Why family offices are coming under the investment spotlight

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.