A new generation of family offices is emerging. Younger family members are taking the lead—or are preparing to—in an increasingly complex world. Investment portfolios are larger, new asset classes and opportunities are driving a more sophisticated approach to investing, and arriving with that is the need for improved governance. As a result, many family offices are beginning to professionalize such that they look similar in structure to other institutional investors. Whether a family has joined a multi-family-office platform or has decided to remain independent, families are increasingly setting up investment committees and independent boards and bringing in new people to fill those roles.
Professionalization can support a variety of family office functions, including compliance reporting, due diligence and investment manager selection. Professionalization is also important, given the scale of the intergenerational wealth transfer analysts expect to occur over the next decade. However, bringing in new people is not easy, and family offices face many of the same struggles faced by other institutions and asset management firms, including finding qualified candidates and providing benefits to attract them.
Growing Complexity
A generation ago, a family office portfolio was likely to be heavy on real estate, with a mix of mostly passive stocks and bonds. The family wealth might be anchored by a single company or a group of investments in the same industry or specialty. That has changed. It is much more likely now that the family business is globally diversified, as is the investment portfolio. Real estate holdings could be a mix of direct investments, real estate investment trusts and an investment in a recently created opportunity-zone fund. Family offices have also emerged as a growing force in private equity and private credit, with some of the largest family offices making direct and co-investments alongside traditional institutions and asset managers.
According to the latest “Global Family Office” report from UBS, artificial intelligence is now a top priority for U.S. family offices, with 65% of U.S.-based survey respondents acknowledging interest in investing in the technology. That was followed by 39% who reported interest in investments in defense and security infrastructure and 35% reporting interest in general infrastructure investments. Families in Latin America, Europe and the Middle East reported similar investment interests.
Some of these interests are driven by inflation, according to a recent survey of family offices by J.P. Morgan Private Bank. For family offices that reported inflation concerns as a top challenge, 60% increased their allocations to alternatives—a rate 20% higher than surveyed family offices that did not list inflation as their top challenge. Family offices also reported a broad interest in diversification in response to growing geopolitical uncertainty. The benefits of investment portfolio diversification are broadly known, but making these investments requires an understanding of the risk/return profile of each asset class. In response, more family offices are looking to set up investment committees and to bring on people with professional investment expertise.
Mark Tremblay, head of family office services at multi-family office Cresset Capital, says that in his strategic discussions with families, he often emphasizes that they need to think through their goals.
“If you want to set up an investment committee, there are a lot of things you could borrow from any small investment company or from what other families have done. But that’s not necessarily comprehensive,” Tremblay says, adding that setting up a family constitution or set of investment beliefs and goals is a good way for families to get clear on what they want.
Adding new “people is only part of the puzzle,” Tremblay says. “Families have to provide guidance on what they are interested in investing in and what they hope to achieve.”
Todd Kesterson, a principal in and the private client industry group practice leader at accounting firm Kaufman Rossin, agrees. He says families often have expertise in one or two industries and that can drive where they invest and how they understand markets. But diversifying away from that often comes with additional complexity.
“We see a lot of oil-and-gas families, for example, that are invested in energy, and they might expand out to real estate, and they feel comfortable evaluating the opportunities there,” he says. “But if they want to go further into hedge funds or private credit or crypto[currency], that’s a different set of skills. Bringing on advisers or investment professionals can bridge that skills gap. But families also have to be prepared for the realities of additional reporting, tax considerations. The role of the CFO will grow, and so will the demands on operations overall.”
Both men say families also have options to set up a hybrid model of professionalization via which they outsource some tasks, such as managing subscription documents or working with service providers on due diligence. A hybrid setup is often the preferred option for new family offices or those that are smaller in size. More mature family offices or those managing more than $1 billion will typically bring on an in-house team to manage complexity and handle investment decisions.
Kesterson adds that the reason why a family office is set up can often determine how family members choose to professionalize and what they invest in.
“If you had a company and you sold it and now you want to manage the proceeds long term, but you don’t want to be dealing with a lot of employees, outsourcing might make sense,” he says. “Sometimes it’s inherited wealth. Some families are interested in running a strong investment portfolio which requires more of a hands-on approach. Each family is different.”
Building in Guardrails
Creating a set of investment beliefs and goals as part of a professionalization process is not just helpful to the people tasked with portfolio management; it can also ensure that family members are on the same page. Tremblay says that in practice, this can formalize how potential investment deals are evaluated, not just external managers.
“Maybe you have someone in the family who has been approached about investing in a gym chain, for example,” Tremblay says. “If you have investment guidelines that limit how much is going into direct investments, then maybe the investment committee evaluates that opportunity differently than they would have if you’re running things on a more ad hoc basis through personal relationships. Then siblings don’t have to do the hard job of saying no.”
Those guardrails can also smooth the transition between generations. The kinds of investments and ways of working that made sense for a family matriarch or patriarch might not hold up in the second generation, when priorities differ between siblings, cousins and others. An investment committee and independent directors tasked with meeting specific investment goals and managing long-term liabilities can help identify what will work best for the family now, based on the available set of investment opportunities.
“Very few family offices start out with a full investment committee and guidelines in place,” Tremblay says. “This is an organic process that develops over time and gets more complex over time. There’s an opportunity when families start to professionalize to take a step back and look where things are and set up the right systems. You can have 10 investment professionals bringing you great deals, but if you don’t have the systems in place to keep track of them or manage the capital calls or reporting, that’s when you can run into issues. A strong back office is as important as manager selection.”
Tags: Due Diligence, Family Offices, Investment Team Structure, Manager selection