TFOA Insights Marc Sharpe

Since TFOA’s inception in 2007, we’ve found there are two basic motivations for single family offices to join our private family office peer network. Some are looking for a safe place for support and advice for matters ranging across operations, structure, design, governance, and long-term planning. Others are looking for like-minded families to co-invest with on direct investments, where they can share their expertise and benefit from proprietary sources of deal flow.

Over the years we’ve learned much from our members about what drives them, the advantages they bring to direct investing, and their approaches to direct investing operations. While TFOA’s membership represents a small fraction of the total family office universe, their insights align well with the growing body of knowledge around what makes family office direct investing successful (or not). To share some of these hard-earned insights, we conducted a survey of our members over a two week period in June 2022, with a series of questions about their direct investing habits.

The concept of the Multi Family Office (“MFO”) appears to offer the best of all possible worlds for a wealthy family who isn’t ready (or perhaps large enough) to start a Single Family Office (“SFO”) of their own. Under one roof it promises a convenient repository for all documentation, reduced overhead, consolidated buying power, diversified risk management, plus economies of scale and talent. But despite their theoretical promise, in practice an MFO must manage a complex set of conflicting interests while simultaneously navigating a financial industry that is largely focused on short-term gains rather than creating long-term value.

The literature typically frames MFOs as a stepping stone between traditional wealth management for the mass-affluent and a robust single-family office solution for the ultra-wealthy. We believe the perspective most needed – and often conspicuously absent – is from the perspective of the family itself. What organizational, operational and investment advantages might an MFO offer the family and how can a family identify those traits within an industry that is often opaque by design? This whitepaper offers an analysis of the challenges both families and MFO’s face; as well as a set of practical principles and concepts to help families who are vetting Multi Family Offices for their financial, investment and other needs.

While the landscape of the family office industry is changing, one certainty is that the Multi Family Office space will continue to grow. This is true for a number of reasons, including the changing demographics of wealth, new attitudes toward risk management, and market-based pressures to find new ways to scale the Single Family Office market to a broader segment of the population. While these new vistas are exciting, not every adaptation will be successful. These emerging trends in the family office space make a deeper study into what makes a Multi Family office successful both timely and important. [1]

“Fear of Missing Out” (aka FOMO) is that anxious feeling of not being included in something with others, such as an interesting or enjoyable activity. The concept was originally used to describe social behavior, a form of self-inflicted peer pressure to participate in social activities. More recently the term has been taken up by the behavioral finance community to describe how investors follow the trades of others in order to “not miss out” on the next big thing. FOMO is a common experience, but in the world of investing it is usually associated with poor decision-making. After all fear rarely provides a solid basis for clear, rational decision making.

According to UBS’ 2021 Global Family Office Report, 13% of family office respondents have already invested in cryptocurrencies, and an additional 15% have it under consideration.[1] Family offices are ahead of institutional investors, who are just now beginning to dip their toes into the space, but the asset class still remains outside a traditional asset allocation. As family offices continue to develop their post covid allocation strategies in parallel with the increasing awareness and adoption of digital assets from a broad spectrum of investors (from retail to institutional), it is more important than ever for families to consider how digital assets may or may not fit into their allocation strategies. To that end we would like to offer some perspectives to help frame how family offices might approach the topic.

Here is a familiar story for family office investment teams: an email arrives, perhaps from a principle looking to learn more about an opportunity; or a deal comes through trusted advisors or the CIO. A family office management team wants to make sure they thoroughly investigate the opportunity in order to provide value to the family. Resources are allocated, introductory phone calls are made, and before long a young analyst is writing up reports on an industry she’s not familiar with, while trying to model an aspirational J-Curve into something that approximates reality. Weeks might be dedicated to such an opportunity before it becomes clear this is not a good fit for the family office. Now imagine emails like that coming in on a daily basis.

According to PitchBook-NVCA Venture Monitor, 2019 saw a record-setting decade in venture, with a 5x increase in deal value to roughly $140 billion.[i] It’s an exciting space filled with the promise of tomorrow, but it is also uncertain, filled with risks, and for many marked with embarrassing failures. A disciplined, proactive approach allows a team to mitigate the risks and maximize their upside, while also providing a singular opportunity for learning and leadership development. Despite all of the bad experiences we’ve all had with early stage investments, there is a real opportunity to bring value to the family office by creating a disciplined approach that fosters exceptional returns, as well as internal learning and skills development.

Here is a familiar story for family office investment teams: an email arrives, perhaps from a principle looking to learn more about an opportunity; or a deal comes through trusted advisors or the CIO. A family office management team wants to make sure they thoroughly investigate the opportunity in order to provide value to the family. Resources are allocated, introductory phone calls are made, and before long a young analyst is writing up reports on an industry she’s not familiar with, while trying to model an aspirational J-Curve into something that approximates reality. Weeks might be dedicated to such an opportunity before it becomes clear this is not a good fit for the family office. Now imagine emails like that coming in on a daily basis.

According to PitchBook-NVCA Venture Monitor, 2019 saw a record-setting decade in venture, with a 5x increase in deal value to roughly $140 billion.[i] It’s an exciting space filled with the promise of tomorrow, but it is also uncertain, filled with risks, and for many marked with embarrassing failures. A disciplined, proactive approach allows a team to mitigate the risks and maximize their upside, while also providing a singular opportunity for learning and leadership development. Despite all of the bad experiences we’ve all had with early stage investments, there is a real opportunity to bring value to the family office by creating a disciplined approach that fosters exceptional returns, as well as internal learning and skills development.

The structure of your SFO will depend on the jurisdiction(s) in which it will operate and the types of investments the family owns or intends to own…

Many SFOs in the USA are structured as limited partnerships or limited liability companies and are organized similarly to hedge fund management companies (i.e. the SFO entity does not own any of the assets it manages; rather, it is a service entity that provides services to the SFO’s clients on a contract basis). It is highly recommended you engage with experienced securities counsel who have worked with other family offices regarding the potential impact of SEC rules on their structure and operations.