For hedge fund managers and private equity firms the family office market is now worth 2trillion, so it is worth taking an interest in the sector's resurgence
The interest in family offices, in all its forms, has resurfaced with a vengeance in the asset management and private banking world. The timing of such renewed interest is worth examining, as well as the reasons behind it.
The concept of the family office is by no means new. In essence, the genesis point of private banking is effectively the family office. This is the case if one accepts the principal structure of the family office commences as an independent administrative hub managing the financial needs of an individual family.
Over time, as the wealth of the family grows and the number of interested parties increases, so too does the scope of the family office. There comes a point when most families not only adopt a specific investment strategy or, more loosely, investment preference, they also consider the merits of owning the investment professionals to execute on this strategy. This is the next layer of the family office. At this point, there have been cases where, based on regulation, the family office will have to be registered as an asset management entity or even as a bank.
Once the investment management team is in place, populated in part by professionals not typically related to the family, and develops a track record, the reputation begins to percolate into the community of investors outside the family and the broader market. There typically comes a point here where the original family may look at the opportunity of opening its doors to other similarly inclined families, for a fee.
They may also recognise that by broadening the membership of the office, they can effectively diversify the risk of the entity and also, crucially, share the costs.
As the family office becomes a multiple family office, it is effectively taking on the next stage of the evolution in the private banking industry. Consider it as the moment when fish developed legs so they could walk on land.
All of the above just tracks the evolution of the concept. Crucially in the past, this evolutionary process could take decades, even centuries. Indeed, certain private banks pride themselves on their history of more than 200 years from the start of their original company providing financial services to their founders.
The difference is that today, the speed of evolution has changed dramatically. Gone are the requirements of being in the market for 100 years before opening the doors to other clients. There have been cases now where family offices have gone from representing one entity to representing 20, 50 or even 100 other families within less than five years. Recent examples of this are Sauerborn Trust in Germany and Fleming Family & Partners in the UK. In the US, the list of emergent family offices is even more significant.
Why is this significant to the world of investment management and also to private banking? Simple - these family offices represent a highly concentrated book of client assets, often with a focused investment process on which it is mandated. Inevitably, this is evolving now to a broader church with the family offices adopting more of a general asset allocation and planning role, driven by the increasing range of clients.
The concentration of assets here is inevitably attractive. It is our estimation that in Europe alone there are now more than 2,000 independent family offices (single and multi-family) as well as investment vehicles exclusively set up to manage the wealth of individuals with assets exceeding 100m. Indeed, we estimate that as many as 11,000 families in Europe have the required asset base to establish a family office.
Moreover, within the last 12 to 24 months of tracking by our business, we estimate there are on average 20 family office investment companies established each month. This all compares favourably with the more mature commercial family office market in the US where there are approximately 4,000 family office entities in existence and a similar rate of new ones being established.
The initial key question of this article focused on why this market is growing in prominence now. The reason for this is private clients, including families, are seeking to regain control of their investment management. At the highest levels of wealth, this can be achieved in a structured way through implementing a family office - or even joining forces with other families. At our firm now, we are increasingly asked to consider providing the best practices for setting up these structures.
The goal of establishing this independent structure is to effectively rebalance the relationship between the client - the family - and the providers of investment products.
For some time now, clients have recognised they have been at a disadvantage with the investment world. This has, at times, resulted in them not being offered access to the most appropriate product and services. Moreover, the fee structures have not been to their advantage.
With this in mind, the establishment of an independent office that returns control and financial advantage back to the hands of the wealth holders is compelling.
institutions in their own right
These offices are now seeking investment managers that will deal with them on their terms. Indeed, they are seeking quasi-institutional relationships. For those families with just 100m in assets, it may not always be a viable demand. However, for families or multi-families with 1bn there is every reason for them to expect an institutional grade of service.
The win-win typically presented to the market of investment managers is that they can now deal with an educated private client entity. Gone are the requirements for hand-holding. After all, they will be dealing with investment professionals acting on behalf of the principal.
However, it can often still be described in our view as win-draw, because the family office model described above in operation in Europe remains relatively new and there is still a requirement for high-grade relationship management.
Moreover, the family members at many of these new offices remain active participants. This is reasonable since they are often the originators of the wealth so they want to keep it close to them.
Therefore, for those hedge fund managers, private equity firms and even private banks seeking to do business with a market that we estimate in Europe alone to be worth over 2trillion, there are some critical steps required before there can be a strong flow of business.
First, these entities need to map the market closely and ensure there is a correlation in the demand from the family offices with the supply of products. Indeed, most firms we meet just assume that because they are potentially good at a product in their world, it is natural family offices will want a piece of it - not so. What is the compelling argument? Hence, understanding this client base both strategically and tactically is vital.
Second, develop a partnership strategy with these families. Remember many of these offices were set up to disengage from their perceived over-reliance on investment providers. However, from the qualitative interviews we conduct regularly with this sector, the heads of these offices are not trying to go it alone. They know they need the investment products being offered by the market. They just do not want to have it offered to them on the same terms they used to receive.
Indeed, many offices that recognise the commercial opportunity of their position are now actively seeking business partners to support them on back-office issues, technology, fund research, fund management and even in marketing.
In some cases, these offices have even sold their book to the market, for example Sauerborn Trust's sale of their business to UBS Wealth Management.
patience is a virtue
Third, firms seeking to crack this market must be prepared to endure a long lead time for successful relationships with family offices. It is unlikely many family offices will permit access to the inner sanctum by a hedge fund management entity in weeks or even months. Certainly, they will try out solutions on a tactical basis.
However, if the goal of the hedge fund firm is to build a long-term flow of business from a broad range of family offices, then there needs to be patience in achieving this.
The good news in this context is it no longer takes 100 years to achieve acceptance, but it can still take as long as three years to see meaningful flows of assets.
The family office market has resurfaced in prominence. Naturally, the hedge fund community is particularly interested in it because it is widely understood private wealth has an inclination to allocate more in this sector than elsewhere.
A note of caution should be offered on any assumption family offices will be a particularly juicy target for hedge fund managers - most established family offices with any interest whatsoever in the hedge fund arena have been investing since the start of the opportunity, even as far back as the early 1950s.
new money from new houses
Based on this last point, Scorpio Partnership's view is while there will inevitably be some new allocation for hedge fund managers from established family offices, we believe the great opportunity is in the offices just about to be created or even in the multi-family offices that have just been established.
The key to them will be in the timing, positioning and context of the approach. That comes with skilful guidance from those who know the market.
Family offices gradually evolve to multiple family offices and then towards private banks
Traditionally the evolution has taken decades or centuries; now it can happen very quickly
2,000 family offices in Europe alone
4,000 family offices in the US
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress