THE FUTURE OF FAMILY OFFICES

2017

Family Offices in 2017

regions. For example, the Swiss market has seen a large increase in family offices being set up by ex- private bankers, following much of the FAMILY banking restructuring that took place after the 2008—2009 financial crisis.” More recently, existing family offices have made changes to the way they operate, adding additional offices OFFICES around the world and emerging in forms that are different than the traditional structure. “Family offices are becoming more IN 2017 international as families are becoming more complex – the trend toward having multiple jurisdictions will likely continue,” says Mike Reed, managing Increasing globalization is seeing family director, multi-family offices at RBC offices opening in emerging markets, and Management. “In Europe, we are seeing the changing the ways in which they operate creation of a number of cross-border family offices, leveraging expertise in London, Switzerland, the Channel Islands or the Isle of Man. he opening of new family offices “In North America and Asia, there T around the world has contributed to has been a surge in family offices, a more diverse landscape, with new which are more like registered wealth centers emerging and a changing investment advisers (RIAs) or simply approach to in investment-oriented organizations than more mature markets. what might be considered a traditional While the US is home to a large family office. number of family offices there are signs “We’re also seeing a number of that growth in other parts of the world is family offices growing their business starting to take off. by merging with other family offices, “There is considerable wealth held creating economies of scale, which outside the US and it needs to be ultimately benefit the client.” remembered that if you define a family The current market environment office as $250m upwards, there are has also had an effect on the way as many family offices in Europe as the family offices invest. As the search for US,” says Michael Oliver, co-founder yield and predictable rates of return of family office services firm Global intensifies amid more volatile market Partnership Family Offices. conditions, family offices have begun “This is unsurprising given the focusing on non-traditional asset predominance of old wealth that has classes, such as and survived in Europe, coupled with real estate. the new wealth that has entered it – Moreover, family offices are particularly from Russia, following the increasingly reorganizing to make their demise of communism.” operations more efficient, keeping “A high percentage of wealth is running costs low while continuing to managed in the financial hubs of the focus on wealth management. world,” says Jurgen Vanhoenacker, “The most successful family executive director, sales, marketing offices are recognizing the & wealth structuring importance of efficiencies and and Ann Marie Reyher, connectivity,” says Reed. A high percentage director, wealth structuring “A successful family office attracts of wealth is managed services-UHNW at a client base of families and assets in financial hubs, and investment manager where their fixed costs can be we are seeing a natural Lombard International. justified, while they also become a key development of family “As family offices have partner and the conduit for managing globalized, we are seeing a family’s entire wealth, including offices in these regions a natural development consolidated reporting and asset of family offices in these allocation.”

3 Family Offices in 2017 THE WEALTHY ARE COMING

The world’s super- rich seek to protect their assets with the upmost and confidentiality

conomies appear to be E decelerating in many global markets, yet the wealthy continue to accumulate assets. Total ultra-high-net-worth (UHNW) assets sank to $5.1 trillion in 2015, from a lofty $5.4 trillion in 2014, according to a 2016 report by UBS Group AG and PricewaterhouseCoopers. Notwithstanding that dip, last year, 210 freshly minted billionaires joined the cohort of the 1,400 families covered by the study. Family offices have become the vehicle of choice to protect and preserve assets for future generations. $ invest in the United States, and to set ESTIMATED BENCHMARK The 2016 EY Family Office Guide up a base there for their children’s PERFORMANCE OF estimates at least 10,000 single family education. Falanga explains how the GLOBAL COMPOSITE offices now exist worldwide, half of 5.1 Chinese family office concept has PORTFOLIO, BY REGION which have been established over the evolved: “Initially, the patriarch creates in % return past 15 years. “Particularly important trillion legal and relationships, in the years ahead will be the strong Total UNHW but does not require a family office as Emerging Markets growth of family offices in emerging assets in 2015 long as the value is in the business, -0.6 markets, where for the most part Surce: and until it has been monetized.” they have yet to take hold,” the guide UBS Group/ Meanwhile, many Chinese UHNW Pricewaterhouse Asia-Pacific predicts. Coopers families approach Tim Speiss, partner- in-charge of EisnerAmper’s Personal 0.0 Motivations Wealth Advisors Group, for help Family offices are gaining traction in starting to operate in the United Europe in so-called BRIC countries (Brazil, States. Speiss describes these early Russia, India, China), where wealth and incremental steps as a process 0.6 creators view their own infrastructures for “learning to manage cash flows to as outgrowths of themselves. “The and from both countries.” Although N. America CFO of the business may become many funds are active in China the family office CFO as well,” (Shanghai alone has about 5,000), his 0.3 notes professor Christopher Geczy, clients are willing to pay a premium for -0.6 -0.4 -0.2 0 0.2 0.4 0.6 academic director of the Wharton US regulatory certainty. Wealth Management Initiative. Safety is a paramount consideration. Source: The UBS/Campden Wealth Joe Falanga, managing director Chinese families seek an “escape Global Family Office Report 2016 at UHY Advisors, has seen an influx hatch”, if necessary, says Falanga, of work in his China practice. His but the desire for security transcends firm represents clients who wish to hemispheres. Todd Kesterson,

