The post-pandemic wealth boom has led to an explosion in family offices, triggering a new rush for gold among Wall Street firms, private equity funds and investment advisors managing the wealth of the world’s richest families. Family offices now manage more than $6 trillion in wealth, according to some estimates, exceeding the $4 trillion managed by hedge funds. It quickly became a powerful force in the financial markets, mergers and acquisitions, cryptocurrency, and real estate, competing with many sovereign wealth funds, endowments, and large corporations. As global wealth continues to grow, especially in Asia, experts say family offices will gain a larger role in the investment phase. “The amount of wealth is enormous,” said Andrew Cohen, CEO of JPMorgan Private Bank. The wealth of the world’s rich grew by an estimated $5 trillion to nearly $14 trillion between market lows in March 2020 and spring 2022, according to Forbes. While recent losses in the stock market, cryptocurrency and other asset classes have pared some of these gains, the wealthy (particularly in the US) are still sitting on mountains of capital from fiscal and monetary stimulus. In the US, the top 1% of Americans alone have added $11 trillion to their fortunes since early 2020, bringing the total to $45 trillion in the first quarter, according to the Federal Reserve. Family offices typically cater to investors with $100 million or more in net worth, although a growing number manage billions or even tens of billions of assets. By their nature, they are confidential and most are not required by national financial regulators to disclose their positions or assets. Campden Research estimates there were more than 7,000 family offices worldwide in 2019 managing nearly $6 trillion, and industry experts say the number has likely grown since then. Accounting consulting firm EY estimates that globally more than 10,000 family offices manage a single family’s fortune, at least half of which began this century. Families want more control Along with increased wealth, the move to family offices is also driven by a shift in how the richest families manage their wealth. They want more control, less reliance on traditional wealth management firms, higher fees, average performance, and product payouts. As more wealth is passed on to the next generation, young investors also want more participation and “values-based” investing. Today’s wealthy people, many of whom have established multinational companies that they have sold, demand an equally broad approach to their personal investments. Many billionaire hedge fund managers, seeking lighter regulation or freedom from standards and the requirements of outside investors, are also turning to family offices. For example, both John Paulson and Leon Cooperman have switched to family offices in recent years. “Maybe 35 years ago, the goal was financial security and wealth preservation. That’s not the case today. Now it’s about creating opportunities.” “The world of investing is becoming more complex, so more families are reacting to this development,” said Sarah Hamilton, founder of Family Office Exchange. “And we are in this transformative time where multigenerational wealth is passed on.” Family offices have been around for centuries of course, most notably the John D. Rockefeller and JP Morgan Wealth Management. Most still take on the “concierge” tasks of the wealthy family, from arranging travel and managing planes and car fleet, to paying bills and managing property. They also typically deal with taxes, estate planning, and succession issues for the next generation. However, today’s large family offices operate like full-service global investment firms. They trade stocks, fixed income, currencies, cryptocurrencies, and commodities. They buy residential and commercial real estate and land around the world. They invest in private equity and venture capital funds, and increasingly do their own acquisitions and deals. The growth has turned family offices into a rapid growth sector for Wall Street banks and wealth management firms. Goldman Sachs, JPMorgan, Bank of America, Citigroup, Credit Suisse, UBS and Deutsche Bank are all hiring family office firms and expanding their offerings. Their goal is to gain more from the family office business by giving access to the same services and experience as other institutional clients – from trading and credit to private equity, due diligence, technology and hedging. “You can have a family that works in shipping with 100 ships,” JPMorgan’s Cohen said. “They may need financing, hedging currencies and commodities. Or you may have a family that sold a pharmaceutical company and want to replicate those returns and are looking for growth opportunities. So you can have multiple asset classes across multiple geographies across multiple generations.” Morgan Stanley’s Family Office unit, which is also expanding, began bringing family offices into a new asset tracking platform last year and has added more than $25 billion in assets to date. “They think more about the form of