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Family Offices Disrupting Traditional Investment Models

Advisors to wealthy families need a broader range of skills, as the rich increasingly pass over limited partnerships and fund managers in favor of direct investments.

Last year, Preqin published a report looking into global asset allocation by family offices, the bias being clearly in favor of private equity and real estate. What is even more interesting, however, is the disruptive effect that direct investing by single or multifamily offices is having on deal flow that would traditionally have been accessed only by private equity or real estate fund managers.

In August 2019 we saw a notable example in this trend, when a U.S. family office paid for a significant shopping center entirely in cash.  

Key wealth management reports have shown that direct investing by family offices outside the public markets is increasing year on year. Commercial and residential real estate are particularly attractive assets, providing both capital appreciation and solid investment returns in the form of rental income. Private equity investments have reportedly delivered the greatest returns for family offices, compared with indirect investments in the asset class.

Some of the reasons for the appeal of direct investing include the ability of family offices to manage their assets internally by hiring investment professionals, the desire to retain greater operational control over their investments, and family offices' ability to be agile and gain priority access to deals.

Compared with investing indirectly via traditional investment funds, direct investing allows family offices to be patient investors, hold investments for longer and significantly reduce service provider fees associated with pooled structures.

In addition, for most family offices, the regulatory overlay associated with investment funds is unnecessarily burdensome and costly, given that they are investing and managing their own money. For all of these reasons, the trend toward direct investments by family offices is proving to be a very disruptive force for fund managers.

This is all taking place against a backdrop of growth in private wealth: wealthy families are getting even wealthier and the number of single and multifamily offices is increasing. Ordinarily the establishment of a family office also goes hand in hand with succession planning and provides a framework to ensure an orderly transfer of wealth to the next generation. To this end, family offices may also provide family management services, which includes family governance, financial and investment education for future generations, and philanthropy coordination.

Further, a family office will typically include teams responsible for the management of investments, property and other assets, as well as the management of the family's legal and tax affairs. In addition, some family offices provide softer 'concierge' services connected with travel and managing household staff. Increasingly, however, the concierge functions of the family office are being separated from the key investment functions as the trend toward professionalism and sophistication of investment platforms within family offices continues.

As such, private wealth practitioners need to be in a position to offer a complete range of cross-disciplinary services to private investors, including estate planning, governance, succession planning, family office setup, investment structuring and private funds.

It is extremely important that professional advisors continue to think about the issues that are important to their clients. For example, areas that matter increasingly to new generations are philanthropy, sustainable investing and impact funds.

We are also increasingly asked to advise on the most appropriate holding structures for family office investments. These will differ depending on whether it is intended to acquire a single asset (for example a real estate asset) or a portfolio of assets (such as a number of private equity investments).

Jersey, for example, provides a variety of structures that are familiar to investors, namely companies (including protected and incorporated cell companies), unit trusts or limited partnerships (including separate and incorporated limited partnerships). The regulatory treatment of such structures will depend on the number of participants (investors) in the structure and the nature of the assets acquired, but it is possible to structure a private investment fund that is lightly supervised by the Jersey regulator.

It is increasingly necessary for professional firms to put together specialist teams that understand the needs of private investors. These are usually multijurisdictional and cross-service line teams. The approach is very different to institutional investors, which will have a number of internal functions—such as legal or compliance—supporting them, and so the starting point is not the same.

Emily Haithwaite is group partner at Ogier in Jersey.

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