Discussion materials Family Offices Business models and reasons to - - PowerPoint PPT Presentation

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Discussion materials

Family Offices

Business models and reasons to exist Macerata, October 2015

Agenda

• 1. What does a Family Office do?
• 2. Asset allocation
• 3. Structure, governance and decision making
• 4. Costs and budgets

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A few definitions

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Ever heard of this Family Office?

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Or this?

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Or this?

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Cascade Investment LLC ????

Or this?

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Where are FO’s located?

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Typical generational shift… impacts what a FO does

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What does a Family Office actually do?

Portfolio management and investments Tax advisory Reporting consolidation / risk mgmt Philanthropic management Estate planning (multi-generational wealth planning) Lifestyle management “Fleet” management “Hard” Family Office services “Soft” Family Office services

Potential services provided

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Highly diverse!!!

The reasons why and why not?

• Control of investment process
• Governance
• Alignment of interest
• Potential higher returns
• Centralization of risk
• Centralization of other services

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The reasons why The reasons why not

• Cost
• Evolving legal and tax requirements
• Competitive offerings (MFO’s)
• Difficulty retaining good talent

Who does what in the Family Office value chain?

Family Family Office Portfolio management Banking and custody platform

“Allocators” Direct investors Determine investment needs in terms of

• Returns
• Liquidity
• Risk

Determine lifestyle and

• ther needs

Provide guidance and

• versight of Family

Office Manage family’s portfolio of Investments, either through selected funds or direct investments Brokers Custodians Relationship banks “Service” providers Technology providers (e.g., information and research, book- keeping, compliance) Tax advisory Legal services Private bankers Regulators

Illustrative value chain, irrespective of business model

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Example of private banks – what services do they provide to FO’s?

• Fairly standardized
• Mostly focussed on

Investment Management

• No lifestyle
• How dedicated is the

team???

Example of services provided by MFO’s

A changing landscape

• How have SFO activities changed since the financial crisis?
• NEW ENTRANTS: direct investing, risk management
• LEAVERS: information aggregating & reporting, estate planning

2007 Top 4 SFO activities, 2007 vs. 2012

Asset allocation 3.4 Manager selection & planning 3.3 Information aggregating & reporting 3.1 Estate planning 2.8

2012

Asset allocation 3.3 Direct investing 3.2 Manager selection and monitoring 3.1 Risk Management 2.9

Source: The Wharton School “Benchmarking the Single Family Office: Identifying the Performance Drivers 2012

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The make or buy decision

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What determines a make or buy decision?

Agenda

• 1. What does a Family Office do?
• 2. Asset allocation
• 3. Structure, governance and decision making
• 4. Costs and budgets

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Asset allocation – plenty of literature…

• Today’s objective is NOT to define where to invest
• BUT to provide an overview of investable asset classes and possible approaches
• There is
• Plenty of literature on portfolio construction
• Plenty of theories on stocks, bonds, liquidity, etc.
• Plenty of macro-economists debating items such as:

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Asset allocation – plenty of literature…

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Asset allocation – ILLUSTRATIVE portfolio

Traditional investments Alternative investments Infrastructure Real estate Hard assets

Cash / liquidity Fixed income US equities Non-US equities Hedge funds (only select and small mgrs) Direct Private equity Others (e.g., PE funds, or FoF’s)… Water, gas, roads, etc Real estate Commodities, art, collector autos, etc 5%

Investable asset classes Illustrative allocation

30% 20% 10% 5% 15% 0% 0% 10% 5% 0-5% Expected returns 3% 7% 7% 10% 20-25%

• 3%

2% Lower risk asset classes generated a blended 5% return Alpha generating assets at +20% Wealth preservation asset classes,

• ften

unlinked to return expectations

Total return

8-10%

Alpha-generating assets can give the portfolio a kick Important though not to lose money on traditional invest. The volatility of portfolio must be constantly monitored

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65% 20% 10% 5%

• 5-6%

12-15% 15-18% 7-8% 20-22% 7-8%

• Volatility

Asset allocation – common approaches to portfolio construction

Sandbox model Diversified institutional model

Invest only is what you understand… and where you have an angle… and based on key investment criteria for portfolio construction (e.g., liquid vs. illiquid assets)

Hybrid model

• Only used by certain Single Family Offices and the

smallest Multi Family Offices

• Focus on one specific sector or asset class
• Perhaps that same class that the family knows well
• Long term approach to investing
• Employed by literally all Multi Family Offices
• Usually 60-70% of the portfolio are placed in traditional

and liquid asset classes

• Remainder allocated to more ambitious
• Combination of the two models above
• Leverages any specific know-how in a space/industry

whilst keeping the more balance view of the Diversified Institutional Model

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What happens in reality – a practical example

