Family offices are changing. There are more than ever before—which is increasing the level of advisory services aimed at helping ultra-high-net-worth families reach their goals.
Alongside the newcomers, the leadership of many established family offices is transitioning from one generation to the next, which is changing how they invest and who they hire.
According to Bank of America’s new family office study, Building for Generations, the way the industry thinks about family offices and their role as investors is likely to change over the next few years.
Direct Investments, Private Equity Remain Top Priorities
Overall, alternatives are playing a bigger role in family office portfolios across asset classes. Data in the BofA report shows that families typically have between 25% and 50% of their investment portfolios allocated to alternative investments, including some more esoteric assets. Private equity and direct investments account for the bulk of those alternatives sleeves. Families in the study report that direct and co-investments in companies remain a top investment priority.
The survey respondents report looking to their own networks, other family offices and private equity general partner firms to help them source deals. Fifty-nine percent of families in the report say they plan to increase their investments in private equity funds and private companies over the next three years. A further 31% view ownership stakes as key tools for growing generational wealth.
Next generation family members are also increasingly investing in sports teams, either through direct investments or through funds. This represents an expansion of families’ interests in direct investing. Many professional sports leagues have recently broadened rules governing private investment and minority ownership stakes. Younger family office members have been some of the first to take advantage of these opportunities.
“Sports ownership is one of those areas that are really defined by age,” says Charles Simonds, family office strategist at Bank of America. “Sixteen percent of family office principals that are in the Baby Boomer age range are invested in sports, but that bumps up to 27% for millennial or Gen Z family office investors. To me that’s an interesting trend and one that suggests we’re likely to see more participation by family office investors in sports in the future.”
Overall, four in ten family offices hold sports investments today, the report’s data show.
Complexity Grows
Both newly formed family offices and those that are established are reporting growing complexity in their investments and operations. Simonds notes that when families transition from one generation to another, cash needs often increase, as the next generation is typically larger than the prior one. “The bulk of new family offices we see have owners that are still actively managing an operating company,” Simonds adds. Which means that the family office will have both an investment portfolio and an operating company budget to manage. “Managing the needs of the family, portfolio, and business are pushing more families to professionalize and bring on advisers,” Simonds says.
According to the report, a majority of families recognize that professionalizing and putting good governance rules in place can help smooth operations and help with uncomfortable family dynamics. However, there are still some gaps. Eighty-three percent of families in the report have named a successor to run the office, for example, but only 27% percent of families have a trust distribution policy or guiding principles in place. That’s beginning to change as operational costs increase and compliance becomes more demanding.
“If your operating budget is $3 million a year or more, that requires a lot of support,” Simonds says. “It adds complexity to your balance sheet. It raises questions about tax and estate planning. But how families manage all of that is still evolving. If you have professionals in place like a CFO or a CPA it is easier, but if not, you have to find those people and bring them in.” Simonds notes that in some cases families might be able to recruit existing professionals from within the operating company as a stop gap, but it’s not a permanent solution. Family offices that want to professionalize will have to go through the process of putting together a competitive offer and recuriting just like any other firm.
Report data shows that families are also working on ways to ensure that their next generation has the necessary financial education and training to take over the operation when the time comes. Forty-nine percent of respondents said that educating the next generation was a key priority. Sixty-four percent reported relying on an annual or semi-annual family meeting to establish investment priorities, ensure alignment, and do some level of education. Other options include the creation of an investment committee or establishing clear goals around investing and philanthropy.
“All of these tools can be helpful,” Simonds says, “but there are still challenges. You might have spotty attendance at meetings or people don’t really understand trusts and estate planning or why they are important. I think we’re going to continue to see some evolution around education.” Simonds adds that family members often pay the most attention around a major transition or liquidity event but it is more beneficial to plan ahead rather than to react in the moment.
“Family dynamics can be challenging. If distributions or liquidity needs rise from one generation to another that can cause tension,” Simonds says. “If the family has concentrated assets whether that is [in] a business or a sports franchise or a trust, the cost of breaking that up to get liquidity can be very expensive. The best way to mitigate that is by planning ahead and educating family members on how everything works.”
Tags: demographics, Direct Investments, Family Offices, investment advice, private assets