Posts in Family Wealth

Fiducia Partners Insights - What is a family office?

What is a family office?

July 4th, 2019 Posted by Family Wealth, Investment, Planning 0 thoughts on “What is a family office?”

The term ‘family office’ is not widely known, and for good reason. While there is no strict definition, a family office is a wealth management company which invests assets on behalf of wealthy individuals or families. The term is not well known because quite understandably these families don’t need, or want, to advertise the fact that they have money to invest. If they did they would be inundated with requests. There are both single and multi family offices, single are normally run by a family member or appointed CFO who looks after one family’s wealth and multi are run by professionals who serve more than one family. 

Family offices tend to be so discreet they are only really contactable through highly selective referrals and trusted networks. As one executive said at a family office conference in Dubai last year, “we’re the most important part of the investment landscape most people have never heard of”.

And not only do family offices discreetly manage the family’s investments, they manage all the financial affairs of a family such as staff wages, accounting and tax planning, property and estate management and succession planning – while running businesses and making investments generates wealth, without proper financial planning and succession planning, preserving wealth is very challenging. Therefore family offices do everything it takes to generate and manage wealth to ensure it will be passed safely down from generation to generation.

Now, not every wealthy family has a family office, but those that do often choose to have one to avoid having to pay someone else to manage and invest their money, thereby increasing their margins. It also allows them to invest without the sector and time constraints that traditional VC firms have, usually trying to exit in 5 years or less. Because of the emphasis on passing wealth down through the generations, family offices tend to make long-term investments which is why real estate often makes up a significant part of family office portfolios. 

How do you find family offices for investment?

For those seeking investment from family offices, you will have to work hard to find them, let alone get in contact. Finding family offices is really a case of networking and receiving personal introductions. Without already knowing the right people finding a credible person, such as a capital raiser, to introduce you to family offices is a good way of starting. There are also several family office conferences each year which can provide a ‘way in’ however I am aware of several families who tend to avoid conferences, particularly those where start-ups pay a fee to present in front of investors. 

When seeking family offices for funding, to avoid wasting your and their time, it’s important to ensure that your business aligns with the family office’s investment criteria and philosophy. Many tend to invest in companies that directly or indirectly relate to the core business upon which their success is built. Also unlike VCs, who are often brutally focused on the figures, family offices value having good chemistry with the person they are funding. Therefore after having received an introduction, getting along with the family office decision makers, usually the investment manager and family patriarch, is essential to receiving their backing.

From my knowledge of family offices, however, all the hard work it takes to be introduced is worth it. Family offices make great investors for entrepreneurs because of their focus on relationships. Of course they want to see a return on their investment but because they take a long-term approach they tend to have more patience than institutional and private equity investors while also serving as experienced mentors with excellent connections. 

For more of my insights into the world of family wealth visit Fiducia Partners insights

Fiducia Partners Insights - Billionaires Giving Money To Charity Not Children - LI-W

Billionaires are giving their money to charity instead of their children

June 20th, 2019 Posted by Family Wealth, Planning 0 thoughts on “Billionaires are giving their money to charity instead of their children”

Children of ultra-wealthy families can usually grow up safe in the knowledge that a sizable inheritance will come to them. But now, it seems that many ultra-wealthy families are choosing to give their wealth away to charities rather than to their children. While charitable giving is often part of a person’s will, more and more families are deciding to give everything (or almost everything) to charity, leaving their children to make their own way and fortunes. It’s also a popular notion to leave enough for children to live “comfortably” but not so much that they will lead an idle, privileged lifestyle.

The idea of giving large chunks of wealth to charity instead of heirs was given lots of attention in 2010 when Bill Gates and Warren Buffett set up the Giving Pledge where wealthy families promise to dedicate at least half of their fortunes to charitable causes during their lifetimes or in their wills. Co-founder Warren Buffett is often hailed as the ‘most charitable billionaire’ and has planned for 85% of his wealth to go to charitable organiations with the remaining 15% to go to his children – although 15% of Warren Buffett’s wealth is still around $12.6bn. And Bill Gates, worth over $80bn, is reportedly leaving his three children $10m each explaining “I definitely think leaving kids massive amounts of money is not a favour to them”. 

