Posts in Family Wealth

Fiducia Partners Insights - How To Begin Succession Planning In A Family Business

How To Begin Succession Planning In A Family Business

January 31st, 2019 Posted by Family Wealth, Planning 0 thoughts on “How To Begin Succession Planning In A Family Business”

Every year 70% of family businesses fail to successfully transition from the first generation to the second. It’s not surprising considering that PwC recently found that just 18% of family businesses have a robust, formalised and communicated succession plan in place.

In my experience this is often due to a perceived lack of urgency where business leaders would rather push on with running and growing the business than face up to the fact that they can’t run it forever. There are other reasons too why business leaders would rather not begin succession planning. While each family is unique, these are some of the more common ones I see:

  • Time pressure – business leaders are invariably busy and other matters are often prioritised.

  • Interpersonal conflict – family unity can be stretched when it comes to handing down the family business. Complex family dynamics can make the subject of succession a difficult topic and can create factions among family groups or staff loyal to one member or another. Instead of taking steps to try and stop this happening many avoid the subject altogether.

  • Communication difficulties – if communication within the business and family is already difficult this presents a problem for communicating succession plans.

As with many things, getting started can be the hardest part so while I always recommend drawing up a formal succession plan and making sure to communicate with everyone affected, there are a few ways you can begin that are better than doing nothing at all. 

First, create a plan detailing the key operational elements of the business in the event that you aren’t able to run the business, either temporarily or permanently. In the event of succession being triggered ahead of plan, this acts like an emergency backstop that should prevent early succession from being a crisis event for the business.  

Second, communicate with your ideal successor and other family stakeholders. Writing a succession plan without involving other family members (as well as key non-family members of the business) is likely to invite upset and discord therefore communication is paramount and should ideally happen long before a planned departure. Communicating such plans gives likely successors and other stakeholders a chance to voice their opinions and become excited about the business before they bear its weight. It’s also possible that likely or willing successors don’t yet have the skills or knowledge to take over and so early communication gives them time to seek the right experience, nurture the necessary skills and build their knowledge.  

Third, nuture potential successors to ensure they are ready to take over. Spending a year or two working closely with your successor before you step down should help make for a smooth and successful transition.

These three steps are just the beginning but I think they are the absolute minimum any family business leader should undertake to ensure the continued success of their business and family. If you would like to discuss succession plans in more detail with me please do get in touch.

If you found this week’s article useful, please let me know by clicking the thumbs up icon above or writing a comment. I really do appreciate it. 

Fiducia Partners Insights - Is Investing In Art A Good Or Terrible Idea?

Is Investing In Art A Good Or Terrible Idea?

January 17th, 2019 Posted by Family Wealth, Investment 0 thoughts on “Is Investing In Art A Good Or Terrible Idea?”

Art and visiting exhibitions is one of my greatest enjoyments and so this week I decided to write about the fine art investment market. Often referred to as a passion investment, investing in fine art generally has more to do with the joy of owning a particular piece than it does about financial gain. Owning a rare or well-known piece evokes feelings of prestige and status, an attractive lure for many of the world’s wealthiest people.

Investing in art is particularly popular right now, helped by high profile sales like 2017’s auction of Leonardo da Vinci’s Salvator Mundi at Christie’s. The painting sold for $450.3 million, setting a new record for the most expensive painting ever sold and creating an astounding profit for the seller who bought it for $127.5 million in 2013.

However most art investors will tell you that despite the potential for return, you should only buy a piece of art if you love it. Unless you’re buying the most rare and coveted pieces like Salvator Mundi (and even some dispute that painting’s authenticity) you really cannot know if the value will go up or down so buying it because you love it is important.  

As with any investment, there are some big risks to investing in fine art so it is not a decision to take lightly. In many ways, the risks are bigger than that of investments in stocks or bonds which can easily be liquidated unlike art where owners often have to wait a long time before the right buyer comes along. The value of a piece of art is also highly subjective and because of the secrecy in the market it can be hard to determine what similar pieces or other works by the same artist are valued at or were last sold at. If buying (and selling) fine art using a specialist auction house this also means adding huge fees to the price with commission commonly in the region of 20%-50%. Once bought there are other costs to consider such as insurance premiums and storage costs. For example a very valuable painting should be kept in a temperature and humidity controlled strong room to ensure its future value.

