Catherine Grum, Head of Family Office Services, KPMG in the UK discusses Family Office 2017 Outlook.
The Family Office as an increasingly entrepreneurial investor
I predict there’ll be an increase in the importance of family offices’ capital in the economy in the coming year, as a source of equity or debt. There will be more strategic interest in patient capital as opposed to investments with pre-determined exit periods which can sometimes dictate how a business gets run.
Also contributing to this are the benefits of working with experienced individuals who have likely run other ventures, as many of those behind the newer generation of family offices have done. In terms of debt in particular, I expect the independence and decisiveness of family offices will increasingly be seen as a useful complement to traditional financing options at a time of economic uncertainty, which may require some of the more traditional debt providers to approach non-core opportunities with greater caution than in previous years.
This trend towards ever more innovative investments by family offices not only meets the needs of the business community for investment but also the interests of the family to develop a more diverse portfolio in the context of an economy continuing to offer low returns via a more traditional investing approach. It can also offer some fulfilment to entrepreneurs who, having exited their business, welcome the opportunity for a more hands on investment role than that offered by a portfolio of stocks and bonds.
Focus on structuring
There is likely to be a rise in co-investing as family offices diversify their investment portfolio but seek to mitigate their risk exposure, as well as to secure access to opportunities one family office may be unable or unwilling to access alone. This requires a greater focus on planning the right structure for an investment, addressing how the benefits and risks will be shared as well as how decisions will be made and how the exit will be managed.
Separating the Family Office from the Family Business
As a continuance of a longer term trend, we’ll see increasing consideration of separating the management of the family’s personal assets and affairs from an embedded position within the family business or businesses to create a stand-alone family office.
The drivers for this will be twofold; increasing complexity of the family’s investments and activities and succession planning:
As a family’s affairs become more complex in terms of investments, assets and operations, some families are concluding the business is no longer the right home for their family’s wealth management.
Equally, in cases where the future of the family and the day to day management of the business have diverged (or are likely to do so in the near future), the next generation will not be as involved with the running of the business but will of course be concerned with the operations of the family office, it makes sense to have a clear distinction between the two parts of the family enterprise. Additionally, for some next generation individuals a separate family office may offer interesting career prospects as an alternative to the family business.
There will need to be renewed focus on how to reward the professionals within family offices, in light of the increasingly evident war for talent.
As many investments are long term, it is entirely likely that some will involve longer exit horizons than the tenure of the staff managing the family’s portfolio or, at the very least, their expectations around compensation. This raises the issue of how to reward and motivate management performance. Part of the challenge is to align the professional manager’s needs with the family’s as only when they are aligned will be both parties be best served.
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