4 Family Offices in 2017 THE WEALTHY ARE COMING

suffer a breach of their information 10,000 of contracts governed by Cypriot law. systems,” he says. That wealth may The minority governed by UK law were be suspect from the perspective of Estimated repaid. King-Christopher notes that number of local jurisdictions, he adds, “and the family offices international families in London tend to last thing Russian or Chinese families in existence form a critical mass, congregating like want is for that information to become worldwide birds of a feather, to buy each others’

public.” Source: 2016 art and properties. EY Family Office Guide Destinations Investments Russian family offices gravitate toward It would be misleading, however, to American real estate investments, lump together family offices in terms typically trophy properties in cities of risk management. The Global such as New York and Miami. Family Office Report 2016 from UBS Russians who relocate to the West and Campden Wealth discovers often bring a substantial entourage, highly diverse regional differences in including bodyguards. Michael strategic asset allocation. The study Kosnitzky, head of the Tax and Middle finds that US family offices are the Market Practice Groups at Boies, “most optimistic,” but “emerging Schiller & Flexner, who and has a market participants are much less substantial Russian practice, has stressed than in 2015,” while “Europe seen some temporary pullback on is standout negative.” account of price disruption in the oil For historical comparison, attorney sector. He believes, however, that Patricia Rogers of Moye White, notes director of Family Office Services Russian offshore investment will that Chinese and Russians today at accountants Kaufman Rossin, continue to expand, depending in are behaving more like US investors describes a flight to safety among part on US/Russians geopolitics and in the 1980s, by concentrating on his Latin American clientele. Brazilian Vladimir Putin’s relationship with the consumer products and real estate, clients, fearing for the stability of their Trump administration. “The needs for hospitality and multi-family properties. currency, government and economy, discretion have been heightened,” he Contrast that penchant for traditional “have the wherewithal to find expertise points out. “Unlike Russia, the United investments with Western managers, abroad,” he says. He sees a constant States recognizes attorney/client who are moving toward infrastructure flow of funds to the United States privilege and Russians perceive a safe in emerging areas, such as Africa, from clients in Venezuela, Panama haven here.” India and Thailand. She comments: and Colombia, where economies London serves as another hub “You might think Chinese money are somewhat firmer but political for those from emerging markets would go back to China, but Chinese risk still looms large. For example, who are consciously seeking a family offices are turning to more new legislation in Colombia requires close, trusted group of highly skilled developed economies.” personal financial information to professionals to protect the family be filed, and raises alarm that the interests. “Clients appreciate the information might be disclosed. value of the UK rule of law, access Confidentiality is a constant driver to our courts, and transparency and for private wealth management. Tony fairness of treatment,” says London- Roth, CIO at Wilmington Trust, reflects based lawyer Ashley King-Christopher Family offices have on a move by asset owners away from of Charles Russell Speechlys. They large firms must consider key factors: Which become the vehicle of toward creating their own fiduciaries law applies? Would I have title to my choice to protect and or proxies as advice providers. “It is assets in a crisis? In 2013, during preserve assets for a vital issue for accumulators that the Cyprus banking crisis, local future generations Wall Street institutions might not use government laws wiped out senior their information appropriately, or may bondholder debt for the 99 percent

