Private wealth is changing the face of investing as we know it. According to the 2016 EY Family Office Guide, family offices are the fastest growing investment vehicles, with at least 10,000 single family offices in existence globally. Family offices…
Private wealth is changing the face of investing as we know it. According to the 2016 EY Family Office Guide, family offices are the fastest growing investment vehicles, with at least 10,000 single family offices in existence globally. Family offices are estimated to hold between $3 trillion to $4 trillion, currently, with single-family offices holding approximately $1.2 trillion in assets – an influential, almost formidable, amount of capital.
Across regions and nationalities, the growth of family offices and the capital they possess has brought about a phenomenal change in the way that they operate. Traditional forms of working are giving way to the creation of cross-border family offices, mergers with other family offices, an interest in non-traditional asset classes, impact investing, and an increase in direct investments. The 2017 FOX Global Investment Survey, which polled 118 family offices, reported that fifty-seven percent of families intended to increase their direct investments in operating businesses or real estate in 2017.
Given the sizeable 2:20 fee structure, and the limited control that private equity offers, family offices are forgoing the former in favour of direct investments. Single and multi-family offices are using direct investments to bypass traditional fund vehicles, and lessen their investment through these structures. Not only does this yield greater return, but also tax efficiency, as family offices can control the duration for which they hold the stakes. Moreover, family offices try to look beyond financial considerations when it comes to investing, and might sometimes factor in other aspects such as their standing in the community and inter-generational legacy. This trend seems to be here to stay, with about eighty-one percent of offices committing at least one full-time employee towards sourcing and evaluating direct investments.
But how are family offices ensuring deal flow? Dedicating infrastructure and staffing to generate deal flow can take time to pay off, and some family offices are gradually making the shift, by co-investing with funds, pooling funds with other families to leverage expertise and relationships across various families, and turning to online deal sourcing platforms.
Whether direct investments by family offices will pay off in the long run remains to be seen, with some experts opining that family offices may not have the wherewithal to carry out due diligence, remain cost-efficient, and build a team with the required level of expertise, given that the deal volume may be enough to leverage efficiencies of scale.
It is possible that family offices will adopt much needed innovation in structure, investment and deal sourcing, in the years to come, and the returns from that innovation could bear sweeter fruit than ever before.
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