A very wealthy family or entrepreneur – for example one that has recently sold a business and holds over 100 million francs – will not necessarily know how to manage those assets and invest them in a professional way. That's where a bank, an independent wealth manager, or a family office will step in. “More and more people are opting for family offices”, says Jan van Bueren, who is in charge of advice to clients about family offices at Union Bancaire Privée (UBP). Either they set up a single-family office of their own, or they join one of the many multi-family offices there are to choose from in Switzerland. “The number of family offices is clearly on the rise”, confirms Jürg Niederbacher, a partner at PwC where he is head of private clients and family businesses. But there is a lack of statistics, he says, because many are operating under the radar. An article on Finews quoting Family Capital magazine puts forward the figure of 9 trillion dollars’ worth of assets under management, which is more than twice the size of the Swiss financial market.
Heavy allocation to listed and private equity
In 2017, boosted by their heavy weighting of equities, family offices achieved an average performance of 15.5% according to the 2018 Global Family Office Report produced by UBS and Campden Research. Jürg Niederbacher points out that family offices take bigger risks than pension funds, including by allocating a bigger portion of the assets they manage to listed and private equity. In their portfolios the average weighting of private equity is 22% and 28% goes to listed shares. This gamble on illiquid assets has paid off as the return has been 18% in that asset class. Jan van Bueren explains that private equity is an investment area many consider, especially for its high return potential, but also because the younger generations are being encouraged to become entrepreneurs themselves.
Family offices’ investment strategies are closely linked to the preferences of the asset owners, Jürg Niederbacher adds, and you can see the investor's touch in the choice of allocation. Some prefer commercial real estate, others hotels, and some others may rather go for equities, says the PwC expert. A third of them have gone into impact investing, a branch of sustainable finance.
“We have built up a data base of 500 multi-family offices based in Switzerland”, states Jan van Bueren. But nobody knows how many single-family offices there are: there doesn't seem to be a clear definition of what a family office is, although everyone seems to agree that it is a provider of services for wealthy families. Another established fact is that family offices do not only manage financial assets. They also handle inheritance, philanthropy, taxes and real estate for families. All these services cannot be covered by a team of two or three. Bill Gates, for example, with his hundreds of millions to invest, relies on dozens of professionals.
Switzerland a prime location
Switzerland is an attractive country for family offices, according to Jan van Bueren, given the many criteria that have to be taken into account, firstly when choosing a family office and secondly when choosing the jurisdiction for one's assets.
Some key trump cards Switzerland holds are its institutional stability (its neutrality), the level of development of its infrastructure, its international access, and the reliability of its tax authorities.
For the wealthier Swiss, their own country seems the natural choice. For a Middle-Eastern or Latin American family, for instance, Switzerland is also at the top of the list because it offers political stability and therefore safety for their assets. But there is no single solution that suits everyone's needs. When choosing a jurisdiction families must assess all the factors that come into play, from stability to infrastructure, as well as tax system and distance from home.
Because holding a banking licence is expensive and complex, family offices generally rely on banks to provide them with custody services or execute transactions. Institutions like UBS and Pictet offer specific global custody services, for example. Because of this cost constraint and complexity the single-family office of the famous Brenninkmeijer family (of the C&A group) gave up its banking licence in the Netherlands last year.
UBP has been helping wealthy families select multi-family offices since 2011 and now it assists them in creating their own single-family offices. The service they provide is essentially help with setting up financial structures and governance systems (including oversight, goal-setting and strategic allocation).
The right governance set-up
The primary task for the family is defining the objectives and scope of its family office. This is a very complicated process. “In some cases it takes more than a year to decide on creating and then structuring a family office”, says Jan van Bueren. Because a family that is recognised for its expertise in, say, the car industry and has become rich by selling its company may not be a wealth-engineering and investment expert.
The second point that is paramount for making the family office work, after defining the objectives, is deciding on the governance structure. As families span several generations, there has to be a decision-making hierarchy. Relations between the family members must be clarified, especially if business is not going as well as expected, Jan van Bueren explains, and the head of the family does not always turn out to be the most competent for the task. Also, it is not enough just to appoint a manager to ensure governance is sound: the communication policy within the family office also needs to be established so that the manager is not bombarded with advice or requests from different members of the family.
The major challenge ahead for family offices in Europe in the coming years will be managing the transition from the second to the third generation, and in Asia from the first to the second, according to UBP.
Jan van Bueren
Global Head Family Office Advisory