Better Understanding the Family Office

9 Aug

By Michael Quigley, Research Analyst, LSN

mike-2Throughout the existence of this newsletter, LSN has discussed at length the trend of family offices moving towards direct investments in the life science space. However, family offices remain an obscure investment entity to many of our readers. In this article, I want to shed some light onto what exactly constitutes a family office, why their numbers are growing, and why they are such a crucial player in small- and medium-sized enterprises.

To begin with, traditional wealth advisory and asset management firms provide clients with advice on investments, and may provide insight into insurance, tax, and budget-related decisions. Family offices, on the other hand, act as personal CFOs for ultra-high net worth families – and individuals handling all of these issues – as well as generational wealth management, philanthropic donations, legal issues and management of tangible assets. Each family office is unique in that its services are a function of the demands, skills and financial requirements of the family or individual whose money they manage.

These organizations exist primarily in two basic forms: Single Family Offices (SFOs) and Multi-Family Offices (MFOs). SFOs – as the name suggests – manage the finances for a single family or individual with a net worth generally over $100 million, with an average of around $600 million. MFOs, which have been recently gaining popularity, serve the same purpose, only they cater to the needs of multiple families with a minimum net worth around $20 million and an average of about $50 million.

The amount of capital held by family offices has been growing recently as a result of an increased demand for complete personalized financial management, SFO’s expanding to multiple clients, MFO’s lowering their asset requirements, and as traditional wealth managers (following the market demand) are offering more holistic services, transforming their business model to become MFO’s. Industry experts estimate that there are currently over 4,000 family offices in the United States alone, with well over $1 trillion in combined assets under management, making them a very significant source of private capital. (1)

Historically, family offices have been the funders of alternative assets such as venture capital and private equity funds, thus stimulating small- and medium-sized enterprises. As discussed in a previous LSN publication entitled “The Perfect Storm,” family offices have been discouraged by the performance of these alternative investments, and are beginning to bypass these types of funds and invest directly into privately-held companies themselves.

Many family offices involved in this trend are utilizing the skills and knowledge of the particular sector that made the family its fortune to identify strong investment opportunities, where they also have to ability to add value beyond capital. (2) What’s more, as long as family offices have been in existence, the majority have maintained a portion of their clients’ capital for the purpose of philanthropic allocations. Recently, philanthropy is becoming less of a donation and more of an investment focused on a measurable, positive social impact on society as a gauge of ROI. With this mindset, family offices are investing directly into industries like life science, where a scientific breakthrough could have a massive, lasting positive impact on a global scale. (3)

Family offices are both increasing in number and in involvement in direct private investments. There are many factors contributing to these two trends, and one of the biggest beneficiaries will be private companies fundraising for the growth of their enterprise. Family offices looking for an impact with their investments do not have the same standards for ROI as traditional investment firms who are under immense pressure to generate consistent returns by shareholders, and are therefore offering better terms with less stringent restrictions on time-to-exit than traditional private investors.

1 http://familyofficesgroup.com/Report.pdf

2 http://www.familyofficereview.com/family-balance-sheet/investments/article/753/direct-investing-taking-care-of-business

3 http://online.wsj.com/article/SB10001424127887323551004578441002331568618.html

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