Choosing Between Multi-Family and Single-Family Offices: VAR Capital’s Guide
When a Multi-Family Office May be Better Than a Single-Family Office. Read this article to understand the differences between single- and multi-family offices and how to decide which to choose. Creators of great wealth will eventually face the question of how best to transferownership and stewardship of assets and funds to the next generation.Starting a ...
When a Multi-Family Office May be Better Than a Single-Family Office. Read this article to understand the differences between single- and multi-family offices and how to decide which to choose.
Creators of great wealth will eventually face the question of how best to transferownership and stewardship of assets and funds to the next generation.Starting a family office is a centuries-old, tried and tested way to manage theintergenerational transfer of wealth. A team of professionals running a dedicatedoffice can help a family to define its goals and strategy, and to preserve capital byinvesting in new assets away from the industry in which the wealth was created.
There are hundreds of family offices around the world. They manage the fortunesof inventive billionaires such as Microsoft cofounder Bill Gates and Googlecofounder Sergey Brin, as well as less well-known individuals who prefer toremain anonymous. In its 2023 global family office report, UBS, Switzerland’sbiggest bank, counted 230 family offices which collectively manage $495.8 billion.The average net worth of the families who contributed to the UBS report — whichis the largest and most comprehensive study of its kind — was $2.2 billion.
Running a family office is expensive. Annual costs are typically measured in themillions of pounds, and the expense is proportionally higher for smaller familyoffices. A family office which manages $1 billion costs 36.7 basis points of assetsannually ($3.67 million), according to UBS, while a single-family office managing$250 million costs 46.6 basis points of assets ($1.17 million) each year. Our ownexperience shows that setting up a fully-fledged family office often comes withsignificant people, regulatory, technology and third-party costs, amounting to £1.5to £2 million per annum.
For families with wealth valued up to $1 billion, it may be wiser to start by joininga multi-family office. A multi-family office is run by a team of financialprofessionals who manage the wealth of a number of families concurrently,providing expertise for a fraction of the cost of a single-family office.
Some families may have a very clear idea of the direction they want to go in whenestablishing a single-family office. They may know exactly how they want toinvest their money in new ways. But this isn’t usually the case. Appointing amulti-family office can help ensure a clean break is made between the familybusiness and the family wealth at a very sensitive time.
It’s crucial to get this transition right, as a family ventures into uncharted territory.One big risk when starting a single-family office is the tendency for families toretain existing staff for the job — finance directors, accountants, personal assistantsand other advisers who they have worked with the family for many years, perhapsdecades. While these employees may be experts in the industry which generatedthe family wealth, they may not have the skills required to create a family officewith the governance and risk management structures necessary to preserve capitaland diversify investments.
Starting With a Plan
Single- and multi-family offices both start with a plan. This plan needs to establishhow four objectives will be met: strong governance; independent oversight;effective asset allocation; and inclusive engagement with all family members.
For a single-family office, the first step is to incorporate a company with anappropriate legal and governance structure to hold assets. The structure shouldinclude key decision-making bodies, such as a board of directors and aninvestment committee. The board of directors may be composed mostly of familymembers, while the investment committee could be mostly made up of externallyrecruited investment professionals, led by a chief executive officer.
The second step in creating a single-family office is to recruit external advisorswho provide independent oversight. The purpose of these advisors is to guaranteethe professionalism of the wealth management operations of the family office.They help ensure decision-making processes are objective, fair and impartial.
The third step is to devise an investment strategy for a well-diversified asset basefor the family office. The strategy should be based on a long-term vision whichblends active and passive investments. About half of the family’s funds will usuallybe invested in actively managed assets such as private equity, real estate and hedgefunds. The rest of the funds can be invested in passive assets such as cash, income producingreal estate and financial investments including exchange traded funds.
Finally, the single-family office should create an information-sharing system toprovide regular reviews and timely updates to all family members. Everyone in thefamily must be fully informed about the activities and performance of the office.Information-sharing is a two-way process — family members should beencouraged to comment on the work of the office if they wish to do so.
A well-run single-family office will generate higher financial returns, cost savingsand effective risk management. It will also contribute to maintaining familycohesion. The structure of the office may evolve over time, as the family refines itsvision, strategy, commercial model and technology. Offices in new geographies,from Asia to Latin America, may be added. Investment professionals with newcompetencies – perhaps in digital technology, healthcare, automation, robotics orrenewable finance — might join the team.
The Multi-Family Office
At a multi-family office, family clients work closely with professionals to define aplan. A multi-family office may appoint one of their senior team members to serveas a chief executive for each family client. The multi-family office may alsoestablish a governing board for each family, made up of family members. It mightalso create a board of independent external advisors for each family too. Such adual governance structure enables the multi-family office to developunderstanding, trust and confidence with each family client, as well as ensuringsound execution and strong performance.
Some family offices operate a hybrid model. This means that they manage criticalroles in-house, such as strategic investment decisions and core operationalfunctions, including payments and cash management. Then they outsource otherroles, such as investment management, to benefit from the scale of professionalmulti-family office firms.
A strength of the multi-family office model is its flexibility. Investment strategiesand operations can be scaled up and down when the need arises. This flexibility isparticularly valuable to families during this time of great geopolitical uncertaintyand macroeconomic change. The era of low or negative interest rates is ending,and the flood of liquidity which dominated markets in the wake of the 2008 globalfinancial crisis is receding. Multi-family offices can move nimbly and make quickdecisions in response to rapidly changing market conditions.
Case study – A multi-jurisdictional family.
A family spanned across three generations and multiple jurisdictions including theUAE, UK and US. As the founder of the family transitioned the operating assets toinvestments, the next generation were tasked with managing the assets to meet thelong-term objectives of all the family members. The next generation hired anumber of advisors in the family office based on their personal connections. Whilethe advisors were well aware of the family dynamics and objectives, they were notready to take on the barrage of investment decision-making based on opportunitiespresented by various family members as well as various banks they dealt with.Certain investment decisions were made based on connections, as well as pressurefrom family members, leading to significant losses from the investments.
The family were then introduced to VAR Capital, which provided an independentand rigorous investment analysis support. The VAR Capital team evaluatedinvestments based on their suitability to the overall strategic objectives of thewider family. While the final decision-making remained with the family, VARCapital facilitated a rigorous and well-governed investment assessment, as well asgood governance in making decisions. All the family members felt more engagedin the process. The inclusive process helped to nurture a sense of fairness and trust,and the involvement of an external agency helped maintain discipline in thedecision-making process.
Conclusion
Joining a multi-family office can be a straightforward and cost-effective way tomanage wealth measured in the tens or hundreds of millions of pounds.If the wealth of a family continues to grow exponentially, there’s nothing to stopthe family moving on from the multi-family office and establishing a single-familyoffice. In fact, joining a multi-family office can be the smartest stepping-stone tostarting a single-family office. As is always the case in finance, the choice ofwhether to start a single-family office or to join a multi-family office is aboutmaking the right decision at the right time.
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VAR Capital is an independent financial services firm offering asset management, lending and family office services. It was founded by individuals with extensive experience from Banking, Asset Management and Family Offices. Based in Mayfair, London, VAR Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA).
Source: VAR Capital
Media Contact: Vikash Gupta, [email protected]
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VAR Capital Ltd is a limited company incorporated in England and Wales with registration number 09159540. UK registered office 41 & 43, Maddox Street, Mayfair, London W1S 2PD. VAR Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Firm reference number 718558. VAR Capital is a trademark of VAR Capital Limited under the UK intellectual property regulation. Trademark number: UK00003429839