Family Offices: Overview:

If you are of the view that family businesses and family offices are the same, time to reconsider.  Family offices are private wealth management advisory firms that serve High Net Worth Individuals (HNWIs), delivering an array of varied services. The services range from that of charity to end-to-end financial solutions. These setups can be viewed as ‘great brain’ to the affluent class of the society who wish to allocate their money, in the best possible manner. The existence of such setups has become imperative, with the propensity of instinctive spending rising among the younger generations. Family offices draw their origin from the 19th century, undertaken by the likes of JP Morgan and Rockefellers. Essentially, the types of family offices are- Single, Multi and Embedded, with the second one being the most prominent. As the name suggests, a Single Family Office (SFO) caters to a single family, while Multi Family Office (MFO) have the burden to please multiple family wealth.  The Embedded one primarily is an informal structure usually being a sub-part to the large family business setup.

 Source: EY- Family     Office Guide, 2016
Source: EY- Family Office Guide, 2016

Asset Allocation:

Family offices have a varied horizon of asset allocation and the nomenclature does provide their investments a considerable room to breathe. The following list of asset classes aims to deliver a piece of mind behind the allocations made-

Private Equity:

The concerned asset class is popular among family offices and rightly so since their governance structures are supreme. Family offices are stringent about the quality of assets, because more often than not huge sums of money are disbursed into a single allocation. A whopping 81% of family offices invest in Private Equity, with direct investments having a greater appeal as against specific funds.

  Family offices: The private equity types

Real Estate:

The biases towards realty space has been a safe haven for many investors, including those comprising family offices. Approximately, three-quarters of them, invest in real estate which gives them an opportunity for direct investments coupled with significant levels of control. The interest shown by family offices in this space gives us insights into the long term investment vision they carry along.

Startups:

Of late, young and nascent entrepreneurs and entrepreneurial setups through their promising vision have been able to lure family offices. Besides the data that one runs for, what could be the interest factor for family offices? It is learnt that startups are keen on investments from setups like these, which along with money can provide networking aid on the back of years of existence. Also, investments by family offices into the startup ecosystem will boost the confidence of these risk-takers and will enhance the overall market scenario.

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Sectoral division of direct investments
Sectoral division of direct investments

Why the rise?

Since its inception, family offices for family wealth have witnessed a steep growth trajectory, with recent developments on an ascent. A lot of parameters play a role in changing the picture of market dynamics and sentiments. Following are four major identifications, which paves the way for a stronger foothold-

First, the new framework. A constant drive for a clear separation between ownership and management has picked up considerable pace in recent times among business houses, irrespective of their size. The problem is at an advanced level among family businesses that has to offer managerial roles to every component of subsequent generations. Often this compulsion leads to wealth erosion, since professionalism is being compromised with. For those who step aside and take non-executive roles, family offices qualify to be a safe and reliable conduit of wealth management.

Second, the millennial mindset. Yes, we all are aware of the millennial mindset that longs to do something out of the box and something that interests them, rather than pursuing an age old family business. The existence of a family office support becomes essential at these times, to direct the younger minds and assist them in their pursuit.

Third, the risk factor. Some promoter families have allocations in their portfolio that raises doubts among the younger generations and the gap eventually widens, along the course of passage of time. The backing of family office in this scenario, yet again comes in handy to justify the risk elements.

Fourth, the diversity craving. With increased regulations and complete change in market dynamics, family offices successfully satisfy the diversity craving of family businesses and wealth. Family offices for family wealth facilitate the erosion of traditional investment practices.

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My take:

The increased want for family office assistance by family businesses, tells us the true story. The more the business has been inflexible across the rime period, the more troublesome it becomes. For any business setup, it is important to accept changes and make them for sustenance. A lot is being talked about the generation ration in family business- 30:13:3, meaning to say that only 3% of family businesses survive a third generation, posing a lot of tough questions. The Indian context especially has a lot to offer with a fair share of instances of the ones who have stood the test of time and the ones who have been crippled by the forces of paradigm shift. In my opinion, there should be greater engagements with family offices by business setups, both by the ones who have sustained for some time and look out for sustenance strategy and the newbies who look out to sound structural setup, right from the outset.

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