Also, as many will know, one of the biggest risks in the art market is that of fraud or forgery. Both are common and the onus is on the buyer to check a piece’s authenticity, provenance and legal ownership meaning due diligence is crucial. Even when an investor or organisation has the best resources at their disposal to steer them away from fraudulent and forged pieces it can still happen. Last year for example the Metropolitan Museum of Art had to give up two pieces within a month of purchase after it was found that one, a vase, was looted by tomb raiders in Italy in the 1970s and the other, a bull’s head, was stolen from a warehouse in Lebanon during the civil war in the 1980s. 

Minimising Risk

To minimise the risks of investing in fine art, the first thing to do when considering a piece is to find out all the information you can about its condition, its provenance, its history, any ongoing maintenance costs, if there are any restrictions and if it is still within copyright etc.

You also need to check on the reputation of the seller and if they have any protections in place for buyers. You want to avoid anything that could jepodise the purchase or cause you to lose your investment. For example if the seller is insolvent at the time you purchase the piece, the seller’s creditors might be able to seize the piece, even after it has been paid for.

In order to determine provenance there are a lot of details to collect and the seller should normally provide records such as a certificate of authenticity, any export licences and documents like wills and estate inventories. International databases of lost and stolen art should also be checked. Note that the art market is a largely unregulated industry and there is no central record of art sales and ownership, which can make it hard to find out about a piece’s history (and easy for fraudsters).

This lack of regulation may seem alien to many investors where in the financial market, heavy regulation makes it illegal to trade on nonpublic information and publicly traded companies must disclose relevant information to investors at the same time to avoid some gaining an advantage. However in the art market insider information is traded all the time, making it hard for a newcomer to join in without seeking advice from established insiders. Far from being an illegal activity, using insider information is a staple of the art market and is a key reason why some make a success of it and others don’t. An example would be if an art dealer has prior knowledge that a major museum plans to show a lesser-known artist they could use that information to sell some pieces to a prospective collector.

If you’re considering delving into the world of fine art investments please do get in touch with me as I have many trusted contacts in the art world and would be delighted to provide an introduction. 

As always, I am very grateful when people who like my articles click on the thumbs up icon above or leave a comment.

Fiducia Partners Insights - Ensuring Good Relationships Between Active and Non-Active Family Shareholders

Preventing Standoffs Between Active and Non-Active Family Shareholders

November 22nd, 2018 Posted by Business, Family Wealth 0 thoughts on “Preventing Standoffs Between Active and Non-Active Family Shareholders”

A few months ago I wrote about preventing feuds from becoming fatal for the family business. In that piece I focused on family members who are actively involved in the business and how they separate their roles at work and their roles in the family. Now I want to look at the relationship between active and non-active members of the family business. The dynamics here need to be carefully managed particularly when a family business has survived several generations as there are likely to be many family members who have shares in the business and while some may be actively involved in it as employees or directors some won’t be and this has the potential to cause tension. And whether involved or not, in a family business every family member feels some degree of responsibility because the business is often interwoven with the family’s history, future and financial wellbeing.

To ensure harmony between all family shareholders for the benefit of the business, here are a few suggestions:

 

  1. Be practical with voting stock

Where the voting power lies can have a big impact on the smooth running of the business. Problems can arise when all shares have equal voting power and active and non-active shareholders vote different ways on key decisions because of differing priorities, risk tolerance or levels of knowledge. One solution is to have multiple classes of stock which enable certain members of the family to maintain control over the company. For example active members of the family business could be allowed to hold a class of stock with one or more votes per share and a different class of stock with reduced or no voting power can then be held by family members who are not actively involved in the running of the business. This ensures decision making about the business will remain with those most familiar with it, but the economic benefit of the business is still shared evenly throughout the family.

