Family Offices: Sleeping Giants
September 04, 2015
“She is a sleeping giant. Let her sleep, for when she wakes, she will shake the world.”
Though Napoleon may have been referring to China, we in the deal-making business know that these days it is funds that are the new giants of the World. Increasingly, large pools of international wealth hold the balance of power in trade, hot money flows and, most importantly, growth capital.
Outside of the investment management and sovereign wealth funds – the known knowns - there is a body of sleeping deal making giants beginning to wake…the Family Office (FO).
In my first blog of this series on FO’s I’ll briefly explore the origins, purposes and challenges of the FO business.
FO’s are not a new phenomenon. The concept of managing a family pool of money has existed in different forms for several hundred years. The traders of imperial Japan and citizens of the Shang and Ming dynasty in China both had patriarchs control the funds of families well into several generations from the original creator of the wealth. Latterly, the merchants of Venice, the Medici's and the various Rothschild outposts had a singular pool of wealth that was managed centrally.
The more modern concept of the FO is attributed to the Rockefellers who, through their great oil wealth, needed to keep the family’s varying interests together and set up an office to handle the family’s administration and oil investments. Due to the lack of local private banks and the difficulty of inter-continental communication, families such as the Rockefellers decided to set up on their own account. Even today, their family office remains one of the largest with a named family at the helm valued at around $43.1bn. There's a lesson in early wealth planning.
Today the FO handles areas as wide ranging as investment management, art dealing and as important as ensuring school fees are up to date.
Significant investing power
Estimates are hard to verify but, by one reckoning, there are over 10,000 family offices across the world and decent estimates put their investing power at $50 trillion. Compare this with an estimate of sovereign wealth funds of around $6 trillion and you begin to fathom some of the hidden fire-power of the family office.
Often the key consideration in developing a family office is a very simple concept: control and co-ordination. It allows a family in business to control the investments it makes. It also enables families to include alternative investments (i.e. art collections) or dedicate some of their wealth to seed investing, private equity or venture capital and includes philanthropy (our charities team advises several family office charities). The decision-making stays with the family “Tai-Pan” and there are no cross sales or other relationship conflicts with banks and investment advisers.
What do these organisations want and need as they grow and invest?
Typically FOs look for the more traditional and very important tax planning and wealth management advice.
Families with FOs tend to be very entrepreneurial and have specific areas of investment expertise – usually the same sector that the family made its fortune in. Family heads know that there’s nothing like buying a business or taking an active role in an investment to grow their wealth +10, +20, or even +30 fold in a few years. Chief Investment Officers (CIOs) know more than most however that time and high quality ideas or companies are few and far between. To generate regular mergers and acquisitions (M&A) deals (ie deal flow) is a time consuming process that detracts from the daily management and requirements of the companies that they are already digesting.
In my next blog, I’ll discuss the issues that face FO and families as they approach a liquidity event, investment requirements and generational succession of wealth.
What do you think Family Offices need as they set up, invest and grow? Share your thoughts in the comments box below (I may even include them in my next blog) or schedule a meeting to discuss your situation in confidence.
