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.
Related links
Single family office
Multi-family office
Blommber's family office report
Hedge funds close the gate
Single family office
Multi-family office
Blommber's family office report
Hedge funds close the gate
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