While this can be a practical option, in the name of fairness and equality many families prefer to have one class of share. In this case a solution I know that many families use is for non-active family members who do not feel informed enough about the business to make key voting decisions to appoint an active family member as their proxy. However this can only happen with consent and trust and so only tends to work in well functioning families.

 

  1. Draw up an enforceable shareholders agreement

Whether you have different classes of shares or not, there may still be other issues about control of the company that you need to address. This can be done with an enforceable shareholders agreement. Depending on the issues you want to avoid or resolve, you can include certain stipulations such as restrictions on the appointment and removal of directors and of their remuneration. Another area that may need clarity relates to dividends which for some non-active shareholders may be their sole source of funds.

 

  1. Promote inclusion

Because a family business is often intertwined with the family’s identity it is vitally important for active family members not to dismiss input from non-active family members. While there is the potential for issue where non-active members begin to unduly interfere, in general any contributions and sacrifices made should be acknowledged and appreciated, and ideally remunerated. It is important to remember that even if a family member has chosen not to be actively involved in the business they are still likely to interested in it and would appreciate being included in some way. Therefore, active family members need to take responsibility for communicating updates about the business with non-active family members just as non-active family members should show an interest in the business, offering opinions and advice, but without unduly interfering.

For many families, holding an annual or bi-annual family shareholders meeting serves several purposes:

  • it gives everyone an update on how the business is doing and makes them feel included;
  • it allows advice or concerns to be heard in a constructive way; and
  • it reaffirms positive family relationships which can only be good for the business.

 

Particularly in the case of large families, it can be difficult to include everyone in the business in a meaningful way but offering opportunities to be heard and promising to listen is something that active members have a responsibility to do and non-active family members have a responsibility not to take advantage of.

 

If you enjoyed this article, please leave a comment and let me know!

Fiducia Partners Insights - Co-investing What is it and should you be doing it?

Co-Investing: What Is It And Should You Be Doing It?

November 15th, 2018 Posted by Family Wealth, Investment 0 thoughts on “Co-Investing: What Is It And Should You Be Doing It?”

Co-investing among family offices has been on the rise for some years and a report released last week indicates that this trend is growing. The Campden Research report says that two-thirds of family offices expect to see a rise in co-investing opportunities over 2019. I welcome this news as I think co-investing presents a great opportunity for pooling experience among family offices and for reducing risk by following more experienced investors, which is why I often encourage my families and clients to co-invest. For clarity, co-investing is where a minority investment in a company is made by a limited partner, in this case a family office, alongside a general partner such as a private equity fund manager or venture capital firm.

I first came across co-investing by family offices after the financial crisis when some were looking for new ways to allocate their capital and also to reduce costs. Essentially it was a way of moving away from funds to direct investing without taking on the costs of due diligence and the risk of being the only investor. It was also partially driven by the shortfall of funds where many failed to meet their fundraising goals during the crisis and were using co-investing as a way to attract investors. However this lack of sharing due diligence costs is also why funds are sometimes reluctant to offer co-investing rights. While some of the costs specific to the co-investment will be shared, the fund manager is normally expected to forego the usual management and performance fees based on the understanding that the co-investment is building on work already done by the firm and therefore the fees should not be charged to co-investors.

Co-investing also offers family offices the opportunity to be more actively involved in their direct investments without having to acquire and manage the investment entirely on their own. And for families that have deep expertise in a particular industry or sector, being able to use their knowledge can even lead to outperforming conventional investments in private equity funds. A survey of LPs conducted by BlackRock last year found that 68% reported their co-investments outperformed their traditional private equity funds.

 

LP Survey Highlighting Outperformance of Co-Investments vs. Funds.

BlackRock LP Survey

Source: Blackrock.com

 

It is also worth mentioning that in my experience many company founders and startups often prefer to work with family offices over VCs, so co-investments made by family offices and VCs can be attractive to them. While both are motivated by making a return, VCs can be more ruthless in their approach whereas family offices are generally long-term investors and willing to offer support and advice.

