Discussion materials Family Offices Business models and reasons to exist Macerata, October 2015 1
Agenda 1. What does a Family Office do? 2. Asset allocation 3. Structure, governance and decision making 4. Costs and budgets 2
A few definitions 3
Ever heard of this Family Office? 4
Or this? 5
Or this? Cascade Investment LLC ???? 6
Or this? 7
Where are FO’s located? 8
Typical generational shift… impacts what a FO does 9
What does a Family Office actually do? Potential services provided Portfolio management and investments Tax advisory “Hard” Family Office services Reporting consolidation / risk mgmt Highly Estate planning diverse!!! (multi-generational wealth planning) Philanthropic management “Soft” Family Office Lifestyle management services “Fleet” management 10
The reasons why and why not? The reasons why The reasons why not • Control of investment process • Cost • Governance • Evolving legal and tax requirements • Alignment of interest • Competitive offerings (MFO’s) • Potential higher returns • Difficulty retaining good talent • Centralization of risk • Centralization of other services 11
Who does what in the Family Office value chain? Illustrative value chain, irrespective of business model Portfolio Banking and custody Family Family Office management platform Manage family’s portfolio of Investments, either through selected Brokers Determine investment funds or direct needs in terms of investments “Allocators” - Returns - Liquidity - Risk Custodians Determine lifestyle and other needs Provide guidance and oversight of Family Direct investors Office Relationship banks “Service” providers Regulators Technology providers (e.g., Private Tax advisory information and research, book- Legal bankers keeping, compliance) services 12
Example of private banks – what services do they provide to FO’s? • Fairly standardized • Mostly focussed on Investment Management • No lifestyle • How dedicated is the team???
Example of services provided by MFO’s
A changing landscape • How have SFO activities changed since the financial crisis? Top 4 SFO activities, 2007 vs. 2012 2012 2007 Asset allocation 3.4 Asset allocation 3.3 Direct investing 3.2 Manager selection & planning 3.3 Manager selection and monitoring 3.1 Information aggregating & reporting 3.1 Risk Management 2.9 Estate planning 2.8 • NEW ENTRANTS: direct investing, risk management • LEAVERS: information aggregating & reporting, estate planning Source: The Wharton School “Benchmarking the Single Family Office: Identifying the Performance Drivers 2012 15
The make or buy decision What determines a make or buy decision? 16
Agenda 1. What does a Family Office do? 2. Asset allocation 3. Structure, governance and decision making 4. Costs and budgets 17
Asset allocation – plenty of literature… • Today’s objective is NOT to define where to invest • BUT to provide an overview of investable asset classes and possible approaches • There is • Plenty of literature on portfolio construction • Plenty of theories on stocks, bonds, liquidity, etc. • Plenty of macro-economists debating items such as: 18
Asset allocation – plenty of literature… 19
Asset allocation – ILLUSTRATIVE portfolio Illustrative Expected Investable asset classes allocation Volatility returns Cash / liquidity -- 5% 0-5% Lower risk asset Fixed income 5-6% 3% 30% classes Traditional 65% generated investments US equities 12-15% 20% 7% a blended 5% return Non-US equities 15-18% 7% 10% Hedge funds (only 7-8% 5% 10% select and small mgrs) Total return Alternative Alpha Direct Private equity 20% 20-22% 15% 20-25% investments generating 8-10% assets at Others (e.g., PE +20% -- 0% funds, or FoF’s)… Alpha-generating assets can give the Infrastructure Water, gas, roads, etc 0% -- portfolio a kick Important though not Wealth to lose money on preservation traditional invest. 10% Real estate Real estate 3% 7-8% 10% asset The volatility of classes, portfolio must be often constantly monitored unlinked to Commodities, art, return Hard assets 5% -- 2% collector autos, etc 5% expectations 20