Among the 200+ high-profile signatories who have joined the Giving Pledge are Richard Branson, Elon Musk, and MacKenzie Bexos, the ex-wife of Amazon founder Jeff Bezos and one of the wealthiest women in the world. 

While supporting charitable causes is one motivation for such a decision, another motivation that drives many ultra-wealthy people to make this decision is to protect their children from wealth’s pitfalls, as the examples below demonstrate. 

The action film star Jackie Chan, worth around $350m, isn’t planning to leave any inheritance to his only son saying; “If he is capable, he can make his own money. If he is not, then he will just be wasting my money.” Simon Cowell too, who is worth an estimated $550m says; “I don’t believe in passing on from one generation to another” and plans to leave his fortune to charities. 

I can well understand the concern that multi-billionaires may have with leaving such vast fortunes to their children without them having worked for it but families of more modest fortunes (although still multi-millions) are also considering limiting the funds they will pass down to the next generation. Having spoken with some of my families about their feelings on inheritance, some are concerned about the security of a large inheritance leading their children to lack purpose and the ambition to achieve their own success.

These are legitimate concerns but one has to execute such plans carefully. Limiting children’s inheritance without discussing it as a family can create unnecessary confusion and discord but working together to decide on core family values and how the money might be used instead is a good course of action to take. Richard and Joan Branson for example will leave most of their money to charity which their children are in favour of, both of whom already build their careers on working to make a positive difference to other people’s lives. 

Equally, gifting the money to a foundation of your creation can be a good course of action. As a family you can decide on how the money is used and what causes you want to support. It also allows children to have a say and to work for the foundation, should they wish. For example Chuck Feeney, once worth $8bn, has donated 99.99% of his fortune to his charitable foundation and is down to just $2m. His children are understanding having said about his plan; “It is eccentric, but he sheltered us from people using the money to treat us differently. It made us normal people”.

The advice I give to my families on this subject is that if they make the decision to limit inheritance and give a large portion to philanthropic causes, their decision should be properly communicated to all heirs so as to promote harmony and avoid any surprise or confusion.

Fiducia Partners Insights - Sibling Rivalry in the Family Business

Sibling Rivalry In The Family Business

June 14th, 2019 Posted by Business, Family Wealth, Planning 0 thoughts on “Sibling Rivalry In The Family Business”

Over my many years of working with wealthy families and their businesses, sibling rivalry is a problem I have seen all too often and has the potential to devastate both the family and the business if not properly managed. Family business leaders are usually most concerned about sibling rivalry when they start to consider succession planning and what will happen when they are not there to mediate disputes. But where siblings are actively involved in the family business before succession if sibling rivalry can be managed and squashed early on then the matter of dealing with it after the death of the business leader becomes far easier. 

When rivalling siblings are actively involved in the family business it is often either emotional or strategic and to find solutions to the rivalry it is first important to determine the underlying causes.

Emotional Rivalry

A common example of emotional rivalry that I have seen is where siblings compete for their parents’ approval or recognition. While this is common in personal family lives and particularly when children are young, it can extend into adulthood and competition in the family business. And as the siblings are in competition with one another, they are not working together to further the interests of the business as a whole. They may actively avoid working together so they can prove the success is theirs alone. In cases such as this, the solution is to work on the parent/child relationship rather than the sibling relationship. This might mean formalising recognition and reward to remove any potential for favouritism, or the perception of it. 

It might also mean putting in place the requirement that family members must take employment outside the family business before joining. While I often recommend this as a good way of gaining exposure to alternative business techniques, in the case of sibling rivalry it also allows siblings to achieve success that is recognised outside of the family. Where siblings have achieved success separate from the family, respect for one another and for oneself supersedes the desire for parental approval. 

Strategic Rivalry

Strategic rivalry in family businesses often occurs when siblings have conflicting values and business styles and perhaps different attitudes towards risk. While such differences may not matter in their personal lives, when working together in the family business and with their livelihoods depending on one another these differences can present problems. 

