Top 5 Trends Set by Today’s Visionary Family Offices
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As family offices grow in number, holdings and sophistication, we’re seeing leadership, investment goals, wealth management and succession strategies evolve. Today’s top-performing family offices are shifting away from the conventional asset allocation and management structures of the past decade. What are these visionary family offices doing differently to cement their success and their legacies?
The first article in this “Top 5 Trends” series examines the shift to Direct Investing, which can, when supported with the right skills and structure, provide superior returns.
TREND #1 – CHOOSING DIRECT INVESTMENT TO SECURE HIGHER RETURNS
Today’s returns have been buoyed by a 10-year trend of economic growth. As we reach the end of this business cycle and its record high valuations, portfolios relying solely on private equity funds to meet allocation targets will face increased risk and lower returns.
According to The UBS / Campden Wealth Global Family Office Report 2018, 26% of U.S. private equity holdings underperformed in 2018.
Despite softening returns, private equity fund fees and carried interest remain high, typically exceeding 20%.
Many of today’s most progressive family offices are choosing to beat returns on private equity funds by making and actively managing direct investments in their family office portfolio.
This strategy not only reduces fees, it increases control over performance and returns. It provides full transparency and the ability to quickly respond to changes in the market. It also offers significant flexibility for longer investment horizons.
The Global Family Office Report showed 14% of family office investments in 2018 were private equity direct investments – twice as prevalent as private equity fund investments. The challenge is that many family offices – especially small and mid-sized ones – are under-resourced and lack the diversity of skills of larger, more established family offices.
Family offices are predominantly managed by traditional investing, accounting and tax experts who are highly adept at running the complex financial and administrative functions within the organization. They are subject matter experts with deep functional knowledge but by the nature of their roles do not have extensive experience in generating shareholder value through direct investing activities. In fact, according to the Global Family Report 36% of family offices in North America cite the lack of relevant resources, skills, expertise and support as a leading challenge to co-investing.
Without expertise, many family offices shift to a direct investment strategy but then fall short of their goals. All too often their investments are passively managed. Relying on incumbent, conventional family office teams to generate high returns on direct investments will not produce the desired results.
Conversely, most private equity firms augment their staff with operating partners and board members for each portfolio company. These operating partners are seasoned executives who have established track records and know how to make money. The firms are relying on these resources to leverage their experience to drive performance, to instill focus and create a sense of urgency on portfolio companies and their management teams.
The key to successfully investing directly into operating businesses is to engage resources with operational experience dedicated to driving the P&L performance and cash flow generation for each investment.
Relying on the operating company leaders to set direction and establish the pace is not good enough. The best-managed portfolios have returns better than benchmark. This requires the kind of leadership that will drive growth, enhance performance and accelerate cash flow with the experience, objectivity and track record to deliver results.
By engaging the right resources who will actively manage the portfolio of direct investments, family offices are more likely to be successful in their quest for above average returns while minimizing fees. It ensures returns exceed what would have otherwise earned by continuing to invest in private equity funds with high fees. This elite level of investment performance translates into top quartile returns, those generally reserved for only the largest and most sophisticated family offices.
Finding the right leaders to deliver outstanding results applies across the board. Trend #2 reveals how top-performing family offices are preparing their next-generation leaders for succession and success. Sign up here to get the full series The Family Office: Beyond 2020, Top 5 Trends Set by Today’s Visionary Family Offices delivered straight to your inbox.
ABOUT THE AUTHOR
Jane Hamrle, a former CFO of multi-generational family businesses, started and ran a family office and managed returns across a portfolio of direct investments. Throughout her career, Jane has
bought, sold and integrated more than 15 companies. With two decades of experience in strategy, operations, M&A and finance, she has a proven track record of creating exceptional shareholder
value, driving performance of operating companies and delivering high-level expertise in the direct investing arena. As President of Private Company Consultants LLC, Jane works with family office
clients as a consultant and advisor.
JANE HAMRLE, PRESIDENT
LinkedIn Jane HamrlePrivateCompanyConsultants.com