However despite its benefits, I couldn’t write about co-investing without mentioning its challenges. The main one for family offices is access to deal flow. Many family offices, even ones managing exceptional wealth, don’t have the dedicated resources to build relationships that form the basis of co-investing since the sourcing of opportunities is outside their traditional investment circle. This challenge is one Fidcuia Partners can help ease since we have a trusted network and can provide discreet introductions to investment opportunities and support deals to their conclusion.

 

If you enjoyed this article, please let me know by leaving a comment. I really appreciate it.

Fiducia Partners Insights - Bulk-buying in London's Luxury Property Market

Bulk-Buying in London’s Luxury Property Market

October 25th, 2018 Posted by Family Wealth, Investment 0 thoughts on “Bulk-Buying in London’s Luxury Property Market”

According to a recent report by property data experts Molior London, some 15,000 newly completed luxury flats in London remain unsold as sales in the capital have dropped significantly due to investors uncertainty over Brexit. While attributed to Brexit the over supply is down to a number of reasons that have led to a glut of supply and dip in demand, a huge change from the status quo where new builds in London were snapped up often before ground had even been broken. The reasons for the current stagnation started following the financial crash when luxury property in cities like London became a safe, easily liquidated bet which increased demand exponentially. Developers responded to the demand but in the time it has taken for many of these projects to reach completion much has changed. Here I briefly detail these changes:

Stamp Duty Increases

Stamp duty has increased several times in the last ten years, particularly affecting properties bought as a second home or as a buy-to-let. Even earlier this month Theresa May announced she would consult on an extra stamp duty charge for non-residents and overseas companies, after which shares in Berkeley Group, a London-focused developer, dropped 3.5%. Stamp duty in the UK is already eye-wateringly high, with this latest announcement putting off many of the overseas investors who have previously been big buyers in London.

Low Oil Prices

The sustained low price of oil has also meant that normally big-time investors in London, wealthy families from the Middle East in particular, have less disposable cash to invest in prime London property.

Interest Rate Rise

In general when interest rates rise, real estate values go down and in August of this year the Bank of England raised the interest rate from 0.5% to 0.75% – the highest level since March 2009. The forecast increases are also a factor.

Brexit

And of course the big one, Brexit. While Brexit hasn’t been all bad for London’s property market including property offering a safe haven for cash and the pound’s slump immediately after the referendum making London homes more affordable to buyers from abroad – many overseas investors have adopted a ‘wait and see’ approach until the dust settles. Aside from the threat of London losing its place as a major international player after Brexit (something I don’t see happening by the way), the potential for Jeremy Corbyn becoming Prime Minister also poses a risk to property investors. At last year’s general election he promised measures that are less than friendly for the luxury home market, advocating the “requisitioning” of homes owned but left empty by wealthy investors in order to use them to accommodate the homeless. In a speech he said, “It cannot be acceptable that in London you have luxury buildings and luxury flats kept as land banking for the future while the homeless and poor look for somewhere to live”.

 

Thinking about the property cycle theory, it is unlikely that the market’s current stagnation will last and so far the long-term trend has always been upwards, despite some volatility along the way. For UHNWIs and Family Offices, who tend to take a long-term approach to investing and can ride out market fluctuations, the decline in prices may offer a buying opportunity.

Many of those that are buying luxury London property now are buying in bulk (often 100 units or more), and at vast discounts (up to 20% or 30%). Molior reported that in the second quarter of 2018, almost 40% of London new-build sales were to “bulk buyers”. The specialist investors and corporate landlords currently bulk buying include Greystar, L&Q housing association and fund management group M&G. This prevalence of wealthy buyers willing to buy up luxury London properties and new builds in bulk, I think, illustrates the strength of the London property market and its ongoing resilience. It should bolster confidence in the market at a time when not everyone is convinced.

Of course there is the risk these investors will struggle to sell the property on again at a later date but I would argue that those buying high-quality property from reputable developers and in good locations will be very unlucky not to see profit in the long-term. For those in a position to adopt the bulk-buy approach, the key is to only invest capital that you don’t need for at least 10 years and to hold your nerve. It’s an approach that takes courage that not every investor has, and as with every investment there is an element of risk.

As Winston Churchill once said:

“A pessimist sees difficulty in every opportunity; an optimist sees opportunity in every difficulty.”