5 Family Offices in 2017 REGULATION AND THE RIGHT LOCATION

New rules and regulations and a demand for transparency mean family offices all over the world need to adapt accordingly

he fittest adapt to survive. squeezed over the next five years,” says T Increased scrutiny and legislative Christopher Geczy, academic director pressures for transparency are of the Wharton Wealth Management transforming the family office industry. Initiative. “In some spaces, such as The global drive toward systemic rules, the United States reforms has radically altered the may become more competitive, and regulatory landscape, prompting a in others less so.” Recent American search for more efficient jurisdictions legislation, such as the Bank Secrecy and more competitive structures. Act and the Anti-Money Laundering Act Dodd-Frank legislation enacted in may propel some residents toward tax 2010 set the stage for financial reform regimes elsewhere. in the United States. “One problem is The Foreign Account Tax that those regulations are still constantly Compliance Act (FATCA), set up coming out,” explains Todd Kesterson to prevent underreporting by US at accountancy firm Kaufman Rossin, taxpayers, exemplifies the trend. who has clients in Latin America and Elsewhere in the world, the Common the Caribbean. Another issue is that Reporting Standard (CRS) is slated families may not wish to register as to go into effect next year, with multi-family offices, which would expose countries phasing it in gradually. In their holdings to public view. “One solution is to create single-family offices where only family members participate,” Kesterson suggests. Tax havens and privacy protocols are under siege across the board. “All is in motion. Few traditional tax avoidance regimes — legal and illegal — still exist, and those remaining will be

6 Family Offices in 2017

consequence, American regulation may actually provide better privacy Few traditional tax avoidance protection. “A foreign person might not regimes – legal and illegal – still exist, wish to be subject to US taxation, but and those remaining will be squeezed might still be able to guard anonymity over the next five years better in states like Nevada, Delaware and South Dakota,” points out Michael Kosnitzky, tax attorney at Boies, Schiller & Flexner. From London-based lawyer Ashley and avoid registration. “That way, they Family and Wealth Management King-Christopher of Charles Russell avoid both costs and fiduciary duties,” provides a list of pertinent Speechlys, makes the case for what Berry notes. considerations. Criteria include he calls “protectionism through The second driver reflects market available legal and tax structures, legislation.” Know Your Customer fluctuation rather than regulation. ease of maintaining employees, (KYC) rules require professionals Some managers may economic and political climates, to ascertain clients’ identities. He find themselves deep in the hole. To filing requirements and the flexibility therefore counsels his own wealthy keep their powder dry for another day, for future restructuring. The guide clients to set up a base in London for funds can terminate and disband, so emphasizes, nonetheless, that a their family office, with key people the founders can retrieve the money location close to the family may onsite to build critical mass. Those to create a family office. A number of be more important than tax or who can show badges like a UK managers who have historically run regulatory aspects. bank account and law firm will have large funds are underperforming with Kosnitzky starts with an analysis of automatically passed a lot of tests. their current strategies. “Some still his clients’ needs, outlining the pros “Governments can impose subtle claim to have faith in the viability of and cons of various jurisdictions. rules over time, and they keep getting their strategies but attribute current Some families resist an unrelated tighter,” King-Christopher warns, “The market conditions to their -term person making decisions for wealthy may be stranded.” difficulties,” Berry says. In other operating their trust company, which words, look to both a push and a pull. local requirements may demand. Converting Structures Berry summarizes: “Investors are Some jurisdictions, such as Ireland, In a novel phenomenon, a number of withdrawing money, but managers necessitate annual meetings, and all hedge fund managers have converted also want to convert to family offices, require some boots on the ground. their structures to family offices in to know what assets they have Will time zone differences pose a recent years. In 2015, 979 funds available to work with.” problem, for example, for distant were liquidated, including those run According to the UBS/Campden tax-friendly locations such as New by Seneca Capital, Lucidus Capital, Wealth Global Family Office Report Zealand? Is the banking system BlueCrest, BlackRock, 2016, “interviews with family offices stable? How protective are the trusts? and Fortress Investment Group. In reveal concerns around the poor “Some courts won’t admit a case on a 2016, the exodus continues. performance and high fees of hedge contingency basis, and others refuse Two principal drivers underlie this funds. There are also some doubts comity of judgment, so plaintiffs must movement, according to New York- about the ability of hedge funds to start from scratch. Does the client based attorney Jeremy Berry of Akin generate going forward, even have creditor issues? We factor all that Gump. First, Dodd Frank requirements with the benefit of volatility.” in,” Kosnitzky explains. have significantly increased the expense Different jurisdictions may dovetail of conducting hedge fund operations. Jurisdiction with the family’s priorities — from Those who were managing their own Another central issue is the most Bermuda, the Caymans or the money to start with, supplemented attractive location for a family’s British Virgin Islands, to Ireland, with some outside funds, have found it imperatives. The EY Family Office Luxembourg, or possibly the United expedient to expel third party investors Guide: Pathway to Successful States. Singapore, for instance, offers a prime example of a location where English is spoken and UK law is followed. “It’s easy to get to, which has made it a magnet for wealthy Asian family offices,” says Fred Tannenbaum, managing partner at Gould & Ratner. He notes, “They like its dynamism and energy and 21st- century outlook.”

