We have seen unparalleled wealth creation in the last 30 years, driven by population growth, emerging market economic development, transformative technology and a growth in consumer demand.
This wealth creation has seen a growth in the number, scale and sophistication of family offices. Since 2000, 68% of all family offices currently operating have been founded (UBS).
Since 2000, the family office investment relationship with private equity has evolved and what was previously consider ‘niche’ is now considered a staple of a balanced portfolio.
Why do more than 80% (UBS) of family offices invest in private equity? Put simply – the returns on offer and the changing nature of the HNWI.
Private Equity offers high absolute returns, diversification and high risk-adjusted returns which continues to attract capital inflows. Recent Preqin data suggests that the prospect of a significant market downturn is driving growth and capital allocations further, due to a track record of delivering robust returns even in challenging economic environments.
Family offices are increasing their allocations to private equity as they search for value and a hedge against uncertain times.
Wealth creation opportunities and the growth of private equity has led to a new type of high net worth individual – an increasing number of which have had an active background in private equity. These are successful, sophisticated investors with a proven track record in investing and will likely want to continue to manage their investments throughout their active investment lifetime.
What have we seen in the market?
At Hawksford, we have seen less of a distinction between our core service lines of fund services, corporate services and private client services, or more accurately, greater cross over between the service lines in the delivery to our client base.We are now seeing a greater number of ‘hybrid’ structures or relationships. For example:
• A trust or family holding company alongside (multiple) underlying fund structure(s)
• A multi-family office manager client looking at the structuring of a fund
Why would a family office look to structure a fund?
Expanding operations and the management of multiple, unrelated investors leads to the consideration of regulatory status. Managing multiple, unrelated accounts can be unwieldy and inefficient; it is therefore much simpler and cost effective to pool these assets into a collective investment scheme which falls within the relevant jurisdiction regulatory regime for funds. Note that funds can be domiciled in many places, depending on items such as investor preference, location, number, relationship, commitment, and whether the fund will be marketed in any way.
The legal framework of a fund provides clarity on the rights and obligations of the investors and the manager. Something which is becoming more prevalent when working with the family offices originating in the GCC for example.
A fund structure allows the family office manager to be remunerated in a method consistent with a traditional fund manager, thereby aligning their interests with those of the families whose assets are under management. Ordinarily, a standard management fee plus carried interest model is employed to ensure the managers have skin in the game and are incentivised correctly to maximise returns.
Multi-family office managers diversify into fund management simply because of the returns being ‘left on the table’ due to the strict minimum investment parameters placed on the families they work with. There are many smaller investors that could benefit from the manager’s ability to pick investments and much larger bets to be made if the pool of capital is widened.
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