 

If you enjoyed this article I would very much appreciate you letting me know by leaving a comment.

Fiducia Partners Insights - The Future For Family Offices

The Future for Family Offices

October 18th, 2018 Posted by Family Wealth, Planning 0 thoughts on “The Future for Family Offices”

The number ultra-high-net-worth (UHNW) families is rising and with them, more single and multi-family offices created to serve them. Knight Frank’s The Wealth Report 2016 tallied 187,500 UHNW families (controlling at least $30 million in assets), forecast to rise to 263,500 by 2025. Family offices need to adapt to reflect the tech savvy, socially conscious millennials about to inherit the family wealth as well as the changing investment market. Here I detail four trends I think family offices will increasingly embrace in the coming years.

 

  1. A preference for socially responsible / impact investing

Socially responsible and impact investing may soon dominate family office investments. A study released this year by Spectrum Group found that “more than half of millennial investors (52%) see the social responsibility of their investments as an important selection criteria, compared with less than 30% of WWII-era investors and 42% of Generation X investors”. Over the next decade the largest transfer of wealth since pre-WWII is about to benefit millennials so any family office not engaging with socially responsible or impact investing may struggle to keep up with the family’s expectations.

 

  1. A move towards direct investments…

…aligns with the long-term outlook of family offices

Something I have noticed more and more of over the last few years is family offices’ growing appetite for direct investing. Many have been moving money from underperforming hedge funds into direct investments, often in real estate and startups, in the hope of more sustainable returns but also to retain control. This is only set to rise with Family Office Exchange reporting that nearly 60% of family offices expect to increase their direct investments in the next two years.

Direct investing makes sense for family offices where the goal is to grow and preserve the wealth of their family for generations. Whereas family offices take a long-term view and can stay in investments for as long as they want, private equity funds tend to stay in investments for five-to-seven years and are judged by quarterly performance. Family offices don’t need to move with short-term markets or put time limits on their investments so cutting out the middle man means they can make long-term investments and ride out market fluctuations. Direct investing also means they avoid hedge funds fees, which can often make the difference between a return, or not.

 

…allows family member to hand-pick investments

Direct investing also makes sense when thinking about the move towards socially responsible investing as it allows family offices to hand-pick each investment according to their family’s own criteria for what it deems as a socially responsible or impact investment.

Also, because we are all living longer millennials are inheriting the family wealth later in life and therefore many have forged their own careers before becoming involved in managing the family fortune. Direct investing allows them to choose investments where their own expertise can deliver value.

 

  1. An increase in collaboration

I also think we will see more and more collaboration on deals between family offices. I think this because families often develop their expertise in a particular market and so when looking to diversify their portfolio, may approach a family with expertise in the market they know little about and vice versa. This can significantly lower the risk element and encourages knowledge sharing.

 

  1. More casual forms of communications

Finally, the Spectrum Group report I referred to earlier has found that 68% of millennial investors favour texting or instant messaging as a way of communicating with their financial advisors vs. email or phone calls. It looks like family offices will have to get comfortable with this fast-paced, all-hours mode of communication.

 

I hope you enjoyed this article, if so please leave a comment to let us know.

Fiducia Partners Insights - Developing a Family Charter

Developing a Family Charter

October 4th, 2018 Posted by Family Wealth 0 thoughts on “Developing a Family Charter”

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Fiducia Partners Insights - Preparing Your Children For Their Inheritance

Preparing Your Children For Their Inheritance

September 27th, 2018 Posted by Family Wealth 0 thoughts on “Preparing Your Children For Their Inheritance”

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Fiducia Partners Insights - Family Business Feuds

Family Business Feuds and How Stop Them Being Fatal

September 20th, 2018 Posted by Family Wealth, Planning 0 thoughts on “Family Business Feuds and How Stop Them Being Fatal”

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Fiducia Partners Insights - Impact Investing

Impact Investing: Can Investments Make a Return and an Impact?

September 13th, 2018 Posted by Family Wealth, Investment 0 thoughts on “Impact Investing: Can Investments Make a Return and an Impact?”

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