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Thursday, March 26, 2015

Family offices: managing the fortune of wealthy dynasties

Family office is a private investment arm of wealth families. When family office manages the wealth of single family it is known as Single Family Office (SFO) and when it manages the wealth of many families it is called multi-family office. Family office manages every task related to the wealth of family from accounting to succession planning, investing and philanthropy management
Establishing SFO is very expensive. In order to justify cost your family need to have at least half a billion dollars. The wealthier a family is the more cost effective it is to have a SFO.

If a family doesn’t own enormous wealth to justify having SFO than a family can have Multi-Family Office (MFO). MFOs can provide services to those families whose net worth is in the range of 100 million dollars to 500 million dollars. MFOs are charged with the same responsibilities, as taken over by SFO. The difference lies in the number of families, served by the family office. SFO serve single family while multifamily offices serve a number of families.

The rise in popularity of family offices against the alternatives can be attributed to a number of reasons. The triggering event of this rise was global meltdown in 2008. Wealthy families, heirs of wealthy dynasties, watched, helplessly, their fortunes being destroyed by the meltdown. The families felt cheated by asset managers, wealth managers and others large institutions for losing their fortune without going themselves into bankruptcy. Banks, for instance, were saved from bankruptcy during the crisis. Families who were invested in large funds and other big institutions watched their entire fortune being wiped away without being able to take out their investments owing to, for example, gates in case of hedge funds.

Feeling cheated, these wealthy families now wanted to take control of their wealth. In order to take control of their wealth they created another type of financial institution, Family office. The impact of rise of these institutions was felt by many in the industry of asset management. As their competitors, family offices invest in much different way than did the alternative institutions. Take for instance the time horizon considered in case of investments. As investors, they have far longer time frames than private equity houses or venture capitalists. Often the long range investment means that there is no exit strategy planned at the time of investment by FO.
Benefits from family office accrue to both parties, one owning the family office and the other receiving investment form these family investment’s arms.

The benefits accrued to wealthy families far outnumber than the benefits to the investees. These include control of wealth, flexibility in investing, and privacy.

The major benefit is control over your family wealth, has been discussed in preceding paragraphs.

The family office helps not only to take complete control of your wealth management but also provides flexibility in investing. The choice of investments can vary widely from real estate investments to investment in start-ups. The increased tolerance for risk taking, when the returns justify, is the edge over other institutions. Now families can invest in those areas where there is more return.
Another benefit to the families is privacy. The privacy afforded by Family Offices can’t be provided by conventional wealth management institutions.

The benefits to the investee firms and companies include the long time period of investment, and the increased risk tolerance.
Owning to long time period investments by family offices, they are given preference by nascent companies over private equity houses.
"With a family office you don't have a time horizon. We like the long-term focus. It's great to have an investor who doesn't view going public as an exit opportunity, but rather a chance to buy more stock," said Pere Valles, Chief Executive of Spanish electoraltechnology company Scytl.

The increased risk tolerance means much more to start ups than to other types of investee entities. The increased trend in investing in technology related companies has added another dimension to the investment.  Generally technology companies don’t have tangible assets, to use them as pledge for arranging loan from bank. Many Family offices are betting on technology, stepping in where venture capital and banks are reluctant to tread.

Another benefit is that those who successfully receive old wealth, for their start-up, need not spend their time searching for new investors hence finding more time to focus on their business.

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