Historically, wealthy families have always found ways to build and protect fortunes. They have pursued business deals ranging from acquiring realty to seeding hedge funds to buying businesses. Today, their numbers are increasing, and many, weary of higher fees and below-average performance of professional wealth managers, are embracing direct investing strategies. 

Wealthy families with nine-figure fortunes – individually or as a group – are increasingly impinging on investment banking and Private Equity (PE). Traditionally, such business transactions were the province of large corporates, fund houses, or PE firms. But this change in investment strategies of wealthy families has given birth to a disruptive force in the investment world: the family office. These firms, created to manage the fortunes of the rich, can operate under the radar of the regulatory system. Their number is growing along with the size of their fat wallets and hunger for deals.

Just think about a group of over 100 ultra-rich families pursuing investments like acquisitions through unregulated financial firms called family offices. Historically, they have been operated as a group, but today they have become an inevitable part of the investment world.

Family Office: A Disruptive Force

Ms. Carol Bernick is the heir to Alberto Culver Co., a hair-care company built by her father. Her family created a family office in 2002 to manage assets outside their stake in the company. The office had no formal name but only one employee. Alberto Culver was sold to Unilever PLC for nearly $4 billion In 2011, swelling the assets of the family office, which was named Polished Nickel Capital Management LLC. Today, the family office, helmed by Ms. Bernick as its CEO, has 14 employees and makes Private Equity investments alongside other families and PE firms.

Family offices are becoming more like financial institutions in their approach – some sort of ‘insti-viduals.’ Wealthy families with a minimum of $250 million in assets prefer to put their money to work through family offices. It is because family offices allow complete control and secrecy.

Examples of family offices include the one started by hedge-fund manager William Ackman and Google co-founder Sergey Brin. Billionaire brothers Charles and David Koch have their family office named 1888 Management LLC to manage a small portion of their $86 billion fortune. Oprah Winfrey, the legendary American talk show host, has OW Management LLC to manage her wealth.

There are multifamily offices that invest on behalf of wealthy families. Quadrant Capital Advisors, a New York-based multifamily office, invests $14 billion worth of assets on behalf of Colombia’s Santo Domingo family. Similarly, Fremont Group, another multifamily office, invests the wealth of the Bechtel family, which runs a construction behemoth.

Family offices are unregulated firms, so counting them takes work. But, globally, it has been estimated that there are more than 10,000 family offices. About half of them were set up in the past 15 years. In the US, around 3,000 family offices manage more than $1.2 trillion in assets.

The family offices collaborate with buyout firms and compete against the firms that do mergers and acquisitions. In addition, they finance start-ups and buy distressed debt, real estate, and exotic insurance products. Family offices vigorously hunt talents from the investing world to do all these financial adventures.

The Fertile Ground for Family Offices

In the past, it took 100 years to make $100 million. But today, the wealth-building process has become much faster mainly because of the entrepreneurs in Wall Street, Silicon Valley, and elsewhere. With the rise in billionaires worldwide, their collective wealth touched nearly $13 trillion.

This surge in wealth globally in the past few decades is partially responsible for the proliferation of family offices worldwide utilizing the higher levels of merger and acquisition activities and Initial Public Offerings (IPOs). As a result, family offices hold assets worth more than $4 trillion globally, an amount of wealth nearly touching the $6 trillion assets of PE firms and hedge funds.

Since 2011, several hedge funds have converted into family offices after returning their clients’ money. Soros Fund Management was one among them. Mr. Soros cited increasing regulation as one reason. U.S. regulators require hedge funds that manage more than $150 million in assets to disclose their strategies and the size of their portfolios.

The private investing world is the only place where we can capture outsize returns and protect capital. It is the hidden world where multibillion-dollar fortunes are made in direct deals that perform independently from the stock market. Private investment firms like Perot Investments in the US set up family office networks that help wealthy families with assets of at least $1 billion to strike PE deals and discuss investing strategies.

Banks Eyeing Family Offices

Investment banks like Goldman Sachs began to pay more attention to family offices as they realized they were losing out on merger deals involving family offices. They treat these family offices the same way they treat large buyout firms. Prominent investment banks such as J.P. Morgan Chase & Co. and Morgan Stanley have given special attention to these family offices. Recently, they have appointed senior banking professionals to cover family offices. Also, PE firms invite family offices to be their ideal partners because of the latter’s appetite to invest directly into companies rather than through funds.

Buyout firms like Blackstone Group LP and KKR & Co. have seen an ocean of wealth in private investing. So, they woo families with flexible private investing opportunities. These financial firms also compel every employee to develop a short list of wealthy families as they look forward to setting up their multifamily office. KKR now has several hundred wealthy families as their family office clients, up from zero in 2010.

The Indian Family Office Story

The family office trend has been gaining popularity in India in recent years. Today, there are around 300 family offices in the country, each managing an average Asset Under Management (AUM) of $100 million. Some even manage assets worth multi-billion dollars. Prominent entrepreneurs like Gautam Adani, Ratan Tata, Azim Premji, and NR Narayana Murthy have family offices. Similarly, India’s media and sports celebrities like Yuvraj Singh, Sachin Tendulkar, Priyanka Chopra Jonas, and Akshay Kumar have jumped on the family office bandwagon.

Like Perot Investments in the US, multifamily offices like Alpha Capital help wealthy Indian families to foray into the new age exotic investment world

Justin Raj

Alpha Research Team