There’s a saying in business circles: “If you’ve seen one family office, you’ve seen one.” That’s because they differ so much by valuation, size and investing missions that it’s nearly impossible to easily categorize them, according to Ernst & Young’s Catherine Fankhauser.
“If you’re looking at family offices as a source of capital it’s not going to be a homogeneous group,” Fankhauser, a partner and practice leader with EY’s family enterprise businesses services, told CFO Dive. “It can create choppiness.”
While there are many iterations of what they can look like, EY views a family office as a business owned or operated for the benefit of a particular family, that typically provides tax planning, legal advice, investor advice and concierge services to the group, according to Fankhauser.
Similarly, Bank of America defines a family office as a private company with employees that help manage a family’s assets and needs. In 2011, the Securities and Exchange Commission provided some clarity by excluding them from the definition of investment advisers.
The moniker can elicit visions of a wholesome family-oriented small back-office, where retirees check in from time to time. But the 2021 collapse of Bill Hwang’s Archegos Capital Management highlighted the scope and risks of the “lightly regulated" sector, according to a 2023 Congressional Research Services report.
Indeed, many are multi-generational organizations with vast fortunes that offer finance leaders an attractive source of financing — albeit one that carries its own unique challenges.
The group includes the family office of Walmart’s heirs, America’s richest family, according to CNBC. The enterprises also span the globe to include such groups as AC Limited, the family office of Sheikh Mohamed bin Zayed Al Nahyan, president of the United Arab Emirates and ruler of Abu Dhabi, according to Bloomberg, which reported AC has a team of dealmakers that is believed to manage assets worth tens of billions of dollars.
All told, the growing number of family offices globally have investible capital that Fankhauser has heard estimated in the “triple digit trillions.” At the same time, over the last five to seven years, the term family office has gained a bigger foothold in public consciousness as the market has minted new billionaires, she said.
For CFOs interested in pursuing family offices as investors, there’s a “dichotomy” to how the opportunity can present itself, according to Fankhauser. On one side, they can be idiosyncratic, but the flip side advantage is that they’re often not as constrained by regulations as some other investors, Fankhauser said. In addition, they often offer more “patient capital” compared to the five to seven-year investment terms more common in private equity because they don’t have to answer to stockholders.
“They obviously want returns for their family members but oftentimes are thinking on a longer-time horizon than private equity or other types of instruments or capital,” she said.
Then too, the missions of the family offices can vary from person to person and generation to generation, according to Joseph Medina, a partner in EY’s private tax group. That means you could be working to address multiple time horizons within the group.
“A person who is in their 80s is much different than the time horizon for the person who is eight months old,” Medina told CFO Dive in the interview. “So even within the family you might say ‘this investment is a really good investment for our second generation, this investment is really good for our fourth generation.’”
Another typical consideration for family office investors is that they typically have a lot more interest than private equity in the after-tax impact of some of the investments. “While tax is not going to drive things, it definitely influences investment philosophy,” he said.
CFOs working with family office investors should ensure they understand what the family office’s expectations are with regard to what reporting cadence the information that they need to provide on the progress of the investment, according to Medina. It’s not only important from a transparency perspective, but the information is typically needed at a specific time for tax compliance purposes, he said.
Fankhauser and Medina also had a few pieces of advice for CFOs pursuing family office investments that perhaps all families can understand. Medina said to make sure your goals are a good fit for the families, who don’t want to be viewed as just a “checkbook.” Meanwhile, Fankhauser said it’s very important to protect the privacy of the family and not divulge any information to others that the organization has shared.
Otherwise, “you can guarantee you won’t be working for that family office for long,” she said.
