The volatility in global asset prices and the regulatory response to that volatility has lit a torch paper under the family office model. Almost every family has had to assess, to some extent, whether the model they have in place proved sufficiently robust and whether it continues fully to serve their needs. Contemplating some kind of consolidation or merger comes as part and parcel of that process, writes Cherry Reynard.
Of those who have gone down the consolidation route, the Threshold/Ashbridge and Pitcairn/Shelterwood mergers – which were announced at the back end of 2009 – have been the largest. Threshold originated as a single family office in 1999 and began working with additional families in 2004, while Ashbridge served as a single family office to five generations of the Grace family. The new, combined entity will look after assets totalling $2.25 billion.
According to Charlie B Grace Jr, chairman of Ashbridge, both firms "have first-hand understanding of families, and both have been vocal advocates of purely advisory, open architecture services," which will enable them to offer an independent, family-owned wealth services firm for families (Click here to read more about the merger)
Shelterwood was a multifamily office before its parent company, the JM Huber Corporation, one of the largest family-owned businesses in the US, decided to phase it out. The Shelterwood team moved wholesale to Pitcairn, one of the largest multifamily offices, but while it seems clear that JM Huber's decision was made on cost grounds, Leslie C Voth, president and COO of Pitcairn, says: "For us, this was about the opportunistic hiring of a very talented, and respected New York-based team."
There are a number of underlying threads to this: it can be difficult to hire people with a smaller pool of assets. It can also be difficult to hire outside the major financial centres in the US. It is even more of a problem in countries where families don't have the wealth to make a single family office scaleable. Chengalath Jayaram, head of the wealth management division at India-based Kotak, says: "In India, the families are not as wealthy, so if you need to hire top flight people, and keep them interested and motivated, it is easier in a multifamily office system because the assets are far higher."
The question is therefore whether these mergers represent a smoking gun for further consolidation throughout 2010. The CIO of a Greece-based single family office Campden FO spoke to is certainly not of the opinion that we are on the verge of a consolidation wave. In particular, he says he doesn't want to see his group's expertise diluted: "We are resolutely a SFO and certainly don't intend to cosy up to other SFOs for reasons of scale. Similarly we have taken a decision not to go out and market our services to others, whether that be to high net worth individuals or other SFOs. We are happy as we are."
For many, it's a question of being in full control of your destiny and remaining a private entity. Remaining as a single family office reduces the need to undertake disclosure to authorities and third parties. At a time when the state and regulatory authorities are increasingly invasive, the goal for many family offices is to remain as low profile as possible.
Joan Major, director, wealth management at multifamily office Sandaire says that this is one of the key barriers to entry for single family offices contemplating a move to a multifamily office model: "The single family office doesn't have to have the same regulation in place. In a single family office, everyone can be at the beck and call of the family, but our families recognise that we are a separate business and have to deal with us through a board."
Andrew Rodger, head of the family office division at Stonehage, who provide international families with wealth management and fiduciary services, says there are plenty of advantages for single family offices who are thinking about merging into a multifamily office environment. "The MFO can share the benefit of its experience of working with lots of families. This can be useful to clients. This can be physical research, information systems, technology or simply sheer weight of human resources." Scale creates buying power, which can reduce costs. There is also the expectation that overheads are spread more widely over a larger asset base. While some commoditisation on the investment or reporting side could also save money.
But for many family offices thinking about consolidation, it is not a simple choice between a "single" and a "multi" structure. Chris Galloway, president of Okabena, a US multifamily office that manages the Dayton family's personal wealth and their philanthropic assets, says she is now considering ways in which the family office can leverage its existing investment staff, technology and some of the more innovative tax structures it has devised, without having to be in the business of attracting assets or marketing against other firms. Its main goals are to spread costs and create efficiencies. However, this is a move it has been germinating for some time, rather than being a response to the turbulent markets of the past few years.
At the moment, Okebena's solution is likely to be partnering with one or two other families. These will be families that already have a family office in place, but may not have developed the investment infrastructure. Everyone will be a "user" of that service. She says: "It doesn't have to be an either/or proposition. People are thinking differently and trying to develop a strategy to sustain their business models. We think that by taking this route, we can retain the character of the family office because the people remain in place." The group has the approval of the family to take this route. However, Galloway admits it is likely to be a lengthy process and they will only do it when it is right.
Kathryn McCarthy, a US-based family office consultant, believes that this will be the most popular model – families will get together on an equal basis. The new office will be built around a service model and will aim to break even rather than make profits. This will give the families buying power, which will improve their cost structure.
So does this suggest consolidation will finally happen? McCarthy says: "Even the billionaire offices need to cut costs. There has been rationalisation and some have had to let people go. Increasingly families have looked to outsource. Today, there is lots of change, lots of analysis. The MFOs did a good job of saying what they would do, but haven't yet delivered in an economic way, so there is likely to be more consolidation there, but it is likely to be very lumpy and situational."
She says that anecdotally there have been some families coming out of the banks, but the wheels of family offices tend to grind slowly: "There has been a big consolidation in the banking industry and people have ended up where they never thought they would be. But the surprise is that more people haven't come out, but often they hold a lot of the banks products or have bankers as trustees. There is great inertia across family offices."
Ultimately, different solutions will suit different types of family. Overall wealth is a significant consideration. McCarthy says multifamily offices may be a solution for those with wealth up to $100million, but the more assets and complexity a family has, the better a single family office structure stacks up. That said, some families want privacy, legacy and sustainability at any cost.
Galloway says: "Every family is trying to figure out what's right for them. There are no right answers. Because of 2008, people are willing to step back and say what they need to do differently and which strategy makes sense. There is a greater willingness to look at creative solutions than there has been for a long time."
Consolidation or not, the year ahead looks like being one of significant change for the industry.