The trend “investment fund” within the trend “family office”

Read our article in the Cayman Financial Review Magazine, eversion 

While family office structures seemed to be restricted for a long time to the classic single family office and only a handful of families in the US and in a number of European countries, today’s family office market is not only experiencing a “boom” in newly-established structures, but is also more diverse than ever before.  

The increased complexity of wealth, ownership and investment structures and this at the international level, urges not only existing family offices to rethink their organisations and professionalise their platforms, but also calls for state-of-the-art family office solutions for an increasing number of wealth owners and successful entrepreneurs who may not necessarily want to opt for the standard family office set-up.

Not least to mention the whole range of multi-family offices that has emerged in response to the clients’ search for independent strategic advice and the quest for international diversification and investment opportunities. Also for the latter the set-up of adequate state-of-the-art structures is a pre-requisite for long-term success; and all this in the light of increasingly changing regulatory environments.

The risk aspect
The family office structures of today are more complex than ever and this in respect to operational size, family members spread around the globe as well as highly-international investment and holding structures, requiring strong risk management frameworks. However, risk considerations in the family office context go far beyond pure financial calculations and measures, extending to operational control and governance systems.

The set-up of professional investment structures remains hereby a priority combined with solid consolidation and reporting platforms, one efficient and commonly chosen solution being the Cayman private placement fund.

It is the clearly defined investment processes in combination with solid legal and holding structures making these set-ups increasingly attractive to the family office world. Segregated portfolio companies enable risk control, in addition to the back-office support provided by professional service partners on site.

A fund structure further allocates responsibilities efficiently through a solid governance framework, so that the family office can focus and excel in its role as strategic advisor on manager selection as well as the implementation and monitoring of overall family and individual asset allocations, while the day-to-day servicing of the structure remains with professionals.

Although other fund jurisdictions have increasingly gained attraction in recent years, with Luxembourg particularly standing out through its newly-established and highly flexible SIF vehicles, Cayman structures remain amongst the favourites especially with private wealth owners.

It is hereby the continued flexibility in terms of investment restrictions, the aspect of limited regulation as well as the broad landscape of professional on-site service providers, which are often the deciding criteria. Also, many of the well-known providers of fund services have reacted to the increasing numbers of family office clients across the globe by extending their international reach and by setting up worldwide platforms in order to offer not only a variety of booking centres, but also administration and day-to-day operations regionally and in proximity to the family or family office client.

The pooling aspect
As families are moving from generation to generation, asset pooling, individual investment profiles and flexibility become equally important aspects to wealth structuring. Family offices are often faced with the challenge of having multiple (family) clients whose personal preferences as well as investment profiles couldn’t be more diverse; while at the same time keeping the pool of assets as large as possible on an overall basis continues to take priority as it guarantees not only cost efficiency, but access to a wider investment universe and best-in-class managers.

Whereas families may have previously often opted for separate family office set-ups split by family branch, umbrella fund structures are nowadays regarded as a suitable solution to solve the dilemma relating to different investment strategies and styles.

However, in addition to enabling customised investment allocations and therefore offering individual family members to invest according to their very own risk and return profiles, fund structures conveniently facilitate the inheritance process per se. In this way, family offices are no longer forced to liquidate in case of a succession event within one branch of the family, at potentially the most inconvenient times, but can simply initiate the transfer of the shares of the fund.

Further, business families will always have a tendency to invest “entrepreneurial” with non-traditional and direct investments often taking up a substantial part of individual and family portfolios.

Cayman as a fund domicile offers not only continued flexibility in regard to portfolio and investment diversification, but stands out through its long-standing expertise in servicing and administrating alternative asset classes including real estate and private equity. See Figure 1.

Add-ons such as next generation funds, which may optionally be supervised by a separate investment committee composed of family branch representatives of the younger generations, are alternatives worth considering; as is the relevance of creating family-owned investment vehicles as an essential part of family legacy planning.

The business aspect
It is not only wealth owners who may have successfully sold the family business and incurred as a result a liquidity event who realise the opportunities in the management of the families’ investment pool; investing itself has become not only “entrepreneurial”, but a business activity in its own right.

The wealth owners of today, be it in first or already next generations, are increasingly seeking to run successful investment companies and therefore in essence, to turn the “cost centre” family office into a profitable business operation, be it in form of fully-fledged multi-family offices or hand-picked investors’ circles.

However, such “opening up” is often easier said than done. Although the own family office may have run as a successful organisation with a remarkable investment track-record over several months or even decades, one of the core challenges remains the integration of external investors; and this without jeopardising own family office operations, not least in terms of risk and confidentiality.

The set-up of professional fund structures, and here again in form of umbrellas with multiple sub-funds, is often regarded as the solution. Investors can be brought in via individual sub-funds which are either managed directly by the family office itself, as often applies to alternative asset classes, including real estate and private equity, or by external managers. Family office venture funds are increasing in numbers as well.

Families who opt for fund structures mainly in regard to the pooling aspects, often also appreciate the option of being able to open up to external investors, including family friends, at a chosen point in time and benefit from the regular NAV calculations through which a track-record can be build.

The possibility of separate share classes for family and external investors combined with clear structures in terms of management and performance fees, generally smoothes the transition in case the family should ever decide to take the next step towards a professional multi-family office platform.

Fund structures also seem to be the answer to another challenge of today’s private investor’s world. As international as the lives of today’s wealth owners themselves, as globally they are aiming to invest.

However, whereas entrepreneurs and business families may easily gain access to interesting and prominent investment deals in their own region, international diversification and this in regard to strategic and direct investments, remains challenging; certainly one reason why investors’ circles are more popular than ever before as is the set-up of fund structures.

The latter enable investors to benefit again from the aspects of pooling by investing together in their preferred asset classes while sharing not only costs and investment platforms, but more importantly, know-how and expertise through the set-up of reputable investment committees as part of the fund structures.

TrendInvestSm.jpg
SHARE
Previous articleExecutive Committee Members 2011-2012
Next articleSticking it to the family, Swedish style
Corinna Traumueller

Corinna leads an international consulting firm advising UHNW clients worldwide on the structuring and management of family offices. Previously she headed the Family Office Advisory arm at UBS globally advising the bank’s wealthiest international clients. In her roles, Corinna has worked with numerous notable families, entrepreneurs and family offices worldwide and has been in the lead of set-ups as well as reviews of some of the largest family office structures in Europe, the Americas, the Middle East, Russia and Asia.

Corinna Traumueller
CEO
Family Office Management Consulting Ltd
33 St. James’s Square
London SW1Y 4JS

T: +44 (0)20 3170 5966
E: c.traumueller@fo-mc.com
W: www.fo-mc.com 

FOMC

Family Office Management Consulting Limited provides independent and objective advice on a variety of family office and family business aspects including global structuring, governance and infrastructure solutions as well as performs in-depth reviews of existing family office set-ups worldwide.

Our highly knoledgeable consultants, specialised in various fields, work alongside owners and families to set up best-in-class structures and implement most sophisticated family office solutions thereby applying rigorous best practices.  Focus areas include, but are not limited to:

  • Family office set-up and restructuring
  • Investment processes and opportunities
  • Risk management
  • Investors' Circles
  • Family governance and succession planning
  • Philanthropy

 

Family Office Management Consulting Ltd
33 St. James’s Square
London SW1Y 4JS
UK

T: +44 (0)20 3170 5966
E: contact@fo-mc.com
W: www.fo-mc.com