Single family offices are appointing investment consultants, refreshing their teams and forming multi-family offices, trends which are all contributing to an increasing professionalisation of the sector.
In particular, third-party consultants are being appointed to perform due diligence on investments, asset allocation and to provide advice on forming partnerships with other family offices. This has, in part, been driven by restructuring following reduced assets under management (AuM) figures in the wake of the financial crisis, particularly because of family offices’ preferences for the private equity and hedge fund investments that were hit hardest by reduced liquidity.
With lower AuM figures, it is harder for single family offices to be viable to their owners from a cost perspective. This has contributed to the success of organisations like Family Office Metrics in the US over the past year, which advises wealthy families on teaming up with others and converting into multi-family offices. This month it signed up its 100th client.
Declining AuM and increasing costs is not the only driver of this process, however, according to Jon Carroll, president and CEO of Family Office Metrics, a consultancy. He said quality, rather than cost, has been the key driver of innovation among family offices.
“If you look at Fireman Capital Advisors, our 100th client, they’re not proposing to pursue this business model to spread cost over a wider base,” Carroll said.
“They are doing it to add value at a profit. It’s a business, not cost-sharing. That’s an important distinction.”
Investment consultancies are also seeing more enquiries from family offices, which are looking to fix shortcomings in their investment processes. This involves improving corporate governance structures, operations and internal controls and increasing investment in technology as a way of improving quality of data and reporting.
As well as the professionalisation of single family offices, there is also evidence multi-family offices are becoming more adventurous. GenSpring Family Offices, based in Florida, is seeking overseas deals, while St Louis-based Lowenhaupt Global Advisors set up an office in Australia last year.
“In the multi-family office space, there are no global players,” said Santiago Ulloa, head of GenSpring’s international operations.
“There are lots of small boutiques, but none of them have managed to develop their business the right way in other places. We believe that 15 years to 20 years from now there will be two or three global players in this area with a presence in the Far East, Europe and the Americas. With the background and size we already have, we want to be one of these three, if not the main one.”
Further regulation possible
Another consideration affecting family offices is the prospect of greater regulatory scrutiny being placed upon them, particularly in the US. The situation currently remains cloudy – a bill which has been passed in the US House of Representatives mentions family offices as an entity which should be regulated. There are also bills before the Senate, but none have yet been passed.
In June 2009, the US Treasury issued some guidance to the market under the Private Fund Investment Advisers Registration Act, which indicated family offices, along with private equity and venture capital funds, should be regulated to make sure there are not contingent liabilities or risks within the system.
“The smart money says something will happen, and it’s likely to happen without full definition of what a family office is,” said Carroll.
“That means it’s likely regulators will have to define what a family office is after the legislation is passed, which will give them some latitude.”
Charles Lowenhaupt, who heads multi-family office Lowenhaupt Global Advisors, said it could lead to reporting of assets under management at single family offices. This would lead to costs that family offices are currently not bearing, in the form of the added burden of time, money and resources associated with compliance.
But Carroll said most family offices he works with operate as though they are already regulated, meaning regulation may not prove as onerous as anticipated.
Wealth consultant Ian Woodhouse, (see PBI 256) said many family offices were recruiting to strengthen in-house teams and using external consultants.
It is this confluence of factors which is leading to the professionalisation of family offices and promises to deliver a leaner, more efficient and regulated environment for these enterprises to flourish.