What Is a Family Office?
Let's start with the basics. The true definition of a family office is defined as a group that provides a family (or multiple families) with a multitude of personal and wealth management services. Like any vertical dealing with the ultra wealthy, each family office is unique in set-up and structure, with each requiring a different combination of services. This makes defining the murky world of family offices incredibly challenging and cloudy. We will clarify and take a deeper dive below...
Difference Between Institutions & Family Offices
Family offices are a unique breed. When it comes to putting capital to work, family offices tend to be incredibly opportunistic and nimble. In comparison, their institutional counterparts often have specific investment mandates and size & track record benchmarks needed prior to pulling the trigger on an investment. The average institutional investors (labor unions, banks, insurance companies, pensions, etc.) require longer and more protracted due diligence cycles, as opposed to family offices, which usually have a significantly greater threshold for longer investment hold times. This difference make family office investors an incredibly attractive pool of capital for both funds and private deals alike.
We will unpack further when exploring the increased direct investment trend in the family office landscape. The differences between the two is vast, with both playing a vital role in the AUM makeup of an array of investment opportunities.
Single Family Offices vs Multi Family Offices
Family offices are split in two core buckets: single family offices (SFO) and multi family offices (MFO). A single family office is defined as a privately held company that manages the financial and invest affairs of a single family/high net worth individual. In addition, a well structured single family office will also oversee a myriad of additional items such as; insurance needs, tax planning, fiduciary responsibilities, trusts, aviation, real estate holdings etc.
The multi family office works in a similar fashion, with the key difference is the oversight of more than one family. In an MFO set-up, much of the core structure is already in place for new families to leverage and plug in to. Multi family offices will often market their services to new families as they seek to attract additional families to oversee. In fact, you will often find many family offices that started as SFO's, and over time, morphed into MFO's.
History of Family Offices
When the term family office arises I bet it doesn’t evoke the ideas of stewards and their kings. When in fact the concept of private wealth management dates back to the sixth century according to EY’s article "Family Office Guide", this job of managing the royal wealth was allocated to the kings appointed steward. How we categorize family offices today started to take shape in the 19th century with the founding of the power house House of Morgan in 1838.
Image of the House of Morgan after remodel in 1914
More recently family offices have gained a reputation for being hard to track down. Most did not have an online presence, and often flew under the radar. This is no longer the case.
The Modern Family Office
The modern family office looks very different than its previous form. Today's family office - both single and multi - are far more sophisticated and forward facing than ever before. They can no longer afford to be inconspicuous. The modern family office needs to put money to work and find deal flow - often in more nascent and emerging industries, such as cannabis. This is tough to do when you are invisible - That being said, finding quality information, background, insight and intel on family offices remains a laborious task. Contact information can be spotty at best. If you get lucky, you may come across a small crumb of information like an e-mail address or a name...but it's not enough. You will very rarely find a full public dossier of information. This can make targeting these families tricky and complex when lacking the core data & research needed.
Why Origin of Wealth Is Important?
Family offices, specifically single family offices, are much more likely to allocate capital to industries for which they made their wealth. This seems natural enough. If you can understand "it", you are far more likely to peel off capital. This can be increasingly valuable for funds and private companies seeking a seed investor. If you can target capital that can wrap their arms around your proposition and truly understand what you're doing, your hit rate will greatly rise; Human nature it's finest.
A Web of Connections
When targeting family offices, it's not always about 'who you know', but rather 'what you know'. In essence, finding common ground, shared connections, mutual alumni roots, etc., can be incredibly powerful when prospecting. Leveraging your web is where the special sauce is. Oftentimes, the smallest nugget of information can spark a productive conversation - Find common ground and your efforts will be rewarded.
What are Family Offices Investment Tendencies?
Family offices are opportunistic by nature. You will not find specific mandates in the family office world. Their goal is to compound capital and find unique opportunities to put money to work. The result - increased opportunity for those seeking capital. The modern family office is often less concerned with track record length, assets under management thresholds, etc. Due diligence is of course comprehensive - as it should be - but the amount of red tape is substantially less than you would find in the large institutional markets.
You will also find an increasing trend in family offices making direct investments into private companies and deals. The reasons for this are mainly - more control, less fees, and their ability to provide patient capital. There is great value here for the family office as well as the funded entity. This macro direct investing trend continues to gain steam and does not appear to be stopping anytime soon.
In a recent report by iCapital, 66% of 157 single family offices surveyed in 2016 and 2017 have plans to increase their direct investment activity. Our Buy-Side product at FINTRX, which focuses specifically on family offices making direct investments, has seen the largest of this direct capital allocated to the technology industry.
Global Family Office Expansion
What was once a niche industry focused mainly in the United States has now gone global. An increase in private wealth has continued to expand the creation of new family offices in areas that were essentially void of family offices in the past. Asia for example has seen a rising number of family offices over the past few years, with many predicted to be on the horizon in the coming years as generational wealth continues to change hands.
Family Office AUM Size
Assets under management (AUM) is the total value of all the assets managed by a family office. If a single family office, this applies to an individual or one family. If a multi family, the capital is spread across a number of ultra high net work families. The true minimum AUM threshold to be considered a family office is cloudy. Some say $10 million, others prefer $20 million. At FINTRX, we use $50 million.
Family Offices & Impact Investing
Impact investing has experienced immense growth in the last decade, outperforming the benchmark for eight out of the last 10 years, according to the MSCI ESG Leaders Index. Utilizing FINTRX, our family office data and research platform, which covers hundreds of families active in ESG/impact investments, we've shared five family offices making impact investments across an array of industries, sectors, and asset classes. In an effort to address social and environmental issues around the world, impact investors aids mission-driven companies - whose innovations spur change - accelerate economic growth for the coming generations.
What Makes ESG/Impact Investing Attractive to Family Offices?
Impact investors make investments into companies, organizations, and/or funds with the intent of generating valuable social or environmental impact alongside a financial return. Investing with high standards to maximize financial performance and public benefit, impact investors aim for a financial return while also making a positive impact on the communities in which we live. These investments are immensely attractive to the family office ecosystem as they put forth the agenda of investing in a responsible manner, in addition to producing a strong ROI.
The family office landscape is a forever moving target, though its continued expansion and growth remains steady. The allure and genuine interest in family office capital is not going away, as the benefits of securing an allocation from family office capital pools are vast. We advise you to taker a deeper dive into this highly sought after and often misunderstood space.