7 Family Offices in 2017 KEY TRENDS INVESTMENT STRATEGY, BY REGION TOP GOVERNANCE PRIORITIES FOR in % of family offices THE NEXT 12 MONTHS, BY REGION in % of family offices Preservation Balanced Growth EM APAC Europe N. America

4 50 Implement a 17 17 60 succession plan 45 39 33

63 43 Educating family 30 members to become 67 34 responsible shareholders 51

Emerging North Markets America 43 Implement a risk 40 register or other form 28 of risk management 27 structure/procedure 25 25 33 33 43 Establish a 23 family legacy 19 33 53 42 36 Re-designing 20 the board/key 27 responsibilities of Europe Asia-Pacific 20 senior staff Note: Due to rounding, totals may not add up to 100% 29 Education of family 40 members regarding IMPACT INVESTING — INVOLVEMENT 22 % family offices 35 family office activities

Highly active Not currently active, likely to change in future Unsure 21 Communication Somewhat active Not currently active, unlikely to change in future 43 between family office 47 43 and family members

34% 14 Human capital 27 oversight 13 14

4% 7 Establish a 17 family council 14 16

7 Include non-family 13 members in the activities 9 14% 16 of the family office 30%

7 Other 3 8 2

18% 0 20 40 60

Source: The UBS/Campden Wealth Global Family Office Report 2016 Source: The UBS/Campden Wealth Global Family Office Report 2016

8 Family Offices in 2017

AVERAGE FAMILY OFFICE CHANGE SINCE 2015 PORTFOLIO in % of family offices in % of global composite portfolio

Bonds Cash or equivalent Equities Operating business revenue Commodities Alternative investments 60 31 or family ownership status 9

11 Direct venture Total family wealth 14 28 58 capital/private equity

7 Private equity funds Proportion of family wealth under management by 57 37 family office 6 3 Co-investing

Number of households serviced (or, for MFOs, 75 21 number of families) 4 15 Real estate direct investment

Location, number of branches, or size of 76 21 family office 3 8 Hedge funds

2 Other assets (e.g. art) Family office leadership, governance and/or 72 27 reporting structures 1 2 ETFs Decrease No change Increase 1 REITs

1 Tangibles

2 Agriculture OBJECTIVE OF THE FAMILY OFFICE, BY IMPORTANCE 1 - Unimportant | 2 - Of little importance 2 Commodities 3 - Moderately Important | 4 - Important | 5 - Very important

2 Cash or equivalent Inter- Consolidation Family unit Family Lifestyle generational function of education enhancement wealth accounting, (concierge management tax and estate services) 9 Developed-market planning fixed income services

3 Developing-market fixed income 3.8 3.3

3.9 18 Developed-market

3.1

7 Developing-market 4.2

2.4

Source: The UBS/Campden Wealth Global Family Office Report 2016

Note: Due to rounding, totals may not add up to 100% Source: The UBS/Campden Wealth Global Family Office Report 2016

9 Family Offices in 2017 GENERATIONAL MINDSETS

Family offices can contain executives spanning several generations, and younger family members can bring a different attitude to wealth

he ranks of the wealthy are are expected to increase by 66 T expanding across the world, percent versus a 27 percent rise albeit at varying paces in Europe. A WealthInsight study depending on the region. As the predicts a 104 percent explosion in number of ultra-high-net-worth families India’s UHNW group over the next proliferates, so too will the single and decade, while a 2014 study from multi-family offices designed to serve Insead entitled The Institutionalization them. With this explosion occurring on of Asian Family Offices reports a a global scale, there comes inevitably surge in China, where those with a shift in the mindset and attitudes of over $100 million in assets account succeeding generations. for one third of the growth in Asia. Knight Frank’s The Wealth Report “In family offices at a nascent stage 2016 marks a current tally of 187,500 of institutionalization, hands-on UHNW families (who by, definition, entrepreneurs are typically involved control at least $30 million in assets), in all facets of decision-making,” forecast to rise to 263,500 by 2025. according to the Insead survey. Over the decade, Asian millionaires Second and third-generation family members on the other hand, who are active in intermediate and advanced family offices, have also honed their capabilities through experiences outside the family office.