Inflation assumptions Returns required 2%

(Eur 2mn)

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Family determines expenses / lifestyle Fees to manage family office

1 2 3

+ + =

1.5%

(Eur 1.5mn)

1.5%

(Eur 1.5mn)

5%

(Eur 5mn)

Decision on returns required is

• ften very simple and involves

the three steps to the left: 1. Make assumption on inflation 2. Determine living expenses 3. Determine costs to run FO

CASE STUDY – a practical example of asset allocation

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CASE STUDY – a practical example of asset allocation

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CASE STUDY – a practical example of asset allocation

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CASE STUDY – a practical example of asset allocation

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CASE STUDY – a practical example of asset allocation

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CASE STUDY – a practical example of asset allocation

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Agenda

• 1. What does a Family Office do?
• 2. Asset allocation
• 3. Business models, governance and decision making
• 4. Costs and budgets

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Business models

Virtual family office

One or two individuals working for family Most other service outsourced

Single family office

Created for the needs of a single family Structured approach with multiple team members/competencies Minimal AUM size to justify expenses

Multi-family office

Asset aggregator Created for the needs of multiple families Can encompass a shift to a “for profit”/fee charging organization

1 2 3

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Governance and decision making structure

Governance structure Decision making processes Family office Board

In SFO structure typically family members plus key investment professionals In MFO structure typically founding family representative plus externals plus key investment professionals

External advisors

Family member 1 Family member 2 Family member 3

Investment Committee (s)

• Governance to be structured ad-

hoc to fit the family’s needs

• Board to meet at least monthly to

review portfolio performance and progress on business plan

• Board to receive inputs from family
• Investment committees to be

structured depending on types of investments (direct vs. allocation) (see following pages for example of direct investing process)

The Family Office team: what skills does it need?

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Trust / confidentiality

Indepen dence Availabili ty Out of the box reasoning Network Generalist nature Financially literate

Necessary skills, irrespective of what the FO inclination is towards types of deals (direct investing vs. “allocators” Ability to coordinate professionals 1 2 Ability to negotiate 3 Ability to find the best experts If a direct investing (e.g., PE) strategy is pursued, the following skills also become important Ability to source

• pportunities (i.e., network
• f proprietary deals

1 2 Business judgement, knowing what makes a good deal 3 Asset mgmt skills (e.g., board experience, identifying full potential, etc.)

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The Family Office team composition

• Outsourcing vs. insourcing debate should always be considered (insource more value added activities

such as portfolio allocation and direct investing, outsource expertise that can be “bought” with damaging service levels or excessive costs Board CEO CFO General Counsel Tax Accounting Portfolio Managers Real-estate Executive assistant CIO

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Expanding and moving on… considering multiple families or vehicles

• SFO structures typically involve separate limited liability vehicles for each asset class or sub-asset class
• As the business grows, and additional families join, risk and return profiles can be customized by offering

participation into various investment programs

• Tax considerations often prevail

Family Office Properties Ltd Private Equity Ltd Art Ltd

USA Asia UK Asset 1 Asset 2 Asset 3

Investment funds

managed by FO

SFO structure Family members + addt’l families & funds = MFO Family 3 Family 2 Family [.]

Bond fund US Equities Fund

Agenda

• 1. General considerations
• 2. Asset allocation and investable asset classes
• 3. Structure, governance and decision making
• 4. Costs and budgets

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Three scenarios analysed…

Light family office structure

One or two individuals working for family Most other service outsourced

Single family office

Created for the needs of a single family Structured approach with multiple team members/competencies Minimal AUM size to justify expenses

1 2

Private banking

Family is actively involved in wealth management Directly liaised with private banking professionals The private bank can charge directly or via embedded for other services

Degree of in-sourcing… and control 2-3% all-in fees At least Eur2-3mn/year Eur1.5mn/year Cost estimates assuming a Eur 100mn portfolio Eur [1.5-2 ]mn/year but depends on insourcing/outsourcing debate

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Private banking fees, above the line and below the line

• In typical private banking context, fees can be in the range of 2-3%
• Asset allocation is an important factor in determining fees
• “Un-transparent” structures with kick-backs also need to be considered
• Private banks often promote more aggressive portfolios as the fees are higher

Top line fees on AUM: 50bps Structured products: Up to 3% Advisory fees Up to 1% Fees on AUM: 1 – 3%

Fees charged to the Private Bank Assets invested in funds

Custody 2-7bps Administr ation 5-10bps Brokerage Up to 20bps

Brokerage costs

Fees: 1% Fees: 2% Fees: 0.25% Total fees: circa 2-3%

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Private banking fees

• Perverse incentives for Private Banks… typically do not offer the most cost effective products to their

clients