongest talent. 

It is crucial to recognise that each family office faces a unique set of challenges.

The impact of this can tangibly be seen in financial markets. A recent study suggested that family offices were involved in 10 per cent of corporate transactions, something that is consistent with our own experience.  

To assist in the competition for the best investments and talent, family offices have been adopting structures that mirror those of other investors. In this they are making use of structures that private equity houses adopt because they are looking to solve many of the same challenges in investing pooled capital.  

There is a credibility advantage of going into an acquisition process with a structure that looks and behaves like those of other private equity funds. It is also considered easier to hire individuals into a structure which is familiar and where the remuneration structure (of carried interest, co-investment and so on) are similar. 

The structuring of investment activities for a modern family office will also be international in outlook and so will tend to look a lot like a private equity business.  

They are looking at preserving and growing capital for generations and so the time horizon is more likely to be 50 or 100 years. 

Although the structures that some family offices are adopting do mirror third-party fund managers, it would be a mistake to overstate the similarities between these organisations. There are often essential differences, which it is important to keep in mind when we advise family offices.  

Thinking long-term

The first difference is that family offices tend to plan over a much longer time horizon than a third-party fund manager. Family offices do not think in five or 10-year fund cycles. Instead they are looking at preserving and growing capital for generations and so the time horizon is more likely to be 50 or 100 years.  

This has a number of consequences for how family offices invest but it can mean that they are less likely to see a quick exit from a direct investment or a listing. This can make a family office very attractive as a longer-term co-investor or backer of a business seeking to raise outside capital. 

Family offices are much more willing to take a few years of less good performance in pursuit of a strategy which may take 20 years to pay off.