In recent years, a large number of well-known hedge fund managers have shuttered their funds to outside capital and turned them into family offices. Among the many reputable names that have made the transition are John Paulson, Leon Cooperman, and Jonathon Jacobson.
The family office market is exploding
However, that shift is part of a much larger trend around the world as more and more high-net-worth individuals (HNWIs) open their own family offices. One estimate pegs the total number of single-family offices in operation at between 7,000 and 10,000, with more than half of them founded in the last 15 years. Another firm estimates the number of family offices at over 8,000 with average assets under management at $917 million.
In recent years, competition in the asset management space has skyrocketed, weighing on management fees. Thus, it seems likely that one reason for the surge in family offices is the realization that when managed correctly, family offices can significantly reduce the amount paid out in management fees.
“Family offices have the unique ability to invest in different asset classes and across the capital structure and liquidity spectrum,” said Jack Berlin, senior managing director of investments for ER Family Holdings. “A growing number of organizations are responding to the growth in the FO market and are providing networking and idea-sharing opportunities, which is expected to catapult the investor base into a higher level of sophistication.”
This explosion in family offices over the last decade — and attendance at the 2023 Prestel & Partner Family Office Forum in New York — inspired the writing of this article (although the insight and suggestions for family offices are my own).
Starting a family office
A family office is essentially an investment firm tasked with investing the assets of a single family, although some family offices do serve multiple families. Family offices differ from other institutional investors like hedge funds and pension funds because they don’t pool third-party capital to invest.
HNWIs who expect to leave behind multi-generational wealth that grows steadily as part of their legacy may especially want to consider opening a family office.
“The benefits of family offices are beyond investment, covering family governance, succession, conflict resolution, all the way to travel management,” said Katja Muelheim, co-founder of Prestel & Partner. “Every family is unique, but the shared challenges and opportunities that come from generational wealth are what brings our community together.”
Additionally, the growing number of multi-family offices indicates that HNWIs don’t necessarily need to go it alone when investing their millions (or even billions).
“After a big liquidity event, starting a single-family office may seem appealing,” said Ryan Austin, founder and CEO of Arondight Advisors. “The operational costs of running an SFO can become a burden. You’re paying for your own wealth managers, advisors, accountants, lawyers, administrators, etc.”
Austin advises that investors need about $250 million for a single-family office to make sense. He added that multi-family offices cater to those with $5 million to $200 million to invest, enabling multiple HNWIs to share the costs of infrastructure and overhead as they foster a collaborative environment.
Asset allocations for family offices
For those mulling whether to start their own family office, there is much to consider. Of course, most of the investment management decisions are delegated to the institution’s chief investment officer. However, it makes sense to look into current trends in family offices before deciding whether to start one.
For example, just like any other investor type, family offices adjust their portfolio allocations over time. According to UBS’ 2023 family office report, the average asset allocation for family offices this year is:
- Equities – 31%
- Private equity – 19%
- Fixed income – 15%
- Real estate – 13%
- Cash – 9%
- Hedge funds – 7%
- Gold and precious metals – 2%
- Private debt – 2%
- Art and antiques – 2%
- Commodities – 1%
- Infrastructure – less than 1%
UBS also noted that in 2023, family offices were planning their biggest shifts in allocations in several years, citing interest rates, inflation, and economic growth as the key reasons for those shifts.
In its “Global Family Office Survey Insights 2023” report, Citi’s Private Bank also noted some significant shifts among family office holdings. For example, the firm observed increased allocations to fixed income and PE, both moves resulting from an increase in reassessments by family offices. According to Citi, more than half of family offices are boosting their fixed-income allocations, while 38% are allocating more to PE and 38% are actually slashing their allocations to public equities.
Importantly, family offices benefited from the rising prices that marked some parts of the market during the first half of 2023. In fact, two-thirds of those surveyed reported mark-to-market portfolio increases, and almost all of them are expecting positive returns for their portfolios over the next 12 months.
Shifts in direct investments
Citi also addressed a growing concern among family offices. In recent years, large numbers of family offices have dramatically boosted their direct investments, with the firm reporting that 80% of family offices are engaged in such investments.
However, although 66% said they were seeking opportunistic deals based on attractive valuations, 38% had paused new direct investments due to economic uncertainty. In fact, these shifts around direct investments may be much more significant than what the Citi report might suggest at first glance.
Earlier this year, Institutional Investor reported that family offices that had “learned the hard way” had begun halting direct deals after realizing that they lacked the capabilities to make quality investments into companies directly. Notably, family offices have been slowly expanding their direct investments over the last few years, so this year’s pivot marks a significant reversal.
Of course, in some cases, it may still make sense for family offices to make direct investments. For example, those with certain industry-related experience may have the know-how to win big with direct investments in companies in their sector.
In fact, direct investments generated a return of 21% in 2021, according to RBC’s “2022 North American Family Wealth Report,” illustrating the potential benefits of such investments. The key is to make wise investments in companies that will pay off, and as many professional investors have pointed out over the years, it’s best to invest in what you know.
To be successful in direct investing, family offices need the resources necessary to do the appropriate due diligence.
Growing wealth in a family office
Amid these changing investment strategies, there are still some general guidelines investors may want to keep in mind as they consider whether to start a family office or embark on funding and launching one.
For example, during inflationary periods and interest-rate-hiking cycles, holding a large amount of cash or fixed-income assets doesn’t make sense because those investments, including cash, will lose value as prices and rates rise. During inflationary periods, a diversified portfolio containing a mix of real assets should provide the protection family offices need.
Additionally, family offices typically allocate about 45% of their portfolios to alternative assets, and for good reason. According to Morgan Stanley, private equity and private credit, venture capital, infrastructure, and private real estate have historically outperformed the public markets.
One other growing trend among family offices is using their wealth to support or advance what’s most important to the family, a practice commonly known as impact investing or ESG (environmental, social, and governance).
“The ability to articulate and act on family values through impact investments as a family office is something that sets the sector apart,” noted Tobias Prestel of Prestel & Partner. “Family offices are increasingly investing their capital for social and environmental benefits alongside the financial.”
Of course, the global markets change and fluctuate over the years, so every quarter or year won’t bring big wins for family offices. When trying to grow your family’s wealth, the ultra-long-term investing horizon common to most family offices will help immensely because it gives your family time to recover from bear markets, corrections, and other unprofitable periods.