Millennial Profiles The transfer of wealth is occurring in a changing psychological context. Consumerism is a key trend. In China and developing nations, cultural elements are affecting the progeny of parents who have experienced new horizons of travel and communications. Longevity is another hallmark, since all are living longer. In many countries, “wealthy parents are preparing their children for professional careers, being aware that wealth will now pass at a much later stage in their lives,” notes Jack Garniewski, senior managing director at Wilmington Trust. Consistent with a millennial view, many new UHNW asset holders tend to pursue a core competency while

10 Family Offices in 2017

they outsource other activities. With GLOBAL FAMILY OFFICE — the availability of off-the-shelf tools TOTAL FAMILY NET WORTH in % of family offices and management products, they may prefer to exercise greater control over their finances than former generations did. Moreover, having often made their fortunes early in life, this may be just the first gyration of their business careers. “Some expect future phases, and don’t view this as the last stop or final $100 million they will make,” says Michael Kosnitzky, head of the Tax and Middle Market Practice Groups at Boies, Schiller & Flexner. His X2 younger clients tend to focus less on material objects such as yachts and airplanes, although they have sufficient $ 759m $ 1,473m assets to use as collateral. They take Average family office AUM Average family net worth AUM considerable pride in their businesses and how they treat employees. At the Source: The UBS/Campden Wealth Global Family Office Report 2016 same time, investing in environmental, social and governance (ESG) projects something average. “To create monetized businesses for $250 million has become popular, and is often seen intergenerational wealth, you need and up. Their enterprises, such as a as a more efficient use of funds than to take more risk, execute a brilliant 62 convenience store chain, an adhesive pure philanthropy, to achieve social idea, do something different,” says Ed company or a major distributor of justice and societal change. Goodchild, founder of Chawker & Co, % housing insulation, will have morphed The Family Office Exchange(FOX) a London-based advisory service for of family from local to regional to national addresses some predominant family offices. He describes how the offices are operations, to become cash cows. now active millennial motifs in its 2015 study, “drive and determination which make it or expect In general, Thurman observes, Engaging the Client of the Future. happen constitute a lonely journey.” to be active his clients still “want simplicity in The FOX study highlights five By the second or third generation, it in impact their lives, having been transitioned investing salient themes applicable to the becomes more difficult to understand into an unfamiliar new world.” current generation: They “prize failure. Successive family members How does this attitude affect their relationships,” and must relate to only see the successful patriarch, offspring? Some believe the money advisors on a personal level; they and not the earlier experiences of is disposable, ignoring accountability “crave authenticity,” whether in work, risk taking. Thus they may become and stewardship; others deny the play, consumption or investing; curators of the family culture, eager 47 wealth and move away from it; a third they “operate in real time,” being to preserve and hold onto the assets, group understands balance and inundated with information; they rather than personally seek remarkable % responsibility. “Those values must value entrepreneurship; and are achievements. The third generation be taught intentionally by parents, of family sophisticated, highly educated and may take contrasting paths, Goodchild offices and don’t arrive through osmosis. well-traveled. adds. “Either they typically want to part believe The first two types represent natural that impact from the tradition, or, by contrast, they investing tendencies to seek pleasure or denial,” Successive Generations may want to emulate the grandparent, is a more Thurman points out. “Shirtsleeves to shirtsleeves in three having been brought up on those tales efficient use Family office executives must look to of funds to generations,” steel tycoon Andrew and become minded to repeat them.” achieve transition accumulated wealth through Carnegie famously pronounced. Across the ocean, Jack Thurman, social generations. The UBS/Campden Across multiple societies, certain managing partner at BKD Family Office impact than Wealth Global Family Office Report philanthropy patterns characterize each and BKD Wealth Advisors, attends 2016 examines the factors most generation’s attitude. Clearly one to a very different clientele. Located conducive to successful results. The cannot make a great fortune by taking in Springfield, Missouri, the heart of The UBS/ report identifies five critical elements: Campden the advice of others, or achieve a the American Midwest, he serves Wealth Global A willing and able next generation; supernormal profit by merely doing low-keyed entrepreneurs who have Family Office an older generation prepared Report 2016 to give up control; a flexible and trustworthy family office; a family with In family offices at a nascent functioning relationships; and sensible stage of institutionalization, hands-on governance structures. “What is comforting about the list of factors is entrepreneurs are typically involved in how many the family office has some all facets of decision-making measure of influence over,” concludes the UBS/Campden study.

