Like each family, each family office is unique. Globally, they've tripled in number since 2019 and are becoming a bigger part of the financial ecosystem. Their collective energies are poised to have a major impact on early- and growth-stage companies as well. Family offices may just be getting started in this regard.
So, how can the massive opportunity take shape most fruitfully for investors, founders and FOs? What are the challenges that befuddle family offices? And how can angel investors partner with family offices to put that capital to work productively? Keiretsu Forum Northwest and Rockies Chairman Nathan McDonald's Investor Capital Expo 2024 talk answered these questions and offered a contextual look at the potential of value-added, trustworthy partnerships for angel investors. In today's blog, let's examine why family offices matter more than ever.
What is a Family Office?
Family offices are a unique type of family business designed to provide tailored wealth management solutions while preserving the identity and values of the family. Unlike traditional financial institutions, family offices focus on managing the wealth of affluent individuals or families in a personalized and comprehensive manner.
They serve as a central hub for coordinating various financial activities, including investment management, estate planning, philanthropy, and family governance.
- Between 7,000 to 10,000 formalized single and multi-family offices exist globally
- Over 20,000 to 90,000 families possessing $100 million or more
A Brief History
Family offices have a rich history dating back over two centuries, with notable examples such as the Rockefeller and Morgan families. However, in the last five to ten years, there has been a surge in active single-family offices (SFOs) and the emergence of multi-family offices (MFOs) since 2008, reflecting the transfer of wealth and the need to deploy capital effectively.
Here’s a timeline that shows this evolution:
1800s
Rise of the Single-Family Office. Rockefeller Family, House of Morgan, etc
1990s
Multi-Family Office model becomes prominent
2008 onwards
Hedge Funds, VC & PE firms begin to convert to MFOs as 7,000+ MFOs created since 2008. SFOs begin looking for more tailored strategies, wealth management services, optimal fee structures and better access to direct investments
2019 and beyond
The Introduction of a Multi-Single Family Office Collaboration Model.
With the history in place, let’s now turn to the potential of family offices. How do they invest and what do they prioritize? Here are some answers that shed more light.
The Rise and Allocation of Family Office Capital
Today, family office capital stands at a jaw-dropping $10 trillion, surpassing the AUM of hedge funds globally. This trend could continue, with an estimated $60-$80 trillion expected to transfer over the next 15 years.
Family office capital may surpass the combined market size of private equity, venture capital, and hedge funds in the next decade.
Typically, family offices allocate a significant portion of their resources towards building a diversified portfolio comprising equities, debt, alternative investments, real estate, and fixed-income securities. In addition, there is a growing interest in private direct investing in sectors such as technology, life sciences, and cleantech, which requires expertise and resources.
Creating wealth is a different skill set from originating and managing investments and family offices sure could use help with the latter.
What are the Challenges and Solutions?
Despite their potential, family offices face challenges such as inefficiency, fragmentation, and the need for privacy. Moreover, the transition of wealth across generations poses significant risks, with only a fraction of wealth successfully transferred beyond the second generation.
This leads to a lack of coordination and collaboration among different departments or functions. Moreover, there is a strong desire for privacy and confidentiality, which can limit transparency and hinder effective communication. Building and maintaining high-trust relationships is essential in the family office environment, where personal and professional boundaries often overlap.
Additionally, family offices do reflect an anti-Wall Street sentiment in play since the great crash of 2008. These offices are also plagued by an ego-driven model, not unlike the TV drama Succession. Despite their best efforts, only a fraction of family wealth successfully transfers to subsequent generations, highlighting the need for effective wealth preservation strategies.
Building institutional-grade infrastructure, fostering high-trust relationships, and leveraging entrepreneurial expertise can mitigate these challenges and ensure long-term success. The question then arises: How can family offices build the necessary infrastructure to succeed in the long term? The following may help:
- Building internal capabilities
- Relying on trusted advisors and consultants
- Leveraging technology
By investing in the right people, processes, and technology, family offices can enhance their ability to source and win deals, provide operational guidance, and drive long-term value creation. An effective direct investment program, formalized strategy, and rigorous monitoring process are essential components of institutional-grade family offices.
However, only a small percentage of family offices excel in implementing these practices, highlighting the need for improvement in this area. This is where partnerships with angel investors comes into play.
How Angels and Family Offices Can Play Ball
“Family offices needs the entrepreneurial expertise that angel groups bring to the table and they value it highly,” said Nathan.
Family offices’ biggest advantages: patient, long-term capital aligns well with the needs of early-stage ventures. By combining forces, angel investors and family offices can build resilient cap tables, support portfolio company growth, and facilitate future funding rounds.
What’s more, family offices are not motivated to over-fund or cram down early investors, as their primary focus is on preservation and risk management rather than astronomical returns only.
This aligns well with the interests of angel investors, who often seek to support promising startups without the constraints imposed by traditional VC models. By working together, family offices and angel investors can provide a balanced approach to financing, matching the business's capital needs while minimizing unnecessary dilution and conflicts within the cap table. Additionally, angel investment groups can leverage their expertise in deal flow screening and due diligence to add value to family office investments, enhancing the overall quality of the investment portfolio.
The recent market correction has prompted many family offices to reevaluate their investment strategies, particularly in direct investments and venture capital. This presents a fine moment for angel groups to expand their membership base to include family offices seeking entrepreneurial expertise and guidance. Family office capital values the insights and experience that angel investors bring to the table, recognizing their role in filling funding gaps and supporting portfolio company growth.
Well, how can angels engage with family offices? A task that is hard but not impossible.
Engagement Strategies
Engaging with family offices requires
- Patience
- Trust-building
- Willingness to share expertise and insights
To start building family office participation, Nathan advises the following:
Ask members for introductions – every angel group has members who know some family offices. Keiretsu portfolio companies have received family office funding as well. Investors would do well to add value to family offices and build trust and those long-term relationships. It may take months or years to gain trust... and that's fine. Nathan also suggests sharing information, educating them, and demonstrating the group's expertise.
In summary, the time is ripe for engagement, with opportunities to build smart and resilient cap tables by partnering with family offices. By understanding their unique dynamics, angel investors and groups can harness the power of family office capital to support entrepreneurial ventures and drive long-term success.
Key Takeaways
- Disruptive growth is coming from family office capital
- Timing to engage family offices has never been better
- Adding family office capital alongside angels builds smart, resilient cap tables
- Family offices bring valuable networks, resources and expertise to support growth
- Future liquidity for early investors is key to a symbiotic relationship
This blog is based on Nathan McDonald’s talk at the Investor Capital Expo 2024, Syndication and Partnering with Family Office Capital.
