Fine tuning family wealth

Families face a dizzying array of concerns and choices when deciding the details of how to structure their family offices. When families look at the multi family office model, the services, fees and the funds on offer can be easily compared like-for-like. But single family offices (SFOs) are a bespoke bundle. They can be totally unique in their goals and how they are structured to achieve these goals. So how should families ensure they have the best set-up for their SFO?

“It’s up to the leading generation, who formerly were beneficiaries, to do an assessment of where they stand in relation to their family’s wealth. It’s important for them to consider what it was designed to accomplish, as well as their own degree of involvement, in order to make decisions about future performance measures and objectives,” says Campden Wealth’s head of research Andrew Porter. This will help drive everything from the type of assets the family wants to invest in, to what services it will provide and ultimately how much it will all cost.

Defining a purpose was not a problem for German family the Wermuths. Third-generation principal Jochen Wermuth is passionate about Russia and the environment, which drove the creation of Wermuth Asset Management (WAM) – a family office and BaFin regulated investment adviser. WAM is committed to impact investing, in particular to a profitable move towards a sustainable economic model and doing business in an ethical fashion. These dual interests have led WAM to provide the seed funding for the Green Gateway Fund. The fund has a target size of €250 million and hard commitments of €140 million which invest in western European growth stage companies with energy and resource efficiency products relevant to emerging markets. It reflects the Wermuth family’s aim of reducing CO2 emissions by investing in resource efficient companies. “Jochen’s priority is to get his message across about resource efficiency and to make the world a better place for his children and his children’s children,” says Sarah Caygill, director of family office investments for WAM.

In Asia, Clinton Ang had a similar desire to reconfigure the way his family investments were managed after his father passed away. He oversees their Singapore-based single family office, HTB Investments, with SGD$100 million (€58 million) in assets under management (AUM). Ang describes HTB Investments’ risk appetite as moderate with its operating business, property and equities each allocated 33% of the family’s assets. They have mainly in-house investment expertise and Ang, like many Asian principals, takes an active role in investment decision-making. This translates to a lower cost base and means that its AUM level does not need to be as high as it would be to sustain an SFO in more mature family office markets, where, as a rule of thumb, $150 million is needed to justify such an enterprise.

Gero Bauknecht knows better than most how important, and painstaking, defining the purpose and structure of a family office can be. Bauknecht, along with his brother, run their family operation Bauknecht Gruppe which is spread over various companies in Switzerland and Germany. Bauknecht interviewed more than 40 SFOs to find out what was the best organisational structure for Bauknecht Gruppe when his father passed the management of the family wealth across to him and his brother about 10 years ago.

“We then took those findings to find our ‘new’ way,” he says.
Five years ago they made the decision to in-source everything. “We wanted to free ourselves from the dictation of various models and advisers who wanted to cover their backs. It was a common sense issue. We just wanted the flexibility. There’s always a bias with a consultant and they surely have to watch certain models and asset allocations. And I couldn’t really follow those.”

As a result of its re-organisation, the family has four quite distinct areas of investment: a small operating business, a business which invests in and manages real estate with a very precise strategy, capital markets and film investment.

“Our main principle is to approach this as a business and not as a pension fund. In whatever we do, we try to find good risk-adjusted returns, try to find a competitive edge and lucrative investments. If necessary, we partner with other people and companies, it maybe managers, it maybe consultants,” says Bauknecht.

This clear investment focus, separated out from lifestyle services, decided the structure of Bauknecht Gruppe. “I don’t think it is appropriate that you combine all sorts of services. Investing money in a risk-adjusted appropriate way is work and needs a certain type of professional. You cannot let these key professionals walk your dog or [have them] organising transport of tables out of Italy,” he says.

As a result of its investment focus they employ very few consultants or advisers and found that the decision to bring its nine professionals in-house was cost neutral when weighed up against having a raft of external specialists.

Bauknecht’s experiences correlated with further analysis carried out by Porter. He looked into the asset allocations of family offices and their use of advisory firms. He found 25% of the European sample allocated 20% or more of their portfolio in real estate direct investment. Out of that subset, 75% used less than five external firms. It highlighted that the more family offices do real estate direct investing, the less likely they are to choose external managers.

“Real estate, direct investing, co-investing and direct private equity investing – all four of these investment strategies bring down the number of external firms,” Porter says.

“While this may seem like common sense to the experienced family office executive, the research provides quantitative support for the intuition,” he adds. “Furthermore, it illustrates the impact that choices make on costs: naturally, there will be limitations in reducing costs with certain asset classes because of the level of sophistication and expertise required to make them viable. Conversely, if reducing in-house costs are an absolute priority for a family office, executives might want to reconsider their relationship to these asset classes.”

Peter Brock, EY’s head of family office services for Germany, Switzerland and Austria, agrees that, in general, family offices which put a higher importance on actively managing a portfolio to achieve a higher return will have to put more input into investments and thus incur more expense. “If you have a balanced and very defensive portfolio you are not managing it as aggressively, there’s less activity and fewer costs,” he says.

The size, shape and complexities of families in the 21st century mean very few family offices will look and feel the same. When was the last time your family took the time to look at the purpose, investment strategy and structure of your family office? Have you got the right fit and are the purposes driving those decisions? There’s no point focusing on the nitty gritty till the building blocks are firmly in place.