The Long Game – Investing for future generations
November 05, 2015
“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel”
Sheikh Rashid bin Saeed Al-Maktoum (Founder of modern Dubai)
Family heads instinctively know that wealth can very easily become finite when there are no inflows. Unfortunately sometimes the recipient of the fruits of hard graft are not always grafters themselves. Family heads also know that if you want your wealth to continually grow, and consistently, there’s no business like business. It is a sad truth that wealthy families lose 90% of their wealth within three generations. With the right deal-making and investment, this trend can be bucked.
Family heads know that though a good spread of risk across a range of assets is useful if you want your money to work for you the acquisition of a business is often the best investment.
So where do Family Offices (FO) invest?
As a whole, although figures vary, FO’s roughly invest around 13% in private equity (PE), 13% with hedge funds, 20% in equities, 15% in real estate and the balance in cash and treasuries. However, there has been a shift since 2008, from PE and hedge funds into direct investments. “[FOs]..cut their average outlay for private equity funds to 9 percent from 11 percent two years earlier. The average portion in hedge funds stayed the same at about 12 percent, while investments dedicated to funds of funds dropped to almost zero.” says Raphael Amit, chairman of the Wharton Global Family Alliance
According to Ashby Monk, executive director of the Global Projects Centre at Stanford University, which studies the movement of financial assets globally, “Since the financial crisis there’s been a question about whether the value-add from an intermediary fund is worth the cost. For these big families there was this perception that they were often getting [mismanaged]”.
Core Data Research showing a survey of which FOs surveyed had direct investments in companies
So what industries are most favoured by FOs? European business services and US technology are, perhaps not surprisingly, clear winners. UK retail assets, and global consumer products are also a clear favourite (a good example of the latter being 3G Capital/Berkshire Hathaway purchasing Heinz). An equally interesting sector for FOs is financial services, with the rise of FinTech companies challenging existing established companies.
Source: Wharton Global Family Alliance
But of course, as with all FOs, individuality is key. The family typically invests in an area that they are most familiar with in order to be more comfortable with the daily activities of their investment. Even when they branch out and invest in a totally unfamiliar area, top notch due-diligence and excellent pre-deal advice is key to the “no surprises” dictum that all investments should be ruled by.
What’s clear however is that deal flow is sometimes a little hard to come across. There are, to be sure, no shortage of offers, solicited or unsolicited – but these are often publicised sale situations. “When you get a call from JP Morgan– you know you’re in an auction” as one FO puts it.
What investment strategies do you think Family Offices need to invest for the long term? To what extent should they spread their investments across different vehicles and sectors? 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.