“Family Office” is a term coined to describe the infrastructure that ultra-wealthy families put in place to manage their lives. The only thing that everyone can agree on in relation to Family Offices is that they are all different. So, how do Family Offices come about?
It starts with wealth and the need to manage both the wealth and the effect it has on the family that own it. A typical Family Office starts with a patriarch or a matriarch (“Head of Family”) who have made a substantial fortune. They most commonly have made their money through a business activity and therefore have at least a personal assistant and an accounting function within their business that they trust. Thus, the personal assistant and chief accountant take on the role of administering the wealth and the organisation of the family (the travel and bill paying side of Family Office). I intend to focus here on the former.
They may be generating large amounts from their business but until a capital event their main asset remains the business itself. Whilst managing the business the Head of Family generally owns everything personally and makes all decisions about investment. They are used to being in control and struggle with the idea that they should not remain in control, so there may be a number of investment accounts at financial institutions but outside of a pension, they are likely to be held in their own name. The first time that the Head of Family may think about the structuring their wealth is when there is a capital event in their business and they switch from being rich with moderate liquid assets to being rich with more liquid assets than they can realistically spend.
In most cases there will have been a corporate finance advisory team to help them with the capital event, and if it is a good corporate advisory team, they will have brought in their colleagues to help manage the tax consequences. These colleagues will be tuned in to how wealth can be structured and how family governance can benefit them in the future and explain wealth structuring to the Head of Family. This may well be the Head of Family’s first exposure to wealth structuring.
It would be common for this to result in the establishment of a family investment company (“FIC”). A substantial portion of family wealth is held in FICs. There are of course many benefits to holding wealth in a company, even a company with a single share class, but really this is the most basic form of wealth structuring.
Over time Family Office infrastructure grows to include investment professionals and in house legal and accounting experts.
As Heads of Family become accustomed to holding their wealth in a FIC, and they become accustomed to their new in house advisers, they look to more complicated wealth structures that can deliver wider benefits than simple FICs. Where tax systems do not penalise it, they are drawn towards trusts or foundations (“trusts”) which help them to create dynastic vehicles for long term wealth holding. However, trusts aren’t for everyone.
There are alternatives which can deliver many of the well known benefits of trusts, which may include some or all of the following structures:
Companies with complex share classes and differing rights across the share classes. These rights can change over time, or in response to particular events (e.g. death), allowing for devolution of value and control in the manner envisaged by the Head of Family. The main drawback is the lack of flexibility that means that it is difficult to deal with changing circumstances.
Partnerships that allow for a separation of management and value can encompass all the benefits of a company with complex share classes and greater flexibility to respond to change.
Partnerships are the current “hot property” to structure wealth for Family Offices. Where tax limitations allow a combination of trusts owning General Partner (“GP”) and Limited Partner (“LP”) interests combined with the division of control and value is proving extremely popular.
Some Heads of Family see this is a dynastic solution to wealth holding allowing for family members with suitable skills to manage the assets through the GP yet providing benefit across the family though LP interests.
Other Heads of Family see this is a means of demonstrating investment track record to attract other families to their partnership. This can both allow them to monetise their skill by charging fees, share cost and also increase purchasing power, giving access to larger deals. Whilst in many cases it is technically possible for Family Offices to run their wealth structures in house, there are substantial advantages to outsourcing them. Most Family Office teams are more excited by investment and deal making than they are in corporate governance, and corporate secretary style work, yet the risk of neglecting those areas can be substantial. Consequently most Family Offices choose to outsource these areas to skilled service providers such as LGL.