What trends are driving family offices in the New Year?
We talked to Howard Romanow, COO & CFO of Island Management, a family office based in Darien, CT, and Jim Hoover, Founder and Managing Member of Dauphin Capital Partners, a family office based in Locust Valley, New York, to get their thoughts.
1) Decreasing allocations to funds
According to a report by UBS and Campden Wealth, family offices have cut allocations to funds by 10% in the last year alone.
Diminishing returns and tax inefficiencies have led family offices to reconsider their allocations to hedge funds. “Lackluster performance, fees, and taxes have all lead to a noticeable decrease in these investments,” explains Jim Hoover of Dauphin Capital Partners.
Howard Romanow of Island Management argues that family offices are also increasingly circumventing PE firms and investing directly. This allows them to benefit from portfolio diversification, management control, and higher returns. A long-term investment view also allows family offices to save on fees.
2) Desire for more direct deals…. despite outrageous deal prices
Direct investments can provide an opportunity for a family to lend their expertise in the industry in which they made their fortune, as well as take advantage of tax benefits.
“Many families’ wealth originates from running a business, so they feel they are capable and have the relevant background, experience, and knowledge to run a business in their space. It’s an even more attractive investment as the family can have a real say in operations and a sense of control; it’s more personal,” explains Hoover.
However, historic highs for valuations may lead some to bide their time for the right opportunity before moving forward on direct deals. Advisory firm Stout Risius and Ross reports that EBITDA multiples remain at or near peak levels as of the second half of 2016.
3) Talent migrating to FOs from PE
Private equity professionals on all sides of the business will continue to explore their employment options and market value with family offices. Some may wish to diversify the types of investments they participate in, others to escape hierarchical firms, and others to expand their careers beyond the traditional private equity structure.
“Working at a private equity firm is just fundamentally different than working at a family office — there is more of a long term focus, without the hassle of fund raising,” says Romanow. “Some may want the hands-on experience of building and growing a business for the long haul that a family office can offer.” However, those looking to make the jump should also be ready for a compensation structure that incentivizes different behaviors and metrics, in accordance to a much different fund structure.
4) Impact investing becomes status quo
Impact investing is becoming more of a standard for many high net worth individuals and their investment operations. Given an increasing cultural focus on sustainability and environmental issues, it’s no surprise that many families wish to incorporate impact investing into their investment theses. The inherent flexibility of family office investments allows for impact investing across a broad range of asset classes.
Jim Hoover of Dauphin Capital Partners, a member of the impact investing society Investor’s Circle, says that apart from an interest in traditional environmental and healthcare investments, education investments are just as compelling.
Of course, like other investors, family offices have to carefully balance social impact with reliable financial returns. Luckily, the Global Impact Investing Network (GIIN) reports that impact investors are seeing strong growth, with assets under management growing by 18% compounded annually from 2013 to 2015. Further, 95% of impact investors report financial returns at or exceeding their expectations.
5) More millionaires means more family offices
The formation of new family offices is a natural byproduct of the introduction of more newly minted millionaires and ultra high-net-worth individuals into the marketplace. A report by the World Economic Forum shows that the number of ultra-high-net-worth individuals has grown 54% since 2008- and a growing percentage are self-made (which may also be correlated with the growing desire for the hands-on investment approach of a family office structure). The same report also observes that younger wealth holders are considerably more socially and environmentally conscious than their Baby Boomer counterparts — further signs of an increase in impact investing.
According to a Financial Times survey, family offices today allocate an average of around 17% of their assets to impact investments. We can only expect this number to grow as younger generations are handed the reigns or form their own, new family offices in the wake of a mass baby boomer retirement.