High Net Worth (HNW) families will typically have a “portfolio” of investment options, which will include allocating funds to successful investment managers, there is a noted acceleration in HNW establishing family offices so they can handle investments in-house. While this is not a new phenomenon (Rockerfeller in 1882 established a family investment vehicle), according to the Economist:
..the number has exploded this century. Somewhere between 5,000 and 10,000 are based in America and Europe and in Asian hubs such as Singapore and Hong Kong. Though their main task is to manage financial assets, the biggest offices, some with hundreds of staff, undertake all sorts of other chores, from tax and legal work to acting as high-powered butlers who book jets and pamper pets.
In establishing a family office it is important to hire the right expertise. While HNW families will have a strong network, and unless they made their money in investment, will not have the right skills. The scale of the fund is also important. A family office trying to leverage $50 million v $500 million may not achieve the returns they would otherwise achieve in a pooled external fund. As with any family structure, family offices are also vulnerable to the same potentially disruptive or corrosive dynamics that are present in one form or another in almost every extended family.
Part of this rising trend is the HNW believe that they can outperform pooled investment funds. According to Campden Wealth, a research firm, the average family office returned 16% in 2017. For family offices, which have sufficient scale in invested capital, brokers and banks will aggressively pitch deals that are not otherwise available to ordinary investors.
If you have at least US$100 million to invest, you may just have sufficient capital to open a family office. You need to consider who else in your family will be involved and whether you can work with them without significant issues. Its important to hire the right people to ensure that you further extend your network with the ultimate goal of accessing the hidden investment opportunities that have a higher return.