Asset allocation – common approaches to portfolio construction • Only used by certain Single Family Offices and the smallest Multi Family Offices • Focus on one specific sector or asset class Sandbox model • Perhaps that same class that the family knows well • Long term approach to investing Invest only is what you understand… • Employed by literally all Multi Family Offices Diversified and where you • Usually 60-70% of the portfolio are placed in traditional institutional model have an angle… and liquid asset classes • Remainder allocated to more ambitious and based on key investment criteria for portfolio • Combination of the two models above construction (e.g., • Leverages any specific know-how in a space/industry liquid vs. illiquid whilst keeping the more balance view of the Diversified assets) Hybrid model Institutional Model 21
What happens in reality – a practical example 1 2% Inflation assumptions (Eur 2mn) Decision on returns required is + often very simple and involves the three steps to the left: 2 Family determines 1. Make assumption on inflation 1.5% expenses / lifestyle (Eur 1.5mn) 2. Determine living expenses 3. Determine costs to run FO + 3 1.5% Fees to manage family office (Eur 1.5mn) = 5% Returns required (Eur 5mn) 22
CASE STUDY – a practical example of asset allocation 23
CASE STUDY – a practical example of asset allocation 24
CASE STUDY – a practical example of asset allocation 25
CASE STUDY – a practical example of asset allocation 26
CASE STUDY – a practical example of asset allocation 27
CASE STUDY – a practical example of asset allocation 28
Agenda 1. What does a Family Office do? 2. Asset allocation 3. Business models, governance and decision making 4. Costs and budgets 29
Business models 1 Virtual family office One or two individuals working for family Most other service outsourced 2 Single family office Created for the needs of a single family Structured approach with multiple team members/competencies Minimal AUM size to justify expenses 3 Multi-family office Asset aggregator Created for the needs of multiple families Can encompass a shift to a “for profit”/fee charging organization 30
Governance and decision making structure Governance structure Decision making processes • Governance to be structured ad- hoc to fit the family’s needs Family member 1 Family member 2 • Board to meet at least monthly to review portfolio performance and Family member 3 progress on business plan • Board to receive inputs from family • Investment committees to be Board In SFO structure typically family members plus key investment structured depending on types of professionals investment s (direct vs. allocation) In MFO structure typically founding family representative plus externals plus key investment professionals (see following pages for example of direct investing process) Investment External Committee (s) advisors Family office 31
The Family Office team: what skills does it need? Necessary skills, irrespective of what the FO inclination is towards types of deals (direct investing vs. “allocators” 1 Ability to coordinate Availabili professionals ty Financially literate 2 Ability to negotiate Ability to find the best 3 experts Indepen dence Generalist If a direct investing (e.g., PE) Trust / confidentiality nature strategy is pursued, the following skills also become important 1 Ability to source Network Out of the opportunities (i.e., network of proprietary deals box reasoning 2 Business judgement, knowing what makes a good deal Asset mgmt skills (e.g., 3 board experience, identifying full potential, etc.) 32
The Family Office team composition • Outsourcing vs. insourcing debate should always be considered (insource more value added activities such as portfolio allocation and direct investing, outsource expertise that can be “bought” with damaging service levels or excessive costs Board CIO CFO CEO General Portfolio Executive Tax Accounting Real-estate Counsel Managers assistant 33
Expanding and moving on… considering multiple families or vehicles • SFO structures typically involve separate limited liability vehicles for each asset class or sub-asset class • As the business grows, and additional families join, risk and return profiles can be customized by offering participation into various investment programs • Tax considerations often prevail + addt’l families & funds = MFO SFO structure Family members Family 2 Family 3 Family [.] Family Office Investment funds Private Equity Properties Ltd Art Ltd managed by FO Ltd Bond fund USA Asia UK Asset 1 Asset 2 Asset 3 US Equities Fund 34
Agenda 1. General considerations 2. Asset allocation and investable asset classes 3. Structure, governance and decision making 4. Costs and budgets 35
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