Why family offices are coming under the investment spotlight
Discreet and private, they manage the wealth of some of the world’s richest people, but now a scandal has thrust family offices into view
Even by the standards of high-end wealth management, family offices are discreet and publicity shy. Providing a bespoke, holistic financial service for small groups of ultra-high-net-worth individuals (UHNWIs) who are very often, as the name suggests, members of one family, they had little reason to shout about their dealings.
But now, following the collapse of Archegos Capital, the family office run by Korean-born New York-based investor Bill Hwang, the spotlight has been turned on a sector that had combined assets under management of some $5.9 trillion in 2019, according to a report by INSEAD, the business school. This compares to $3.6 trillion for the entire hedge fund industry. They are growing rapidly too as there are now more than 7,000 family offices, INSEAD calculates, an increase of 38 per cent between 2017 and 2019.
Needless to say, the industry is keen to put the Archegos case into context. “Archegos is far from a typical family office,” says Michael Oliver, co-founder of the Global Partnership Family Offices.
“At the end of the 2010s, the United States saw an increase in hedge funds restructuring under the guise of ‘family offices’ which saw them running similar strategies, but without external capital. This was done to adjust their regulatory burden as family offices have a reduced regulatory requirement because they have no clients to protect from malfeasance.
“To ask whether family offices should be more regulated is the wrong way to look at this; it is impossible to properly define what a family office is and they operate in a wide range of sectors.”
Family offices’ emphasis on managing intergenerational wealth sets them aside from most other financial institutions in terms of regulation, according to Dr Miruna Radu-Lefebvre, professor of family entrepreneurship and society at Audencia Business School in Nantes, France.
“In the UK, family offices require an authorisation from the Financial Conduct Authority, as they manage investments or investment funds, deal as principal in relation to investments, and provide financial and business advice,” she says.
Some in the sector argue because family offices are managing their own money, not that of outside investors, and know the risks they’re taking, greater external regulation isn’t necessarily relevant. Instead, they should focus on their own corporate governance structures and, with growing competition among multi-family offices, this could be a key selling point.
Christophe Reech, chairman and chief executive of Reech Corporations Group, an investment company that focuses on technology-based solutions, says: “As the scale of family offices has grown over the last few years, so has the business environment, not least rapid technological advancement, regulatory change and greater focus on the external ‘purpose’ of financial institutions.
“As a result, more have started to look at themselves as businesses, bringing in professionals who can help them manage elements such as data security, compliance, risk management and human resources so internal operations are watertight.”
Demand for family office services has not escaped the attention of other financial services firms. “Larger banks are now offering more family office services to cater for this increase, which has led to a debate over whether this creates a truly family office environment or whether it is just an extension of the traditional investment management offering,” says Emily Mailer, consultant at law firm Howard Kennedy.
Growth of multi-family offices and their increased geographical spread has implications for governance and regulation. Mailer adds: “We’re now a borderless society with money spread across the globe; the family office has to take into account monetary regulations this entails with no single pot of money and standard jurisdiction.”
It’s not just discretion that makes family offices attractive to UHNWIs. They also appreciate the extra element of control, according to Rami Cassis, founder and chief executive of Parabellum Investments, an international investor and entrepreneur, who operates a family office.
“By setting up this type of business, UHNW investors can have their fortunes managed by a trusted group of financial and legal professionals, who can potentially be briefed to follow specific social or environmental goals as investors look to boost their legacy as well as their bottom line.”
The environmental, social and governance, or ESG, agenda is of growing importance to family offices, a trend driven by their changing demographics. Once concerned with old money and inheritance, they’re increasingly managing wealth from those who have made their fortunes earlier on in their careers, often in sectors such as technology.
“As the next generation come to a position of control over their family’s wealth, these principles are much more to the fore, with a greater concern over the environmental and social impact of their investments; this is something the family office space has had to adjust to,” says Daniel Dickinson, chief executive of AHR Private Wealth.
This new generation is also challenging the traditional family office approach to wealth management. “More entrepreneurs are creating family offices and transforming the sector,” says David Newns, who founded his family office after launching and selling two companies to FTSE 100 corporations for around £158 million.
“These are people who successfully built businesses and had a wealth-creation event, such as selling their business. They set up a family office to manage that wealth themselves. And they’re bringing an entrepreneurial mindset and skillset that’s different to the traditional approach,” he says.
“Rather than just putting money in different asset classes or funds, and analysing the financial performance, the new family offices are behaving more like venture capitalists. Deals are increasingly hard to come by, so they’re talking directly with specific companies that need capital.
“There’ll be a merging of venture capital and the family office. The latter will play a more active and prominent role than ever in the ecosystem of funding.”
What kind of lasting effect the Archegos case has on family offices remains to be seen. However, one thing is clear: this highly discreet, exclusive subset of the financial services sector is embracing innovation with remarkable enthusiasm.