11 Family Offices in 2017

custody, multiple trading relationships and leverage. Our clients run similar investment strategies to those of hedge funds, all involving the use of leverage. Typical examples would be equity long/short, , event- driven and relative value. But we have seen the following shift. In the past, these family offices were content to allocate a portion of their What is your role at Credit Suisse assets to hedge fund investing; now, Prime Services? they are increasingly likely to hire a I head up the sales effort focused PM from an existing hedge fund and on sourcing ultra-high-net-worth and establish their own in-house fund, family office clients for Credit Suisse’s which uses a hedge fund strategy. unit. These clients, We help the family office set up these who have an existing relationship funds and are on hand to advise them with CS Private Bank, are looking on the choice of vendor, to assist on at establishing their own in-house operational set-up, and even on hiring investment funds. Our team consists of personnel. So clients benefit from of private bank employees, all of whom dedicated resources from both the bring considerable prime brokerage Private Bank and Investment bank side. experience. They are “embedded” within the Investment Bank and charged with servicing these clients. Our clients run So how do your family office clients employ the traditional similar investment functions of a prime broker? strategies to those of They utilize the services of a prime hedge funds, all involving broker in pretty much the same the use of leverage way as other hedge fund clients. To step back a bit, the role of the prime broker is to provide hedge funds with

Interview: THE INCREASING SOPHISTICATION OF FAMILY OFFICES

Family office clients are seeking a different level of support from their bank, says Barry O’Callaghan from Credit Suisse

12 Family Offices in 2017

Where are your clients located? seen their returns drop off somewhat, were also on the rise last year, so Our clients are primarily based as they grew to multi-billion-dollar clients have been making money on in EMEA, with the majority in size. There does appear to be a event-driven strategies, including Switzerland. We also have an sweet spot, whereby smaller funds corporate actions like rights issues. equivalent team based in Hong seem to be capturing more alpha. Kong, who look after family offices Accordingly, some family offices have Do you see this trend in family in APAC. been disappointed by their hedge fund office prime brokerage clients returns in a challenging market. continuing? Why are your clients now Instead of spending time and It’s difficult to say. What I will note is becoming more interested in resources on identifying hedge funds that over the past 12-18 months we running their own hedge fund to invest in, family offices may now have seen a considerable uptick in operations? turn their efforts to selecting the best interest from both family offices and The primary advantage for family individual hedge fund manager. The ultra-high-net-worth individuals. This offices is that they can retain portfolio manager meanwhile, can year has been busier than normal, control, and avoid being affected apply focus to the investing task, with new clients onboarding onto the by the actions of other investors. rather than spend time on marketing platform, and our pipeline for 2017 is That said, participants can become a fund. They can also benefit from up around 40 percent year-over-year. as involved as they wish to be in “patient capital,” in that the family day-to-day operations. You might office is more likely to make a long- see one member from the family term commitment to the fund. office on the investment policy committee or decision committee, Which are the current popular Family offices who is authorized to give a yea or trading strategies? can retain control, nay to each investment as it comes This year we have witnessed a lot of and avoid being up. Alternatively, the family can interest in event-driven and distressed allow the portfolio manager as much debt strategies. A number of investors affected by the autonomy as is deemed appropriate. are finding opportunity in non- actions of other Significantly, in recent years, investment grade debt in today’s rate investors some of the larger hedge funds have environment.

13 TECHNOLOGY AND WEALTH MANAGEMENT IN 2017

Entrepreneurial family office members are divesting funds from traditional sectors and investing in new technology and digital start-ups Family Offices in 2016

