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What Are Family Offices, And Why Are They Taking Over The Venture Capital world?

Patricia Borlovan

Family offices are a very silent but active member of the investment network, which has gained more traction in recent years.

Family offices are private companies operating similarly to venture capital funds but are more focused on managing one or multiple families' financial assets and wealth. A more flexible and customized solution that handles the wealth of a single source, family offices are growing in popularity worldwide, offering an alternative to venture capital.

Today, in this article, we'll be going over the meaning of a family office and some of the most critical elements you should know when starting or joining one.

What's a Family Office?

Family offices in the investment world are financial advisors and service providers that help individual investors or families looking to invest their money and protect the family wealth for the next generation. Wealth advisers say family offices have the look and feel of a venture capital firm without the pressure coming from the demands of outside investors.

This type of organization can help one or multiple families and aim to make investments easier to understand, offering guidance on how to put money to the best use.

A family can run its activity in their own home or can find a dedicated space that would create a professional environment. The idea of an office can help them focus, work better, and have a space to invite or receive startup founders from their portfolio, partners, or representatives from other advisory firms.

Sources of funds

Family offices are concentrated on funding sources from high-net-worth individuals or high-net-worth families.

Family office size

A traditional family office can run with an investment amount starting from $100M and going up to billions of dollars.

Family office structure

A family office can have one or multiple dedicated investors working on the wealth management of the organization. According to FOX - Family Offices, this organization usually has around four family members and an external advisor who provides specific expertise and brings an objective perspective from outside.

As the family office grows, a governing board needs to help the company stay focused on its goals and keep it running flawlessly.

The Evolution of Family Offices

The Silicon Valley Bank and Campden Wealth ran research in 2020. In the past decade, they discovered that family offices started to become more active in the venture ecosystem, having a strong focus on early-stage deals. Family offices expanded their footprint worldwide, including Europe considering technology and startup disruptors the new path to follow. From 2013 to 2018, European family offices hit a new record of $5BN invested directly in early-stage technology companies.

Family offices seek co-investment opportunities rather than being a lead investor, and 92% of the family offices surveyed by The Silicon Valley Bank stated they prefer to join other families or VC funds. And their co-investing deals seem to generate more returns (of 15%) than direct investments (10%).

Tech startups are not the only destination of funding for family offices, as more and more venture capital firms attract their money in their funds. According to a Dealroom report, the private wealth investments into VC funds had a 3x growth, and 20% more VCs now raise their funds from personal wealth.

Family office investment into European startups jumps fivefold

Source: Sifted — Family office investment into European startups jumps fivefold

"Our appetite for investing in venture stage tech has changed significantly over the past decade, boosted by the fact that there is a much better understanding of the sector, not to mention the increasing number of opportunities emerging at this stage." says Giles Heseltine, Managing Director of Hottinger Private Office for Sifted.

The activity from last year confirms the growing trends, according to UBS's latest Family Offices Report for 2021. Here, we can see that 77% of private family wealth worldwide is now focused on technology and innovation. More than half of family offices prefer private equity as their favourite investment opportunity.

Let's look at the trends and industries where family offices direct their money. We see sustainability covering most of their interest, having +50% of the global private wealth going towards this sector. Western Europe is counting down 72% of these investments, while Eastern Europe is adding another 24%, and the rest of 45% is taken by family offices in the US.

Other industries supported by family office investments are education, climate change, healthcare, agriculture, global economies, and poverty alleviation.

Family Office vs Venture Capital

With family offices and venture capital firms taking over the technology startup world, let's see what sets them apart individually and how they collaborate to grow the global ecosystem.

Family offices, especially single-family offices, are focused on one's family wealth and offer a series of additional financial services to help them expand their wealth and protect their portfolio. On the other hand, venture capital firms. Are gathering funding sources from multiple areas and focusing solely on the source, analyzing, and selecting the best investment deals for the capital invested. Sometimes, the money coming towards a VC fund can come from a family office.

Family Office vs Hedge Fund

Both organizations are defined as wealth management instruments created to help individuals and families protect their legacy and high net worth.

However, they are distinctive through their structure and objectives. Through diversification and heavily managed assets, hedge funds protect portfolios from bearish markets. On the other side, family offices take the process one step further by bringing a dedicated team of professionals that provide financial services for the family assets.

