Hussein Sayed, a local anchor with CNBC, a tv network, beams from the stage as he welcomes participants to a conference on family offices (fos) in Dubai. Among those present are billionaires and their offspring, advisers and money managers, and a smattering of investment-minded blue-bloods, including Prince Michael of Yugoslavia. “We think there may be over $2trn represented in this room,” announces Mr Sayed, “though of course there’s no way of knowing.”
Now an essential part of every self-respecting billionaire’s stable, fos are booming. Their roles include managing families’ wealth, administering their assets and often other services, from the mundane (paying bills) to the knotty (succession-planning). The biggest have become deal powerhouses, capable of competing with global banks and private-equity firms on big transactions. But they are also, by definition, private—and therefore little understood. “We’re the most important part of the investment landscape most people have never heard of,” says one executive
The fo has its roots in the organisations that oversaw the fortunes of America’s 19th-century robber barons, such as J.P. Morgan and John D. Rockefeller. Several hundred have been in operation for at least three generations. Some now serve extended families with hundreds of members—over 600 in the case of France’s Mulliez clan, owners of the Auchan hypermarket chain. Most, however, are recent creations. Of the 311 family offices that took part in the survey for the latest annual Global Family Office Report by ubs and Campden Wealth, published in September, more than two-thirds were established after 2000 (see chart 1) and over half are serving the first generation of wealth.
This spurt reflects an acceleration in the number of billionaires worldwide (see chart 2) and the wealth they control, now estimated at close to $9trn. No one knows how much of that sits in fos, but a reasonable guess is $3trn-4trn. Several factors explain the growth. One is an increase in “liquidity events”: founders or their heirs cashing out of operating businesses, for instance through initial public offerings, and generating pools of cash that need managing. Another is fashion: newly minted billionaires, from Asia in particular, feel increasingly that they are not full members of the club without one. A third factor, says Philip Marcovici, a wealth-management consultant, is disillusionment with third-party money managers, fuelled by scandals over opaque and abusive fees, and banks pushing their own expensive products, or those of partners, in return for kickbacks. “The feeling is that if you want the job done well, you have to take it in-house.”
The definition of an fo is slippery. Some investment firms with loose or no family connections claim the tag for reasons of cachet. Some big, more thrusting fos reject it as sleepy-sounding, preferring “private investment firm”, “capital partnership” or the like. And no two dynasties’ priorities are the same, hence the old saw: “When you’ve seen one family office, you’ve seen one.” Most, though, fit into one of two categories. The purest form is the “single-family office” (sfo), often sprouting from a family-owned business and continuing to serve one family. It will, on average, have a dozen employees. Running costs are such that this only makes sense for families with at least $100m-150m. Rebecca Gooch, Campden’s head of research, estimates there are about 5,300 sfos, of which three-quarters are in North America or Europe.
“Multi-family offices” (mfos), by contrast, serve more than one master. Most manage the affairs of a handful of families. The largest serve hundreds. Pooling costs makes them viable for clans with as little as $25m. Some mfos began as sfos, branching out later in the search for growth. Others were established as multi-client businesses by third-party money managers. Mergers have created hybrids. London-based Stonehage Fleming was formed in 2014 when the office of Britain’s Fleming family (relatives of Ian Fleming, the creator of James Bond) merged with a fiduciary firm serving South African families that had fled the apartheid regime. It has some 250 families on its books.
Some mfos act as a family’s sole fo, others as adjuncts. Sandaire, another London-based mfo, whose origins lie in the sale of Provincial, a British insurer, manages money for the former owners, the Scotts, and 31 other families. Some of these have their own fos for some tasks while using Sandaire for others where it has expertise, such as asset allocation for stocks and bonds, says Alex Scott, the founder (and a great-grandson of Sir James Scott, who set up Provincial).
The new buyout barons
This diversity means that fos vary in size. The average one oversees $500m-1bn. The biggest, mostly sfos, administer far more. George Soros’s manages $25bn. Other giants include Pritzker Group, run by scions of the family behind the Hyatt hotel chain, and jab, owned by Germany’s Reimann family, whose holdings include Keurig Dr Pepper and other food and drink brands—though both prefer to see themselves as diversified investment firms and eschew the fo tag. The very biggest have hundreds of employees and engage in a dizzying array of activities besides managing money (or selecting outside managers to do so). This can include tax and legal services, compliance, cyber-security and monitoring invoices (yacht firms are notorious for overcharging if they think bills will not face close scrutiny).
