Even by high-end wealth management standards, family offices are discreet and shy when it comes to advertising. Providing a tailored and holistic financial service to small groups of very wealthy individuals (UHNWIs) who are very often, as their name suggests, members of the same family, they had little reason to cry out about their families. transactions.
But now, with the collapse of Archegos Capital, the family office run by Korean-born New York investor Bill Hwang, the spotlight is on an industry that had combined assets under management of around $ 5.9 trillion in 2019, according to a report from INSEAD, the business school. That compares to $ 3.6 trillion for the hedge fund industry as a whole. They are also growing rapidly because there are now more than 7,000 family offices, calculates the INSEAD, an increase of 38% between 2017 and 2019.
It goes without saying that the industry is keen to put the Archegos affair in context. “Archegos is far from a typical family office,” says Michael Oliver, co-founder of Global Partnership Family Offices.
“At the end of the 2010s, the United States saw an increase in the restructuring of hedge funds under the guise of“ family offices ”, which allowed them to pursue similar strategies, but without outside capital. This was done to adjust their regulatory burden as family offices have a reduced regulatory requirement as they don’t have clients to protect against wrongdoing.
“Asking whether family offices should be more regulated is not the right way to look at it; it is impossible to properly define what a family office is and they operate in a wide range of industries. ”
The emphasis that family offices place on intergenerational wealth management sets them apart from most other financial institutions in terms of regulation, according to Dr Miruna Radu-Lefebvre, professor of family and corporate entrepreneurship at Audencia Business School in Nantes. , France.
“In the UK, family offices need authorization from the Financial Conduct Authority, as they manage investments or investment funds, act as an investment principal and provide financial and business advice. “, she says.
Some in the industry argue that because family offices manage their own money, not that of outside investors, and know the risks they take, more external regulation is not necessarily relevant. Instead, they should focus on their own corporate governance structures and, with growing competition among multi-family offices, this could be a key selling point.
Christophe Reech, President and CEO of Reech Corporations Group, an investment firm that focuses on technology-based solutions, says: “As the size of family offices has grown in recent years, the business environment has increased, especially technological speed. advancement, regulatory change and a greater focus on the external “purpose” of financial institutions.
“As a result, more and more people have started to see themselves as businesses, bringing in professionals who can help them manage things like data security, compliance, risk management and human resources so that internal operations are watertight. ”
The demand for family office services has not escaped the attention of other financial services firms. “The big banks are now offering more family office services to cope with this increase, which has led to a debate on whether this creates a true family office environment or whether it is just an extension of the traditional investment management offering, ”says Emily Mailer, consultant at law firm Howard Kennedy.
The growth of multi-family offices and their increased geographic distribution has implications for governance and regulation. Mailer adds: “We are now a borderless society with money spread all over the world; the family office must take into account the monetary regulations that this implies without a single pot of money and a standard jurisdiction. ”
It’s not just discretion that makes family offices attractive to UHNWIs. They also appreciate the added element of control, according to Rami Cassis, founder and CEO of Parabellum Investments, an international investor and entrepreneur, which operates a family office.
“By setting up this type of business, UHNW investors can have their wealth managed by a trusted group of financial and legal professionals, who can potentially be briefed to track specific social or environmental goals as investors seek to strengthen their legacy. as well as their funds online. ”
The environmental, social and governance, or ESG, agenda is of growing importance for family offices, a trend driven by their changing demographics. Once preoccupied with old money and inheritance, they increasingly manage the wealth of those who made fortunes earlier in their careers, often in industries such as technology.
“As the next generation comes to a position of control over their family’s wealth, these principles come to the fore much more, with a greater concern for the environmental and social impact of their investments; it’s something that the family office space has had to adapt to, ”says Daniel Dickinson, Managing Director of AHR Private Wealth.
This new generation also challenges the traditional family office approach to wealth management. “More and more entrepreneurs are setting up family offices and transforming the industry,” says David Newns, who founded his family office after launching and selling two companies to FTSE 100 companies for around £ 158million.
“These are people who have been successful in building businesses and who have organized a wealth building event, like the sale of their business. They have created a family office to manage this wealth themselves. And they bring a different mindset and entrepreneurial skills to the traditional approach, ”he says.
“Rather than just putting money into different asset classes or funds and analyzing financial performance, new family offices behave more like venture capitalists. It is increasingly difficult to find deals, so they speak directly with specific companies that need capital.
“There will be a merger of venture capital and family office. The latter will play a more active and more important role than ever in the financing ecosystem. ”
It remains to be seen what kind of lasting effect the Archegos case has on family offices. However, one thing is clear: this very low-key and exclusive subset of the financial services industry embraces innovation with remarkable enthusiasm.