traditional sectors, and investing in food security, agriculture, alternative energy and climate change. E-lending Family offices may be pursuing platforms such as Prosper and several goals, either separately or in Kabbage, and new vehicles such as tandem. Some could be looking for equity , have proved a diversification, drawing away from the popular draw for . technology sector or specific company Drivers they have already launched A Silicon Valley approach relies on cutting out middlemen, especially in a context of enhanced networking, awareness and transparency. Entrepreneurs may believe they do not need a fund to perform functions with which they are familiar, since echnology investment has many have been partners themselves T become self-propagating, as in major venture firms. “Five years a generation of Silicon Valley 15 ago, we saw private equity funds billionaires plows their new wealth in club deals, pooling resources,” into venture capital for start-ups. % says Fred Tannenbaum, managing Those investing through family offices of family partner at Gould & Ratner. “Now we enjoy inherent advantages of freedom offices see the same happening with family reported and flexibility. According to advisory having offices.” Yet a huge amount of effort firm GrowthCap, “Unlike private experienced a and accounting will be involved in equity and venture capital firms they cyber-security trying to understand or track, say, 35 breach in the typically do not have a fixed fund life,” past investments and capital calls. and are positioned to invest widely Family offices may be pursuing across sectors, business stages and The UBS/ several goals, either separately or in Campden transaction types. Wealth Global tandem. Some could be looking for Family Office Consider some leading examples of Report 2016 diversification, drawing away from venture groups within family offices. the technology sector or specific Sculley Brothers, spearheaded by company they have already launched. the former Apple CEO and his two “Others may be trying to find strategic brothers, focuses on healthcare investments that can generate delivery systems; Gund Investment synergies between existing holdings also invests in early-stage healthcare or lines of business,” suggests Akin and IT; Duchossois Technology Gump’s Jeremy Berry. In general, Partners pursues IT areas, including most families are looking to access communications, semiconductors and businesses they feel would grow software. Among pioneers ready to exponentially faster than the standard parlay seed capital, Steve Anderson’s asset base of stocks and fixed income. Baseline Ventures stands out, while Although as insiders they enjoy an Bloomberg offers an illustration advantage of informational flow, they of an early-stage fund directed toward should still be wary of neglecting the big data, content discovery, technology value of diversification. platforms and media distribution. “The question is, can you keep Silicon Valley’s billionaire factory has on making it big?” asks Christopher been looking beyond the so-called old Geczy, academic director of the economy, and exploring more social Wharton Wealth Management enterprise and energy investments. Initiative. Some evidence does Family offices are divesting funds from demonstrate that outperformance can indeed be sustained by those belonging to networks, but the field remains competitive. Successful venture capitalists may operate on Family offices are divesting funds the deal horizon, but they are vying from traditional sectors, and investing against legions of other actors. “If they in food security, agriculture, alternative are receiving smaller size pieces of a energy and climate change deal, that makes the operational risk and workload tougher in a procyclical environment,” says Geczy.

15 Family Offices in 2017

EASTERN PROMISE: THE RISE OF FAMILY OFFICES IN THE MIDDLE EAST AND SOUTHEAST ASIA

An explosion of wealth in the East is creating a need for appropriate guidance on family wealth management in these markets

he growing numbers of HNWIs biggest brands and global properties. The challenge T from emerging markets has With new financial centers, such as for founders of been a key theme in wealth Abu Dhabi’s ADGM, launching in the family offices is management circles in recent years. region, the Middle East continues to that they built New sources of wealth in previously emerge as an increasingly important untapped regions across the world global center for wealth management. their wealth on have helped shift the focus of asset While the family office landscape very specialist managers from established markets to in the Middle East remains smaller experience – a emerging markets in Southeast Asia, than other regions despite the large very different the Middle East and Africa. amounts of wealth, there are signs that skill set from The Middle East, in particular, is a this could change. well-established center of wealth but In its wealth report published managing with an underdeveloped family office earlier this year, property consultants investments scene. With investors in the region Knight Frank reported that the number having shown signs of repatriating of UHNWIs — with wealth of over capital since the onset of weaker oil $30m — in the Middle East grew by prices more recently, the potential for 89 percent between 2005 and 2015 a new generation of family offices to and is projected to grow by a further emerge could be significant. 54 percent in the following ten-year Thanks to its oil resources the period. The rise in the number of region is home to some of the wealthy individuals in the region could wealthiest countries per capita across fuel a rise in the number of family the globe, and its sovereign wealth offices. funds are well known for their high- Indeed, a study by international profile investments in some of the investment manager Invesco in 2015