Some also offer more personal “concierge” services, such as arranging travel (down to ensuring limos are stocked with the right drinks), help with sensitive family issues, such as navigating marriage (pre-nups) or divorce, or preparing the next generation to take over. Some also help with the family’s philanthropy, though most billionaires have separate charitable foundations to co-ordinate their giving.
At the top end of the industry, the aim is to offer the families whatever they need, whenever they need it, says Giuseppe Ciucci, Stonehage Fleming’s boss. The role of the fo has evolved into being a trusted adviser on anything from an investment conundrum to a child going off the rails. Peter York, a British cultural critic, has described fos as “super-help…for the super-rich”.
These financial butlers are not stuck in the past, however. For some fos, preserving wealth matters more than growing it. When David Tice, an American investor, told the conference in Dubai “you guys are already wealthy and you only need to get wealthy once”, there was much nodding of heads. But many are comfortable at the cutting edge of finance. The fos of the Pritzkers and Bill Gates, for instance, have reportedly been keen buyers of the riskiest “equity” tranches of collateralised loan obligations (a form of securitised debt).
fos are also embracing sectors as diverse as cannabis, e-sports and crypto-investing. Of the workshops in Dubai, the biggest draw was one on blockchain startups and smart contracts. Some are unafraid to swim against the tide. The office run by the event’s organiser, Anthony Ritossa, whose family money comes from Istrian olive groves, is said to have done well on contrarian bets related to subprime mortgages and European sovereign debt. Flexibility over controversial investments is possible because in many cases fos answer neither to external investors nor regulators. In America, for instance, those managing money only for families or associates are exempt from disclosure and other rules governing investment advisers.
Open-minded investors with large sums of money have helped to shake up the world of corporate buy-outs, as fos develop a taste for swooping on large stakes or entire companies. Private equity’s share of fos’ portfolios has risen steadily. It now accounts for over a fifth of the average one—second only to equities (see chart 3). The $100bn of deals done in 2016 was four times the amount invested in 2011, according to PitchBook, a research firm. Earlier this year Bloomberg called this burst of buying the “rich-ification of private equity”. Another recent report by Campden concluded that fos’ allocations to private equity—including both direct investments and those through funds—could rise by three-quarters between 2017 and 2019.
From a target’s perspective, fos offer several advantages over banks and private-equity firms, including longer-term capital and generally a less pushy attitude. fos typically want in for at least ten years whereas private-equity funds look to divest after five to seven. When the founder’s son sold Ring Container Technologies, a maker of plastic containers, he picked Michael Dell’s fo, msd Partners, over private-equity and industry suitors, on the grounds that it would stay longer and care more about preserving the firm’s culture.
Such is the power of family wealth on Wall Street that some mergers-and-acquisitions rainmakers are building businesses around it. Byron Trott, a former Goldman Sachs partner, is one such facilitator, bringing fos juicy deals, advising on investments and co-investing through his own vehicle, bdt Capital Partners. He worked on jab’s $19bn purchase of Dr Pepper Snapple and is said to be close to the Pritzkers and the Waltons, the family behind Walmart. He is reportedly raising a new fund of up to $9bn to channel family wealth.
A long tail of smaller fos are eager participants in more modest deals. One such is Conexión Capital, whose founding capital came from the sale of Panamco, a Latin American drinks bottler set up by Albert Staton. It focuses on early-stage investments of $1m-10m in consumer-goods firms with novel products, and looks to stay with them for at least ten years. It recently invested in a firm promising a creamier sort of almond milk, made by rehydrating crushed-almond paste. “Baristas love it,” says Eduardo Arboleda Staton, the head of Conexión, and Staton’s grandson. Conexión also serves as a kind of merchant bank for fos, bringing other families, particularly from Latin America, into club deals—40-50 are now in the network. “There has been a big swing away from families being just a passive source of capital,” says Mr Arboleda Staton.
Investments in hedge funds, by contrast, have been falling, and now account for only 6% of portfolios. Struggling in hostile markets and hobbled by regulation designed to quell their buccaneering urges, hedge funds have been a drag on fos’ returns for years. A steady stream have been returning investors’ money and turning into fos themselves, including Jon Jacobson’s Highfields Capital (which once looked after a big chunk of Harvard University’s money) and Leon Cooperman’s Omega Advisors. Mr Cooperman, a Wall Street superstar, explained that he did not want to spend the rest of his life chasing the s&p500, and that seeing a doddery Kenny Rogers on stage made him realise you’ve got to “know when to fold ’em”. Other hedge funds, like BlueCrest, are turning into family-and-friends offices, serving the firm’s partners, traders and other staff.
