Why Most Family Offices Shouldn’t Exist
Well not in their current form anyway…
The Temptation
It is very attractive for wealthy people to set up a Family Office structure as in the right jurisdiction can deliver wealth creation, asset protection and structural benefits. Drawn by the allure or direct investing in the latests technologies, of managing active investments, rather than putting capital into funds as a passive LP. With a new tech savvy generation — ‘digital children’ who want to be hands on, want to make an impact.
The challenge isn’t setting up a Single Family Office (SFO), the challenge is about scale, coverage, expertise and having enough bodies to fulfil the various roles involved in investing, due diligence, assessments, board meetings and and… With an explosion in numbers the underlying data indicates that 85–90% of Family Offices are operating sub optimally, not able to cover all the functions and simply lack firepower. Under staffed, short on expertise and small operations.
Scale matters or does it?
Many would say that unless you have at least $200 million in assets, it is likely the office is too lean, especially when there is a need to have active participation in an investment beyond closing — reporting, decision making, or indeed sorting out issues and rescuing when things go south, and they do.
Many new family principals, often self made — believe it is about executing direct investments, yet soon find ‘active investing’ it is much more hands on, requiring mostly tech expertise and syndication with other families to spread risk.
The trend for Family Offices is more direct investing, as they see the opportunity to reduce management fees and where families as Limited Partners miss out on the additional benefits of licensing Intellectual Property that stays with the fund GPs.
Where in fact it is the ability for Families to license and hold the IP that delivers multi generational wealth. Now the most important facet of innovation investing.
Family Office 2.0
The evolution of the Family Office matters — the focus on multi generational wealth creation and preservation is primary. The evolution from tradition investing through funds, fund of funds, the desire for diversification, for mixed allocation and not be satified with current returns. The younger generation want active hands on involvement, would prefer to do it themselves and not pay in their view high fees for passive management — where most returns are market average at best.
The issue in VC, PE and MFO is the same — a lack of expertise to choose, assess and understand the new generation of advanced technologies — such as AI, data centres, Longevity, Quantum is born out by the poor performance of investments. Hard lessons learned trusting others to find the right answers. so what are you paying 2% and 20% for?
Deal Complexity — in a tech driven world
There is a significant increase in deal complexity as Families are attracted to AI, Longevity, Blockchain, Quantum, Materials, Energy where understanding the moving parts, the detail, the inner workings, and exploiting and securing the patent potential goes way beyond traditional due diligence, and investing nouse. Beyond the capabilities and structure of most funds.
The need for access to expertise is amplified, as many families have forged ahead are now facing mounting losses. Doing it yourself is the right answer — providing you get the right support. Keeping in mind the big Sovereign Funds, PE firms and yes Multi Family Offices also underestimate the complexity of new world opportunities — mostly staffed by ex bankers, consultants and investment analysts, are also getting it badly wrong. The gap in necessary expertise is wider than ever — is the AI real, or somebody elses? Is it a veneer? What is it built on really? How much IP is unique, borrowed or stolen? Point made!
Lacking Firepower
Most SFO do not have sufficient firepower to go it alone. They need to get access to expertise, experience and systems to supplement small internal teams. But most of all have partners and support that deliver qualified opportunity flows that meet the Family Office strategies and criteria.
SFOs end up being opportunistic, caught in the headlight of the trends, the next big thing — the pumping AI opportunities, the latests Therapy or Fintech breakthrough. Rather than target and build up deeper knowledge around a specific sector, technology, passion, cause and endeavour.
More than ever before SFO’s need to work alongside partners that have the technology understanding, have and know how to run businesses and to get the best performance from each investment.
Keeping more of the Value, minimising fees
Smart SFO’s recognise the opportunity to create accretive value across investments for scaling, supporting sales and distribution opportunities — something Multi Family Offices, VC Funds are unable to exploit, as they keep each investment siloed, for reporting, simplicity and lack of creative foresight.
Success in building wealth is about getting involved and not passing responsibility to third parties who are not vested in the journey, for a fee. A reason why so many SFOs have emerged, because the principals are not enamoured with the options of paying to be part of a fund, where less than 5% deliver anything near a 3x return. Try to go it alone, and are soon out of their depth, cutting corners and missing ‘red flags’.
Families are seeking active involvement as Family Office 2.0 advances, delivering the flexibility to make a difference which makes finding partners that deliver elements of deal execution, tech analysis and most importantly sourcing the best opportunities vital, but also post deal attentionhands on help to get the best performance from investments and cross fertilisation of technologies, scaling effects and unlocking IP.
Author: Nick Ayton is a technologist with 10 start-ups behind him and a 20 year career in business transformation and running large technology businesses. He works at the coal ice of advanced deep technologies helping Family Offices to source specific opportunities, to close transactions and works inside the investments to optimise performance and scale performance. A leading thought leader in AI, Blockchain, Quantum, Materials, Longevity and Energy technologies.
