Family offices are facing some interesting times. Not only are existing family offices growing and expanding along with the wealth under their management, but new ones are being formed. Business exits, the desire to preserve family legacy and tech entrepreneurs with a new wave of investable wealth are not only driving this trend but also reshaping traditional family office structures.
Along with technological advancements, market disruption, rapid growth particularly in Asia and the ever- changing global political and business environments — many in the family office space are being challenged to re- examine their purpose and strategies.
1. The Global Marketplace
Family offices are increasingly able to conduct business on a global level – this brings new considerations around location, structuring and governance.
Significant shifts are underway in technology, geopolitics, environment and society. These are combining to give birth to a new phase of globalisation – Globalization 4.0. The developing world is driving global connectedness. For the first time, emerging economies are counterparts on more than half of global trade flows, of which, south-south trade is the fastest growing. Global value chains are also evolving as technology and automation drive a shift towards the localised production of goods in proximity to consumer markets.
2. The Fourth Industrial Revolution and AI
The fourth industrial revolution is upon us, bringing with it both challenges and opportunities. Organizations that are digital leaders in their fields experience higher productivity and faster revenue growth than their less digitized peers. Despite this fact, most industries are less than 40% digitized.
This leaves the majority unprepared for the new wave of disruption that is fast approaching, bringing with it advanced automation and artificial intelligence (AI), developments that will take data application and system-level innovation to the next level. These powerful technologies will not only facilitate the freeing up human time, allowing us to strategically focus on what matters most but also exponentially accelerate rates of innovation.
3. Recession proofing
According to the 2019 UBS Campden Wealth Global Family Office Report more than half of the family offices surveyed are preparing for a recession. Steps to mitigate risk, increase cash reserves and capitalize on opportunistic events are among the top priorities.
Plans for investment strategy realignment are also underway. In 2020, 46% of family offices plan to put more into direct private equity investments, with 42% devoting more to private equity funds and 34% channeling more into real estate.
4. Mainstream impact investment adoption
While many impact investments demonstrate the ability to yield market-related returns, impact measurement still requires some refinement. To date, this has been a delicate subject as investors attempt to agree on definitions. Yet, the initial steps in this direction have been taken and momentum towards mainstream adoption is gathering.
The Global Impact Investing Network has defined core characteristics
that make it easier for family offices to identify and find their niche within the impact investment space.
The Rise Fund and Bridgespan Group have partnered in this regard to formulate the impact multiple of money (IMM), a metric that can help investors to evaluate the projected return on impact opportunities. Likewise, the Impact Management Project (IMP) is a forum for building global consensus on how to measure, compare and report ESG risks and positive impacts. These efforts help to make impact management & measurement more accessible to all investors.
5. Evolving from Family Business to Business families
Increasingly, family businesses are reaching maturity and being sold or expanding by purchasing other family businesses. These activities leave the families involved with large amounts of wealth to manage. As these families transition from operating companies to managing wealth portfolios, the development of family offices is often a natural next step.
This evolution brings with it the necessity to step into new roles and find a new sense of identity while preserving family
values throughout the generations. In navigating such issues, many seek new support structures and need to devise new investment strategies.
6. New forms of the family office
The next generation of investors has an entirely different approach than their predecessors. The millennial mindset wherein access is valued over ownership prevails. This means that the traditional binary of either a single or multi-family office isn’t always desired, giving rise to entirely new structures and hybrids. These include the virtual and private multi-family office.
While virtual family offices haven’t yet flourished, some of the more modular structures that enable families to select the services they require on-demand are garnering interest. Increasingly private multi- family offices where groups of families can pool their resources and enjoy co-investment opportunities are forming. These organizations may have dedicated, shared, or even ad hoc resources available. This sharing economy made possible by the extraordinary efficiency of the digital market will continue to grow and change the face of the family office.
7. Non-financial risks becoming more important
Traditionally, family offices mainly considered risk and return when it came to investment decisions. Now, non-financial are increasingly being factored into these considerations and will become equally important when selecting investment opportunities, as they can be included in calculating a more holistic Risk Adjusted Return.
Climate risk, although a widely debated topic, has been factored into the World Bank’s risk management strategies. Reputational risk has become an increasingly important point of consideration since the Panama Papers exposing family offices and details of their investments were leaked. Then, of course, there is succession risk. Just over half of family offices have a succession plan. Statistics show that only one in three successions are successful, making succession high on the list of risk priorities to address.
8. Preparing for future roles
Traditionally, CEOs in family offices have finance backgrounds, but modern family offices need to ask themselves who the next candidate in the line of succession is likely to be and educate these individuals and the organization’s stakeholders accordingly.
Educating for future roles is a challenge that we’re already seeing being addressed by major Ivy League Universities who have recently released several targeted programs for future generation education. Still, while most people regard the next generation of ownership as ‘the kids’, the reality is that the next generation is often the owner’s spouse.
9. Continued demand for increased control
Digitization affords access to systems and information that enable family offices to effect and manage deals without the assistance of banks and advisors. This provides family offices who wish to self-manage, and also grow sizeable alternative investment portfolios with absolute control over their investments.
In areas where family offices do rely on wealth management services, as concerns over the security of information intensify, traditional wealth advisors will continue to be challenged by client demands for increased visibility, centralized data along with full access and control over their affairs. The implementation of software and tools to facilitate this will become increasingly necessary.
10. Succession as a process
Succession is a long and delicate process in the company’s life and needs to be managed professionally. While over half of family offices now have succession plans in place, the successful execution of these will come to the forefront.
For those managing the rollout of these plans, it’s important to remember that succession and ownership don’t always have to coincide. While many surveys report that the average age of succession is 45 years plus, several experts note that succession often happens with a transition of management or board, although not necessarily ownership, closer to the age of 40. When succession planning is treated as a process rather than an event and executed in this manner, heirs can be prepared, educated and trained for a smooth, smart transition.
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