Multiple jurisdictions, private equity, generational mathematics, soft services and professionalisation are some of the trends set to rock the family office sector in 2015, according to three family office experts.
Andrew Porter is head of research at Campden Wealth and leads its annual Global Family Office Report project. His top five trends for 2015 are:
1. 2015: The year of private equity
The Global Family Office Report 2014 found the average global family office invested 9% in direct venture capital or private equity with a further 8% in private equity funds. This will continue to rise as family offices seek out direct deals, introductions to ‘off-market’ opportunities and as investment banks increasingly act to ‘flag’ targets for minority stakes. Due diligence may be a sticking point that family offices will need to be wary of.
Ageing family office principals, primarily in North America and Europe, have a heightened awareness that staff and structures need to be optimised as they approach the point when they need to transfer authority to either family members or non-family executives. In developing economies and Asia there is a move away from strict family control toward increased non-family involvement.
3. Measuring impact
Family offices are seeking to professionalise their philanthropic functions and are looking to develop their ability to measure the impact of giving. This is only likely to increase as the next generation of family engage with philanthropic efforts – this digital native cohort is used to analytics and dealing with data.
4. Multiple jurisdictions
Family offices are increasingly looking to be in multiple jurisdictions, whether it be European or North American offices setting up in Asia, or vice versa. What do offices need to be doing to make these new offices a success? Networks are vital, plugging into a professional network is a key part of the sustainability of new offices.
5. The rising interest in alternative finance
Businesses are turning to non-bank financing to fill the liquidity gap and family offices are among participants lending to alternative finance platforms. It’s still in its infancy, and the assets involved are small, but it’s a fascinating area to watch for alternative investments.
There are a number of strong correlations between Porter’s predictions and those from US based family office specialists Kirby Rosplock, author of The Complete Family Office Handbook, and Barbara R Hauser.
The pair published their trends in a paper The Family Office Landscape: Today’s Trends and Five Predictions for the Family Office of Tomorrow.
The paper, released in the latest Journal of Wealth Management, concludes that sustainability of the single family office model will be top of mind this year, “particularly as individuals evaluate overhead to operate SFOs and growing expenses due to generational mathematics”.
Their top five predictions are:
1. The number of family offices will continue to increase
Both the rising ultra-high net worth (UHNW) population and the large anticipated transfer of wealth from the Baby Boomer generation will drive an increase in both single and multi family offices.
While the paper acknowledged it is difficult to find hard data on how quickly single family offices are growing in number, it said anecdotal evidence coupled with several outside indicators provided some insight into the size of the market.
These included that the population of individuals with $500 million or more now sits at 5,910 individuals, and the growing number of family office events and conferences run each year, which sat at 100 in 2014.
The paper’s authors predict the family office sector will develop accredited certification programmes, and there will be a continuing interest in educational events targeted at the family office market.
This will partially be driven by banks and investment advisers seeking to associate themselves with specific industry credentials. As the paper states: “[Family offices have] become the darling of the proverbial wealth management space, as many believe this should be their ideal target audience.”
The paper says many single family offices are looking for more advanced and specialised training for their staff focused on best practice, knowledge and peer-learning.
3. “Soft” services will return to the fore
The paper’s authors say they have seen an increase in hiring non-financial experts in areas such as governance, family dynamics and family facilitation. They note that in 2014 four significant US institutions expanded their offerings in these areas.
Previously, the report notes, family offices had been going in the opposite direction and had become increasingly focused on managing investments.
The report suggests this was driven by financial institutions becoming involved in the family office space, and also the fact that many single family offices evolved into multi family offices and wanted to reduce overheads and maximise profits.
But the report authors said their experience was that “soft” services are most highly valued by family members. The report refers to the patriarch of a Pennsylvanian family office. Despite being from an investment background, he said 80% of his focus was now on educating the fourth generation.
4. Succession and exit planning
As assets are split between a widening pool of next gens, family offices will increasingly question their future.
From 2007 to 2061, a wealth transfer of $59 trillion is set to happen in the US. While family office wealth is always concentrated in the first generation, by the fourth generation it becomes very fractionalised.
While some family offices are adopting more democratic governance structures as the number of clients multiplies, others are questioning their commitment to remaining one entity.
Options on the table will include joining or transitioning into a multi family office or disbanding. Family offices will also plan ahead for succession, and address whether the role of family versus non-family members within the office.
5. Multi-jurisdictional family offices
As wealthy families become more global multijurisdictional family offices will become the norm, addressing tax and investment advice pertinent to each jurisdiction. This will be a market ripe for global private banks to exploit.
Family offices will increasingly pair with families from other jurisdictions, and will increasingly mix with family offices from outside their home country.
Many family offices will take care of their non-investment related services in their home country, while investments will be managed in a financial centre like London, Geneva or Singapore.