Their growing heft means that fos no longer struggle to attract the sort of talent that was once drawn to hedge funds. Ben Ingram of Berwick Partners, a recruitment firm, has seen “enormous growth” in the number of highly skilled finance professionals willing to consider working for one, thanks partly to their push into alternative investments. But those making the switch can also look forward to less regulation and public scrutiny, more control over whom they do business with and, typically, a better work-life balance. BlueCrest has lured top traders from Goldman Sachs and BlackRock since turning into an fo.
The most eye-catching hire has been Greg Fleming, once seen as a possible future leader of both Merrill Lynch and Morgan Stanley. With backing from Viking, an investment firm, he is leading the reinvention of the Rockefeller fo—which has served multiple families since the 1970s—into a wealth manager, advisory firm, brokerage and boutique investment bank rolled into one. Mr Fleming wants to quintuple the assets managed by the new firm, Rockefeller Capital Management (rcm), to $100bn within five years.
Big banks, like private-equity firms, are keen to work with outfits like rcm. Most have growing groups that serve fos. ubs’s is a joint-venture between its wealth-management and investment-banking arms, since it aims not only to help manage assets and risk but also to bring private-equity deals to fos and arrange financing. J.P. Morgan is focusing on fos with $2bn or more at their disposal. Banks organise events to strengthen ties to well-heeled families. One gathering, arranged by Credit Suisse in Detroit in 2017 and ostensibly about urban regeneration, was reportedly attended by representatives from around 40 families worth a combined $75bn.
Advisers from banks and consultancies are also jostling to help fos navigate what many consider their biggest challenge: ensuring a smooth transition to the next generation. Heirs are expected to take control of two-thirds of such fortunes over the next ten to 15 years. But preparing the kids to steward assets is not easy. Children of 8% of the families in the Campden survey said they wanted no involvement in overseeing their wealth. “The threats to family wealth are primarily internal, not external,” says Mr Ciucci.
fos play various roles in aiding succession. “It is the soft stuff that can be most helpful, preparing the children for the money rather than the money for the children,” says one executive. As well as managing financial assets, Market Street Trust Company—which serves, among others, the descendants of Amory Houghton, who founded America’s Corning glassworks—organises weekend family events designed to strengthen bonds between generations. Older members are encouraged to share inspiring stories, youngsters to air their fears about the challenges ahead.
Another way to bind the generations together is to accommodate younger family members’ priorities. A growing share of fos, currently a third, do some “impact” investing—where the goal is a measurable social or environmental benefit as well as a financial return. Mr Marcovici says fos are more interested in this type of investing than the typical wealth manager, in part because they see it as a good way to draw in millennial heirs with a social conscience. As they do more sustainable investing, often in tandem with owners’ separate philanthropic foundations, the biggest of them look increasingly like Wall Street heavyweights, only nicer, says Mr Marcovici.
Not everyone thinks their growing influence is benign, however. Brooke Harrington of Copenhagen Business School worries that the growth of fos is undermining meritocracy in capitalism. “The bigger the apparatus they have behind them, the harder it is for the market to discipline them,” she says. Chuck Collins of the left-leaning Institute for Policy Studies, in Washington, dc, frets over opacity—“they ensure ever more wealth goes off the ledger”—and their growing lobbying clout. He argues that billionaires and their fos have worked tirelessly to exploit loopholes and rig rules to further their interests, most notably by helping to gut America’s estate tax. “They are in the dynasty-protection business, trying to arrest the normal, natural process of wealth dispersal,” he says.
fos are nonetheless in expansion mode, opening satellite offices on other continents. The most popular location for new outposts is Singapore, whose government has greatly relaxed red tape in order to attract more fos. The rush to Asia is partly about locating closer to investment opportunities and partly, for mfos, about proximity to a fast-growing pool of potential new clients.
China alone produced two new billionaires a week in 2017. Rich Asians had preferred to keep their money in the businesses they created, reinvesting to build conglomerates. The new generation, having made much of its money in technology and services, is more comfortable cashing out, trading assets and transferring a slab of their wealth to an investment office. In the past ten years the number of Asia-based fos has climbed from around 50 to somewhere between 500 and 1,000.
This increased willingness to release cash from the primary family business and invest it elsewhere, combined with the rise of the do-it-yourself approach to managing wealth, suggests that the number of fos will go on rising. With upwards of $2trn expected to pass from entrepreneurs to their heirs over the next 15 years, the family office is entering a Gilded Age.
The Economist, Dec. 13, 2018