Family offices in Europe are far less interested in managing family philanthropy than originally thought, with more than one-third (36%) not involved in the practice at all, according to the Global Family Office Study 2014. This is proportionally higher than any other region.
Despite this, European family offices have the highest volume of assets dedicated to philanthropy. If their volume of giving is the highest, why do offices not undertake their management?
Campden Wealth’s head of research, Andrew Porter, says the Continent’s history of state support, which has long promoted the welfare and cultural good of its citizenry, could be one reason why family offices take a backseat on philanthropy.
“State responsibility in Europe, expressed through both health and education initiatives, as well as a legacy of state patronage for the arts, has effectively put charity at the back of many entrepreneurs’ minds,” he says.
“This may have created a second-order effect on family offices, causing them to place less importance on philanthropy. Unfortunately, European family offices seeking to promote family legacy place less emphasis on social capital.”
Porter says there could also be a perception in Europe that wealth is better spent donating directly to an experienced charity.
Despite a high proportion of family offices having no involvement in philanthropy, one-third had endowments of at least $10 million, with many focusing on the healthcare and education sectors.
Family offices listed the benefits of philanthropy as family legacy and fostering family union. Porter adds that many family offices use philanthropic causes to engage the next generation. That, however, did not stop family offices worldwide from ranking charity as their lowest priority.
Porter predicts family offices will professionalise their philanthropic function in the future as the next generation seek to develop better ways of measuring impact.
The Global Family Office Study 2014 concludes that philanthropy plays an important role in family legacy – not only because of the social good it provides, but also because it serves as a catalyst for succession.
Porter says two additional, emerging trends to track among Europe’s family offices are data security and reputation management. “It remains to be seen whether family offices will evolve to manage aspects of risk beyond an office’s traditional investment-focused remit. Considering how privacy, data security and reputation function as core components of family legacy and social capital, it would be surprising if offices do not adapt to manage this remit.”
Other findings about Europe from the Global Family Office Report 2014
European family offices mirror the Global Family Office Report average findings with improved confidence and a clear willingness to accept more risk in their portfolios. Traditionally, European offices have a bias towards the preservation of capital, resulting in the pursuit of more conservative investment strategies, relative to offices domiciled outside of Europe. However, as highlighted in the 2013 European Family Office survey, offices in this region last year began implementing more pro-growth asset allocations. Subsequently, European family offices have benefited from strong performance from equities, private equity and direct investments in 2013.
Family offices in the region typically manage longer-term assets, such as real estate, private equity and direct investments, in-house. There seems to be a trend toward insourcing investment services, while technical, legal and tax-related services are increasingly outsourced. Shorter-term assets, hedging instruments and derivatives, which require a high degree of monitoring and execution expertise, are managed via investment and private banks. Portfolios with exotic financial instruments are typically outsourced to asset managers.
Cost and structure
Direct family office costs are slightly lower in Europe than the global average of 86 basis points per annum. Lower costs are a function of the larger average portfolio size of USD900 million and total assets of USD1.5 billion per family office. Investment style also contributes to running the typical European family office at lower marginal cost, because they have a higher proportion of ‘conservative mandates’ which tend to be cheaper to manage than growth mandates.
Families expect strategic asset allocation, asset implementation, risk management and structuring/tax planning expertise. Cost effectiveness is not just a given; it must be proven. The European environment is highly regulated and, in some worst-case scenarios, boundaries are defined by litigation. Therefore, family offices will likely have legal as well as accounting and investment expertise.