If you conducted an autopsy at a family office, it would not show a structure map with a universal organisation template. Rather its DNA would disclose the basic idea of professionalising the personal and commercial affairs of a family.
Generally, the purpose of a family office is to add value. A common pattern in the effort to add value is the number of families benefiting from alternative mechanisms to maintain, control and boost their resources.
The Generation game
The ability to prepare and effectively manage the transition of inter-generational capital and the succession or professionalisation of a privately held company is one of the greatest challenges facing families. Few succeed to do this whilst preserving the degree of wealth of the family, their integrity, and retaining family unity in a significant way. Many family offices have historically turned to a trust or a private trust corporation (in common law jurisdictions) or a fund (in civil law jurisdictions) to keep and arrange their family wealth in order to attain the holy grail of inter-generational wealth transfer. Quite often, these structures subsequently include a Special Purpose Vehicles (SPV) platform that owns properties as varied as real estate, shares in private businesses, etc.
Funds for families
The platform positions for vehicles used in structuring family assets remained the preserve of trusts, private trust companies and foundations – all with underlying SPVs – in the pre-Covid era, where the world’s richest global families were growing their wealth. Among the structuring alternatives, however, there is a new contender to consider – the structure of the fund. As the family office’s wealth increases, its method of managing and structuring its properties becomes more institutionalised. In certain situations, the family office starts to behave more like a financial adviser and the fund vehicle becomes more appealing with this transition, or a real requirement in the cases of large families or club deals.
Transferring to individuals
The transfer of wealth from companies to individuals over the last decade has gone up significantly. Private assets in the Middle East are estimated to exceed $11.8 trillion by 2020 (post Covid), with the United Arab Emirates, Saudi Arabia and Kuwait responsible for over 22% of the amount, according to the Boston Consulting Company, there was no evidence of this downward trend Pre-Covid, with main global research citing that there were projected to be 7,300 single family offices worldwide, with $5.9 trillion in collective assets under control. The wealth of the families behind them, meanwhile, amounts to a vast 9.4 trillion.
With capital transitioning into private ownership, it is unsurprising that we have seen the rise of the family office as a major influencer in both structuring trends and fund investors in the private wealth industry. There is also excellent liquidity in the capital held in the Gulf countries, with 82% held in investable assets compared to a 60% world average.
The Knight Frank Wealth Report4 and Preqin’s 2020 Global Private Equity & Venture Capital Annual Report5 earlier this year concentrated on family offices’ global investment asset distribution and found that the strong preferences were private equity and real estate. It is therefore unsurprising that this growing trend towards capital investments by family offices is being emphasized as a disruptive force in key markets and sectors by fund managers.
A myriad of studies on wealth management has also shown that direct investment by family offices outside the public markets is rising year after year. Why? Family offices are obviously adjusting to this low-yield world by expanding their investment strategies in the search for a higher yield, mostly in a safe and ethical way, while looking at low-yields from stock markets and other conventional investments. Around one in three family offices presently invest sustainably, according to the Deloitte Global Family Office Report 2019.
Before Covid-19, real estate was extremely common as an asset class, whether it was commercial or residential, as it offered both capital growth and solid investment returns in the form of rental income. What this will look like once the Covid-19 pandemic has been eradicated is uncertain but unlikely to change.
Direct investing
Such news have enhanced the attractiveness of direct investment in assets that are managed internally by members of the family office team who have the professional skills required for investment.
The goal for many families is to have absolute control over their investments. They want to know when the family should end the investment, determine when to enter the market and be in charge of negotiating deals. Direct investment enables family offices to construct an investment portfolio on their own timeframe and desires, not those of other investors compared with investing indirectly in conventional investment funds.
In addition, the regulatory overlay associated with investment funds is deemed intrusive for most family offices with the endless demands for due diligence and perceived high fees that merely add insult to injury.
Therefore, consumers consistently search for the most suitable holding arrangements for investments in family offices. The type of arrangement can also vary depending on whether it is planned to purchase a single asset in real estate or a portfolio of particular assets in the private equity sector.
Family offices have a number of various mechanisms to use for this function, ranging from corporations, covered and integrated cell firms, unit trusts that also concentrate on property or limited partnerships (LPs), including separate and integrated LPs. The regulatory treatment of these structures would depend on the number of investors and the quality of the assets obtained in the system.
In certain situations, for multi-family offices handling various assets of non-related family investors, the need for regulation is inevitable. In such situations, pooling multiple investors’ assets into a controlled collective investment scheme may be more effective.
The legal framework of a fund structure, even where investors are related, provides clarity on their rights and obligations as an investor, which acts as insurance if and when a family falls out.
In control
For a single-family office, and the Ultimate Beneficial Owner choosing to use a fund style arrangement for the assets it controls, control is a key advantage. If properly organised, a fund may provide the family office with leverage, much like a fund manager manages a private equity fund.
The shares in the General Partner (GP) are often held by a family office, which in turn operates the LP and contracts on behalf of investors – often family members. In addition, such fund structures often allow employees of key family offices to be remunerated in a manner that parallels managers of industry funds and aligns their interests with the families whose assets they control.
This helps draw star talent into the domain of the family office. Employees of the family office should and are expected to invest with the family simply because, if appropriately executed, it can allow the family office team to optimise returns and ensure that when it comes to risk and reward, both parties are aligned.