Advantages of Family Offices

The core benefits of family offices are the management of complex trusts for their clients, helping individuals and families align their investment to their interests, and the family legacy, for highly affluent individuals. Family offices can help you protect your assets, transfer a business to another owner, and educate your family on how to protect your assets.

Family offices grew extensively over time and diversified their services, offering a wide range of benefits right now. Some of the financial benefits are represented by:

The patient capital of family offices is perfect for startup founders

Family offices provide an amount of money raised through the direct line of wealth managers, compared to a VC fund that has other external pressure from those who allocate the money.

An experienced asset manager to generate higher returns for your investments

Family offices know how to protect your investment portfolio by distributing your capital in less-riskier assets. Family office representatives provide strategic advice, participate in board meetings, and facilitate the connections of a startup with other investors from the community.

They dedicate their attention to finding the proper selection of investments for your assets and your values, goals, and strengths.

Portfolio protection and lower investment costs

Running your own family office can be more effective than a traditional venture capital fund or other types of investment organization. You only need the power to sustain the operational costs and a few savings to use with external expertise when required.

Your internal team will be represented by your family members, who are more likely to be aligned with a set of common goals.

Increased potential for more ROI and goal achievement

Creating a family office together with the ones you trust most makes room for deeper conversations around personal goals, values, risks, and the organization's overall vision.

You can direct your family's assets in a unified direction, keeping what matters more in everyone's mind.

A long-term investment strategy supported by efficient planning

Many wealthy families worldwide tend to look at succession planning beyond growing their family business or assets. From charitable giving to other actions with a more significant impact on the world around us, they have a long-term vision of how the family's wealth should be distributed and grown across future generations.

This is one of the reasons why family offices focus on family governance and the quality of good investment management beyond anything else.

A central ecosystem that keeps everyone connected

Compared to a traditional enterprise business with everyone involved, a family office tends to have everyone connected and working towards the same goals. Family office representatives are interested in knowing wealth management is going and staying related to the portfolio actions.

The Role of a Family Office

A family office will not only analyze the best options for your investible assets but also manage liquidities, organise and diversify your portfolio and act as an investment advisor for any questions the family has.

This type of organization is defined by the way you decide, so compared to other service providers is personalized to your interest and values.

Important — As we previously saw, a family office also requires a budget for external advisory, as sometimes things get complicated when personal stuff gets mixed up with business matters. If these situations impact investment decisions, they create risks for the family's portfolio, so they need an external perspective for better clarity.

Types of Family Office Services

Family offices can offer a wide range of financial services, depending on the family's asset allocation and financial needs.

Some family offices focus exclusively on a few specific types of concierge services and bring external expertise for the other areas. A few of the most common services family offices provide are:

  • Financial planning and asset allocation
  • Investment structure and portfolio development
  • On-demand investment advice for current financial assets
  • Investment plan implementation
  • Investment policy development
  • In-house portfolio management
  • Income and taxes consulting
  • Tax planning
  • Income and taxes plan implementation
  • Team coordination for external advisors
  • Balance sheet analysis
  • Cash flow analysis
  • Cash flow forecasting
  • Cash flow management
  • Risk management
  • Portfolio performance analysis
  • Family governance
  • Estate planning
  • Family education plan
  • Dedicated training programs

Single-Family Office vs Multi-Family Office

High net worth individuals and high-net-worth families with a consistent package of investable assets start a single-family office to have more flexibility over their private wealth management.

The organization is created to help the family achieve their financial goals, protect their investments, and establish a clear set of priorities.

Compared to single-family offices, a multi-family office is a wealth management firm that offers services to more than one family but is limited to a few clients.

How to Start a Family Office

Running a family office is not an easy job, even if you decide to start with a single-family office. Usually, families create their own family offices when the value of their investable assets is higher than $100M.

Through this type of organization, you can maintain control over your assets, have a private investment activity, grow your family legacy together with your family members, and work together to grow your family's wealth over time.

Keeping an ongoing activity in a family office depends on the size of your family, the operational activities, types of investments planned, the cost of due diligence processes, the cost of external partnerships and advisory, and many other elements that can generate a cost.

Managing the family office business can be different for each family and individual, and its complexity can vary from one investment to another. The Family Office Exchange defines the following elements as the most critical aspects of good family office management.

Family Office Exchange

Source: Family Office Exchange

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