I suggest that the solution to dealing with strategic rivalry is found in solid business and strategic planning. Drawing up a solid business plan and then sticking to it should help to avoid disagreements over strategic direction. It’s also crucial to avoid relying on handshake agreements. Formalised contracts, job descriptions and operating procedures can’t be misinterpreted and therefore set out expectations from the beginning. 

One high profile case of sibling rivalry over the family business that I recall is when Reliance Industriesfounder Dhirubhai Ambani died in 2002 without leaving a will, let alone a succession plan for the business. His eldest son, Mukesh, took up the role of Chairman while his youngest son, Anil, was made vice-chairman. Mukesh reportedly tried to push Anil off the board which led to a nasty legal battle resulting in a de-merger of the company in 2005, led by their mother. Even when heading their own businesses their feud continued until 2010 when their mother intervened again to issue a non-compete agreement. Today, Mukesh is personally worth around $43bn whereas Anil is worth around $1.5bn. While it is unclear why the two brothers’ feud first started it is likely that their rivalry was both emotional and strategic and without solid agreements about how they would work together once their father past away their rivalry was free to spiral out of control. While no one can know for sure, it wouldn’t be unrealistic to speculate that the two arms of the split up business would have faired much better if it hadn’t broken up and the two brothers had been able to work together.

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

Blue-Marble-Private-Titanic

Ultimate Travel Experiences For Extraordinary People

May 9th, 2019 Posted by Family Wealth 0 thoughts on “Ultimate Travel Experiences For Extraordinary People”

With spring now in full swing I’m starting to think about taking some time away from London, which for me often means escaping to my beloved Mallorca. But what about when you’re looking to go somewhere off the beaten path or have a completely unique experience?

For many of my clients, this is what travelling is all about as they work extremely hard to create and sustain their family legacy so when they take a break, they want to use it to do something or go somewhere truly amazing. 

I am therefore delighted to announce that Fiducia Partners has formed an alliance with luxury travel company, Blue Marble Private, which curates some of the world’s most extraordinary and unique travel experiences I have come across and that we can now offer to Fiducia Partners’ extraordinary clients. 

When I had the great pleasure of meeting Elizabeth Ellis, the founder of Blue Marble Private, it quickly became clear that for those on a never ending quest to go one step further than most, Elizabeth is the person to go to. Before founding Blue Marble Private she spent two years travelling the world, making global contacts and expanding mindsets on what’s possible to be able to offer unique, creative and thrilling travel experiences.

One such unique experience Blue Marble Private offers is to take a submarine to 3,800 metres below sea level to reach the wreck of the Titanic. Elizabeth, a certified OceanGate Affiliate has been working with OceanGate Expeditions, the US firm who is operating the six-week scientific and exploratory expedition that provides adventurous citizen explorers an opportunity to work alongside researchers and content experts in an effort to document and preserve the historic site. This trip is the ultimate for those wanting an exclusive experience as far fewer people have visited the wreck of the Titanic than the number of people who have been to space or summited Mount Everest. As a certified OceanGate Affiliate, Blue Marble Private is authorised to offer space on the 2019 expeditions and whilst space is limited for this year there is space on the 2020 expedition. This trip is made even more exclusive by the fact that rust forming bacteria is rapidly consuming the Titanic which is expected to be eaten away within 15 to 20 years, so it really is a sight that not many people will be able to see. 

And for another trip of a lifetime, Blue Marble Private’s Antarctica trips sounds otherworldly. Elizabeth spoke of coming up close to Emperor penguins and flying over the frozen Antarctic Ocean to see its blue ice tunnels. I’m told that access to the interior of Antarctica is severely limited each year so this isn’t a trip many people can say they have done.

For something closer to home but no less exciting, Blue Marble Private also recently organised an experience where clients flew in formation with Breitling’s fighter jet team. Their clients flew at 400mph over France’s Burgundy wine region and continued the experience on the ground with the region’s exquisite food and wine – a perfect combination of exhilaration and relaxation.

If I’ve tempted you into forgoing the usual and wanting to take an extraordinary trip you can take advantage of our alliance and contact Elizabeth Ellis – Founder of Blue Marble Private – on elizabeth@bluemarbleprivate.com or +44 203 411 2191.

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.

 

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