By and large, the world’s wealthiest families have, in the past, sought the advice and assistance of traditional professional managers to manage and invest the family’s financial assets. Now, many of those families are operating as their own private equity fund, rather than investing in third-party funds, in order to manage those same financial assets.
Setting up their own family offices, to invest directly in companies, allows wealthy families to consolidate tax, accounting and wealth management under their own roof. The family office structure allows a family to retain control of their assets, cut deal fees and ensure a family’s privacy and confidentiality. As a result, members of a family office can span several generations and, depending on the structure, may impact future investment trends and succession planning.
Family office investment trends
Family offices traditionally diversify their investments over a broad range of asset classes. However, recent trends show rising family office allocations to private equity investments. In addition to the strength of the private equity asset class, and potential for co-investments, there are other characteristics that attract family offices. Those family offices whose wealth derives from growing and operating their own companies often have personal expertise in private equity, understand specific industries and can lend their own successful experiences in business to help operations and management teams drive value that is fundamental to a fund’s growth. Additionally, the trend in private equity funds toward patient capital and longer hold times parallels family offices’ focus on wealth creation and preservation, rather than near-term returns.
Family offices are also becoming increasingly conscious of the social impact of their investments. Motivations for socially conscious investing include the belief that investments should contribute to advancements in social, environmental, corporate governance and other issues. Unsurprisingly, millennials are helping to drive the increase in socially conscious family office investing. According to a 2016 UBS report, about two-thirds of family offices with millennials believe they will pursue socially conscious investment opportunities. Further, almost half of the family offices surveyed believe socially conscious investing is more efficient than traditional philanthropy.
Succession planning for future success
Unlike other groups of investors, such as traditional private equity firms, the main goal of family offices is intergenerational wealth management. The 2016 UBS report found that implementing a succession plan is often the top priority in the near term for many family offices because almost half expect a generational transition in the next 10 years.
Some of the most important factors that a family office will need to manage in order to successfully transition to a younger generation include:
- an older generation that will manage the transition, including spending the time and energy to teach the next generation, and one that is willing to give up control;
- motivation of the younger generation to learn and take the reins;
- retaining a manager/director for the family office that is trusted by the family;
- implementation of appropriate management and organizational structures; and
- family dynamics conducive to a generational transition.
In pursuit of maximizing the chances of success, family offices are taking a number of actions that include:
- supporting the education of the next generation,
- openly discussing succession with the current and next generations,
- motivating and engaging the next generation by educating them regarding family office activities,
- developing a succession plan,
- reorganizing the family office as needed, and
- seeking advice from other family offices or service providers.
According to the 2016 UBS report, two-thirds of family offices feel confident that they will survive a succession event in their current structure, but barely more than one-third believe that the next generation desires to increase their involvement. Unless the next generation becomes more active and involved in their family office, institutionalization and the hiring of non-family members in key roles will become more and more important to the continued success of many family offices.
Eric Ideta is a member of Nixon Peabody's Private Equity & Investment Funds practice and resides in the Los Angeles office. Jack Rose is an associate in the firm’s Private Equity & Investment Funds practice. Read more Nixon Peabody blogs here.
