“Success is not final. Failure is not fatal. It is the courage to continue that counts."
Global Family Office Wealth: The Numbers
Global personal financial wealth is truly staggering, growing 12% last year to $209.1 trillion in US dollar terms. The total world-wide wealth was roughly 2.5 times as large as the world’s GDP for the year $81 trillion, according to BCG 2018 Wealth Report. Privos Capital estimates that today there are well over 20,000 single and multi-family offices world-wide managing over $25 trillion of assets around the world. In contrast, private equity and venture capital have a mere $3 trillion AUM compared to hedge funds that clock in at a tiny $2.7 trillion and shrinking. There is a whole cottage industry, from EY to Bloomberg, that throw huge resources estimating the wealth of global elite; however, the important take away from our perspective as a multi-family office is that personal private wealth, family offices, and UHNW wealth stands alone in power and sheer force in the world economy.
How Steve Jobs Created A Family Office
If you are trying to understand what is a single or multi-family office is and why they matter in the current 2019 global financial markets, you've come to the right place.
To give you a practical, real life example of how a single family office was created and the impact on the world one person can make, you need to look no further than Steve Jobs, the American founder of Apple Computer and Pixar, who created a "first generation family office" based on his genius, drive, and creativity. When Steve Jobs died in 2011 due to complications from a relapse of his previously treated islet-cell neuroendocrine pancreatic cancer, his wife, Laurene Powell Jobs, inherited what today is worth $21.3 billion from the Stephen P. Jobs Trust to become the fourth-richest woman in the world and the 54th wealthiest person on the 2019 Forbes annual list of world billionaires.
Today, Laurene Powell Jobs family is the richest woman in Silicon Valley, the largest shareholder in Disney, and uses her family office to promote social causes and philanthropy that are the heart of her family's values and vision. Steve Jobs' family office is one example of why you need to sit up and become intelligent about global family offices, how they allocate capital to the 17 SDGs, how they participate in the capital stack of world-wide deals, and the global impact each family office is making in our global economy. At Privos, we believe that the legacy of Steve Jobs and his family office embodies the hard driving, creative brilliance, and intense entrepreneurism that we strive to replicate at our firm every day.
As an aside, when you have time, we ask that you watch the following short video clip of Sir Johnathan "Jony" Ivy, Apple's world famous Chief Design Officer (CDO), giving his moving eulogy for Steve Jobs, his best friend, during Steve Jobs' Memorial Service that took place on Apple's campus in Cupertino, California. Jony Ivy's short, seven minute eulogy is one of the most powerful, uplifting, joyful, and inspirational tributes to a best friend that you will ever listen to in your lifetime. Jony Ivy's short seven minute eulogy in which he describes the "bold, crazy and magnificent" ideas that Steve Jobs inspired embodies the vision and mission that we hold dear at our multi-family office, Privos Capital. You can view the eulogy here: https://www.youtube.com/watch?v=GnGI76__sSA
What is a Family Office & Why You Should Care
By way of background, family offices are professional firms dedicated to managing the personal fortunes and lives of very wealthy families. The first family offices trace their lineage back to the Roman major domus (head of the house) and the Medieval major-domo (chief steward). The modern concept of the family office developed in the 19th century. The first modern family offices were born around the mid-19th century, with the birth of private banks and trust companies that were created to help the entrepreneurs of the Industrial Revolution manage their wealth. In 1838, the family of financier and art collector J.P. Morgan founded the House of Morgan to manage the family assets. In 1882, the Rockefellers founded their own family office, which is still in existence and provides services to other families. The mandate then - as it is today - is to protect and grow a family's investments - their companies, businesses, funds, foundations, and philanthropic activities - and assets for both current and subsequent generations.
Generally, a family office is a private company, onshore or offshore, that manages the investments and trusts for a single family office, a multi-family office, or a sovereign royal family. The company can be based anywhere in the world, on-shore or off-shore. There are several types of family offices in the broadest sense: (1) a single family office, sometimes referred to as a SFO; (2) a multi-family office, also knows as a MFO; and (3) sovereign royal family offices. Sometimes a single family office is described as an ultra high net worth individual (UHNW) or (UHNWI). For example, Silicon Valley and tech-related family offices that you may (or may not) have heard of today include: Vulcan (Paul Allen), Iconiq Capital (Mark Zuckerberg), Bayshore Global Management (Sergey Brin), Cascade Investment (Bill Gates), Hillspire (Eric Schmidt), Clarium (Peter Thiel).
At Privos Capital, we have seen a massive boom in the establishment of family offices around the world, particularly in Emerging Markets and Frontier Markets. Global family offices are motivated by a myriad of factors for setting up a family office: reducing family conflicts, preserving family wealth, increasing inter-generational wealth transfer, consolidation of assets, dealing with an exit or trade sale of a core business, handling a liquidity influx, increasing wealth management efficiency, reducing vendors and professional advisors, the desire of the family to have greater control over their investments and fiduciary affairs, and reducing complexity. The former Global Financial Crisis (GFC), geopolitical uncertainty, Brexit, North Korea, China, Trump, Teresa May resignation, EU issues, Iran and other factors have led family offices today to increase their control over the fortunes and establish their own family offices.
Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. Typically, a family office's net worth exceeds $100 million albeit there is no set rule about the AUM of a family to quality as a so called, “family office.” Large global banks, such as Morgan Stanley, Credit Suisse, Goldman Sachs, HSBC, and others, have dedicated “Global Family Office” teams of professionals to cater and banker the world’s elite family office; these Global Family Office teams sit above the private bankers and armies of financial advisors (FAs). Then there are the high net worth investors (HNWI), or those with over $30 million or more to invest. While not family offices, there are over 128,000 high net worth individuals in the world whose wealth accounting for over $19 trillion of assets, according to a recent Capgemini and RBC Wealth Management Survey; their fortunes accounted for 34.6 percent held by all millionaires according to Bloomberg.com. Many of these high net worth investors become family offices; however, the majority of high net worths actually lose most of their fortunes by the time the third generation of their family takes the reins.
Family offices are the last outpost of private capital in the world. Privos Capital estimates that today there are well over 22,000 family offices and HNWIs globally managing over $25 trillion of assets, a truly staggering amount of money. Compare $25 trillion for global private wealth to the mere $3 trillion AUM in the private equity and venture capital world, or only $2.7 trillion for hedge fund AUM: clearly global family offices and UHNWIs have AUM over EIGHT TIMES the wealth that of private equity and venture, yet global family offices rarely are mentioned in the press.
Further, BRIC / BRICS, N-11, and the 37 Frontier Countries of the Emerging Markets are adding family offices in record number every year, by passing the number of Western or developed family offices in record number. Anyone who has visited recently Sao Paulo, Brazil, the financial center of Latin American, and looked up in the sky at the largest fleet of private helicopters in the world, witnessed Qatari private banks opening offices in London, or Chinese family offices playing in the U.S. China SPAC market, engaging the western capital markets, and listing companies on NASDAQ, NYSE, FTSE, or AIM, can appreciate the explosion of wealth in the BRICS, Frontier and Emerging Markets. Global banks, wealth mangers and asset management firms are going “long” China and the Emerging and Frontier Markets to boost their assets under management. Private equity firms are fueling the booming billionaire creation business by helping EM and Frontier Markets entrepreneurs exit and sell their family assets and leading country specific businesses, creating vast wealth.
Today, family offices - those families with whom Privos partners globally - typically take the form of a highly private single family office, multi-family, or a royal family office, as you will typically see in the Middle East. Most of our partners view their SFO as mainly a private investment office. Privos partners with the private investment offices of our family offices around the world. Regarding governance, our partners tend to have fewer committees than typical LP investors and they provide frequent and detailed information to family stakeholders. Multi-family offices have a higher percentage of board of directors, investment and audit committees compared to single family offices.
Our family office partners continue to run passionately and aggressively their core operating businesses, funds, and foundations, while other families have had a "liquidity event" and are now focused only on managing investment assets. No family office is similar to another; they are all unique in their own particular way. Typically, our partners are involved in operating businesses and are the majority stakeholders of the holding company. The majority of our partners world-wide locate their family offices not in tax havens but in a global financial center where they can collaborate and network with top investment experts who help them aggressively grow the family fortune, fund, or portfolio company. Family offices pay tax, create jobs, and opportunities for their partners, employees, and stakeholders.
A typical family office is the most concerned with trans-generational wealth management, raising capital, forming joint ventures with other family offices, consolidating accounting, tax, legal and estate planning services not unlike a typical private investment office. Family offices also spend a considerable amount of time on asset allocation and investing in equities, fixed income, hedge funds, private equity, real estate, real assets (oil, gas, timber, commodities), art collection, wine cellar, etc. They are truly global citizens, doing deals 24/7 in all time zones world-wide.
Pinpointing the exact number of family offices operating in the U.S. and around the world is difficult since there's no universal definition of a family office, however, estimates from Privos Capital insiders, other multi-family offices, single family offices, bankers, wealth and asset managers and our private equity and hedge fund managers show booming growth. In another sign of growth, assets managed by family offices are "growing at a faster pace" than that of advisers that cater to the more traditional high-net-worth market, or those with $5 million or more in investable assets. One new twist in the sector has been the emergence of the so-called "virtual" family office. While it has the ring of a robo-adviser, a virtual family office is more about doing a few key functions in-house and outsourcing the more complex functions to outside professionals with specific expertise.
New investment trends are emerging in the family office space as the bull market moves into its record-setting 11th year, and mega-wealthy families look to engage the younger generations in the family business. Wealthy families are dialing back their exposure to hedge funds, mainly due to subpar performance in recent years and high fees. They are still making sizable investments in traditional private-equity funds that invest in companies with the goal of cashing out with a profit in a five- to seven-year period. But family offices are increasingly striking out on their own and buying direct stakes in established operating companies, early-stage upstarts and real estate, such as hotels, commercial buildings and apartment buildings. About 60% of our family office partners said they plan to invest more in "direct investments" in the next 12 months. A typical wealthy family, which has a much longer investment time horizon than funds do, evaluates hundreds of deals a year, said the CEO of Privos Capital. In many cases these direct investments are made in the same businesses that made their family rich. Wealthy families prodded in part by younger, socially conscious offspring, are also boosting their stakes in Sustainable Investments and Impact Investments that they believe will have a positive impact on their local community and the broader world.
In addition, some U.S. family offices are taking advantage of the 2017 change in the federal tax code by taking part in the Qualified Opportunity Zone program, which provide tax breaks on investments in economically distressed communities.