institutions than they are families,” said Daniel DiBiacio, head of the family office at Morgan Stanley. “We have taken the view that these ‘individuals’ are more serving a business relationship with a company.” More family offices are also venturing on their own to buy private companies, take partial stakes and form start-ups. According to a report by UBS that surveyed family office clients, family offices have about a third of their portfolio in equity, 11% in fixed income and about 10% in cash, which has remained fairly stable. The allocation of family offices in private equity and direct investments jumped from 16% in 2019 to 21% in 2021, the largest increase of any asset class, according to the report. The rest is in real estate and other assets. More than half of the offices plan to increase their investments in private equity over the next five years – the largest share of any investment sector. Buying and financing companies directly means that family offices are now competing with venture capital firms and private equity firms for deals. MSD Partners, the investment firm that grew out of the family office of Michael Dell, recently appointed Goldman veteran Gregg Lemkau as CEO, and last year acquired a 50% stake in digital advisory firm West Monroe. The deal came on the heels of MSD Capital’s acquisition of Ring Container Technologies, a plastic container producer, in 2017. BDP Capital Partners, founded by famed banker Byron Trott, has invested about $30 billion in 41 businesses led by family members and founders — with most Investment comes from business owners and family offices. Besides better returns, direct investments reward family offices with their longer time horizons. Business founders who have sold their businesses and launched a family office often want to stay active in industries they know well and use their expertise to help launch new success stories. “This new wave of liquidity from the first generation of founders is being driven by the ability to do this over and over again,” said Sarah Hamilton, founder of Family Office Exchange. “They want to share their knowledge across industries and make a real impact. Maybe 35 years ago, the goal was financial security and wealth preservation. That’s not the case today. Now it’s about creating opportunities.” States are also vying for family office spoilers. Singapore recently established a Family Office Development Team to lead and coordinate initiatives that will attract more family offices. Singapore does not impose a capital gains tax and allows family offices to apply for a tax exemption on their income. The Institute of Wealth Management has launched the Global Family Office Circle in Singapore to attract more family offices. The number of family offices in Singapore has doubled since 2019, according to the regional office department. Among the recent additions: the family office of Nikki and Jonathan Oppenheimer, of the diamond dynasty, who recently announced an outpost in Singapore. Google co-founder Sergey Brin and British vacuum tycoon James Dyson have also opened branches of family offices in Singapore. The argument for more oversight However, the emergence of family offices has increased calls for more regulation. Since single family offices only serve one family, they do not have to register with the SEC as investment advisors. Even family offices that serve more than one family often get an exemption from the Securities and Exchange Commission to keep their files confidential. The collapse last year of the multi-billion dollar Archegos Capital Management, which is run by former hedge fund manager Bill Hwang, sparked renewed calls for more disclosure and restrictions. Representative Alexandria Ocasio-Cortez of New York State has drafted a bill requiring family offices to register with the Securities and Exchange Commission as investment advisors unless they oversee less than $750 million. “The Archegos explosion has removed any rationale for exempting family offices from regulation and transparency,” said Dennis Keeler, CEO of nonprofit advocacy group Better Markets. Kelleher said Archegos has refuted the two central arguments for the family office exemption — that they don’t pose systemic risks and that they don’t hurt ordinary investors, because they only invest for one family. Kelleher said the fact that Archegos has inflated its $1.5 billion portfolio to $35 billion, and caused massive losses in many publicly traded stocks, highlights the need for SEC regulation. But so far, the family office lobby has succeeded in resisting the new regulations. They argue that regulation would not have prevented losses in Archegos, whose brokerage firms have strayed. Meanwhile, experts say, with financial markets becoming increasingly volatile and stocks plummeting, family offices have the flexibility, agility, balance sheet and patience to continue to thrive even in the event of a recession. “We are talking about investors with time horizons of 100 to 200 years,” Hamilton said.
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