16 Family Offices in 2017

noted that there was an opportunity BONUS STRUCTURE, BY REGION for private banks and asset managers Average bonus as % of salary as family offices looked to outsource asset management responsibilities. Europe N. America The Invesco Middle East Asset Asia-Pacific EM 60 Management Study 2015 revealed a level of dissatisfaction with low returns, particularly given the volatile international markets in recent years. “We are observing a gradual distancing from their owners with far more autonomy than was previously acceptable,” says Arif Rahim, vice- president, head of investment strategy at Saudi Arabian firm 40 Sidra Capital. “There continues to be a gradual polarization between the personal wealth of the family and that generated by their business, with the majority of the wealth still being held within their companies.” He adds: “Generally, a distinction exists in the allocation and risk 20 appetite of assets held by the family office and that of their businesses, with allocations via the business focused on greater liquidity and downside protection.” The Invesco survey also revealed that succession planning was a concern for Gulf Cooperation Council (GCC) family offices, which, unlike other mature markets, include newer 0 Executive Investment Operations Financial sources of wealth. officer officer officer officer “In the GCC, most wealth is Source: The UBS Campden Wealth first generation so new inheritance Global Family Office Report 2016 structures need to be developed for large families within local legal the right support around them.” frameworks.” The Invesco study noted. A significant number of IPOs in the “New money is immature and needs 89 Middle East in recent years has fueled a mature market and more established the rise in wealth, although weaker money can be reluctant to move,” says % market conditions driven by lower oil Michael Oliver, co-founder of Global growth in the prices have resulted in fewer listings in Partnership Family Offices. number of the latter half of 2015 and into 2016. UHNWIs in “Finding appropriate service the Middle In Southeast Asia a wealthier middle providers of quality in these regions East between class has emerged in recent decades who understand how to build and 2005 and and has seen a corresponding rise 2015 develop a relationship with a client is in the size of the wealth management crucial. There are a lot of providers sector and, increasingly, the regional Source: selling snake oil who are looking to Knight Frank family office landscape. exploit naivety and inexperience. According to the latest CapGemini “The challenge for founders of family World Wealth Report, the number of offices is that they built their wealth on HNWIs from the Asia-Pacific regions very specialist experience – such as grew by 9.4 percent during 2015. The being able to manufacture and market Asia-Pacific region’ 5.1 million HNWIs the right product at the right price. had wealth worth $17.4trn, compared Oliver continues: “That’s a very with $16.6trn in the North America, different skill set from managing making it the wealthiest region in the investments and so they really do need world.

17 Family Offices in 2017

“Certainly, family offices are coming of age in Asia. As recently as ten years ago there were probably no more than about 50 family offices in Asia, now The wealth- there are several hundred, though management mindset that is still a tiny figure compared with 3,000 in the US and 1,000 in in Asia is evolving from Europe,” says Adam Benskin, director one of accumulation to at international financial advisory firm preservation Strabens Hall. “Asia is now home to a third of ultra- wealthy people — defined as those with net assets of more than $30m — but accounts for less than 5 percent of family offices.” Over the years, Southeast Asia’s “Similar to Europe, the family office UHNWIs investors have undergone a mandate in Asia aims to preserve change in mentality and are seeking to wealth and facilitate its transfer from change their approach to management generation to generation. The concept of wealth, which has been one of the of the family office in Asia is still a key developments in the growth of the new one, yet as the region booms, we asset management sectors in financial predict the concept to do the same.” centres such as Hong Kong and However, gauging the size of the Singapore. family office landscape in Southeast “The wealth-management mindset Asia has proved harder here than in in Asia is evolving from one of wealth other regions. accumulation to wealth preservation “The number of existing family and so issues such as succession offices is perhaps one of the hardest planning and intergenerational wealth statistics to collect,” says Patricia transfer through structures such as Woo, family office expert in the global foundations and trusts are moving tax strategy and benefits practice at higher up the agenda,” says Dominic international law firm Squire Patton Gamble, co-founder and chief executive Boggs. “It is because many family officer of Singapore-based adviser- offices do not want to be labeled search service wealthinasia.com. ‘family offices’, and do not even “Hong Kong as a center for wealth operate under a separate roof. management is developing but there “In Asia, a ‘family office’ can more is more wealth-management expertise often be a section within the family in Singapore, which makes it a more business rather than an independent attractive base for UHNWIs with legal entity with separate office space. sophisticated financial affairs.” She continues: “The importance of Yet, while both the Middle East and this type of ‘embedded family office’ Southeast Asia are seeing growth should never be underestimated as in the number of family offices, there these sections carry out many ‘family have been questions over where to office’ functions.” domicile. In the Middle East, concerns over the regional stability has prompted some to establish offices in more mature markets, while a similar trend is also evident in Southeast Asia. “I anticipate the number of independent single family offices to increase significantly in the coming three to five years, especially for families whose main business is located in a different country from the family office,” says Patricia Woo. “The family business would be in a developing country and the family wants to locate its family office in a developed economy.”

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