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The silent but powerful investor: the evolution of the family office

Family business

The silent but powerful investor: the evolution of the family office

Published 14 December 2022 in Family business • 6 min read

As family offices grow in popularity and expand into riskier investments, families should take a holistic view of their whole ecosystem to build a healthy future for themselves and society, argues family business expert Peter Vogel. 

Family offices are booming, driven by a huge transfer of wealth across generations, the tech revolution, and the rapid growth of Asian economies.  

Often shrouded in secrecy, the increasingly powerful sway of these bespoke, diverse platforms for preserving and growing intergenerational wealth means families are increasingly influential players in the investment arena.  

While families tend to take a long-term view, their approaches to investment are changing, especially when faced with the double threat of high inflation eating into value and strong economic headwinds. The rise in costs of running a family office are also putting pressure on the way families manage their resources and influences their investment decisions. 

Family offices are increasingly using agile investment approaches to extend their reach beyond traditional, more conservative investments. For example, a recent report by consulting firm PwC and Family Capital found that family offices have been noticeably active in real estate and private equity and are becoming “increasingly proactive and ambitious in pursuing their goals”.  

Drawing on a database of 5,200 family offices worldwide, the report found that the total number of family office–backed real estate and direct investment deals within and into Europe in 2021 was 934, surpassing the previous high of 901 recorded in 2019. Such deals – where direct investments were overwhelmingly in private equity – were worth a combined US$ 227.6bn. This was also a record high, and accounted for a tenth of the whole market, marking a vigorous bounce-back from a pandemic-impacted dip in 2020.  

The research also revealed that megadeals – those above $2.5bn – were also on the rise, with healthcare and biotech, retail and consumer goods, and automotive and industrial products proving most popular as investment destinations. 

These findings are backed up by recent research by Silicon Valley Bank and Campden Wealth showing that three-quarters of family offices surveyed made venture investments in 2021, about twice the number doing so 10 years ago. 

The family office of the future 

In our work with enterprising families who are either looking to create, or already have, a family office, we encourage families to look at these platforms as more than just money-making machines.  

In fact, to do that would risk missing out on the greater benefits that can accrue when the family office is a core part of a family’s ecosystem, values, and purpose.  

In the age of stakeholder activism, purpose and ESG (environmental, social, and governance) considerations, families must also understand their role and responsibilities in the global economy and respond to demand for greater accountability and responsible investment, especially as they exercise increasing influence on the fate of larger corporations through their private equity investments and the real estate market. 

As part of a holistic approach to managing an enterprising family, family offices can be the central hub and catalyst that nurtures and protects the entire ecosystem. In turn, we believe this leads to better investment decisions that are more aligned with the overall family purpose and activities and a sense of internal and external stewardship, managing the wellbeing of the family and the community it exists in.  

My forthcoming book, Family Office Navigator, offers a practical guide to creating a family office, or to update an existing one, to build a sustainable, healthy family enterprise system by focusing minds on the purpose of the family and the appropriate focus and organization of each family office.  

We see this as the next evolutionary step in the history of the family office in a post-COVID world, in which enterprising families embrace this platform as an opportunity to reflect and act on their wider responsibilities to society while strengthening their family ecosystem and building for the future. 

As families grapple with challenging circumstances, and society adapts to the growing influence and changing habits of wealthy dynasties, especially in the way they invest, we see several ways to optimize impact in a positive way for all stakeholders.  

Enterprising families should carefully reflect on the purpose, focus, structure, and governance of their (future) family office and ensure the family’s ambitions are mirrored in the family office strategy. Only with clear guidance from the principal family can the family officers take good, long-term-oriented decisions.  

Demystifying the family office 

Family offices, in some form, have been in existence for thousands of years. We trace them back to Roman times when wealthy families would delegate their affairs to a trusted aide – the ‘major domus’. The Crusades saw another iteration, with European nobility entrusting the stewardship of their estates to trusts as they went off to war.  

It wasn’t until the Industrial Revolution and, in the US, the rise of magnate families such as the Rockefellers and Morgans, however, that the modern concept of the family office emerged as a formal arrangement for managing family wealth.  

Today, simply put, the family office is a structure for wealthy families to manage, preserve, and develop their total family wealth – their financial, human, and social capital – that has been built up across generations, often through the success of an entrepreneur.  

Families generally set up family offices to escape some of the cost and complexity associated with managing their money through more standardized and traditional vehicles. 

With the explosion in riches from digital economy entrepreneurs, Asian economic growth, and a massive transfer of wealth across generations, the demand for family offices and related services has never been higher. Estimates range from about 6,000 to more than 10,000 family offices worldwide, all looking after the interests of ultra-high-net-worth families who wield increasing power as investors.  

Within this broad definition of a family office, there is a multitude of approaches. As a saying goes: If you have seen one family office, you have seen one family office. Some families develop a cohesive, holistic platform managed by a sizeable staff that supports a higher family purpose, unifying the total family wealth spectrum to nurture a healthy family enterprise ecosystem across generations that covers business, family, and social interests.  

At the other extreme, the family office can be a pure investment vehicle, managed by a third party or an in-house expert or team of experts, charged with finding the right places for money released through the sale of a legacy business or another liquidity event, such as the passing of a parent.  

Between the two, family offices can manage anything from education and healthcare to tax, legal affairs, estate planning, investments, philanthropy, and properties as well as the private jet. There are various models at play, from “single-family offices” dedicated to just one, typically very wealthy family, to multifamily offices that manage the affairs of several families. There is little financial point in having a single-family office unless you have a certain amount of money. Expert opinions vary, with some saying at least US$100 million, while others go as high as $1bn. This makes even an average family office a force to be reckoned with. 

Authors

Peter Voegel - IMD Professor

Peter Vogel

Professor of Family Business and Entrepreneurship at IMD

Peter Vogel is Professor of Family Business and Entrepreneurship, Director of the Global Family Business Center, and Debiopharm Chair for Family Philanthropy at IMD. He is Program Director of Leading the Family Business, Leading the Family Office, and Lean Entrepreneurship. Named in the Poets&Quants 2022 list of the best 40 MBA professors under the age of 40, Peter has been published in peer-reviewed academic journals and, has written a number of books, book chapters and scientific and practitioner-oriented reports.

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