Most of the wealthiest families in the country manage their assets through a structure called a family office. While each family office is different, most of them have in-house accounting for all family assets, tax planning, risk evaluation and control, and succession planning for family wealth and businesses. The best ones do their own financial and investment analysis comparable to what you’d see at a hedge fund or private equity firm. The very best ones think carefully about how to prepare coming generations for the responsibility of stewardship, and how to caution them against excessive consumption and wasted lives.
I like talking to family offices because they tend to think like long-term investors focusing on the needs and responsibilities of multiple generations at a time. A few years ago, many of the family office people I know were preparing for possible domestic unrest and were buying homes in sparsely populated areas with onsite electric generation, and massive food supplies. When low interest rates reduced the returns available from many investments, a lot of family offices started investing in commercial and multi-family residential real estate. It’s both interesting and helpful to know how the ultra-wealthy are thinking about the current set of investment opportunities. With that in mind, I went to the Rise of Family Offices conference hosted by Ironhold Capital Founder & CEO, Paul Gray.
Approximately a dozen family office representatives spoke, and while each has their own focus and needs, there were three main themes that emerged. The first is a continued focus on real estate. They’ve largely invested in properties that produce significant cash flow. At a time when many were frustrated by low rates of interest in their savings accounts, these investors were earning higher yields. Because real estate tends to be relatively illiquid and has high transaction costs, it’s also a better investment option for people who have a long time frame. This is common thinking for most of us. If you were going to live in a new town for one year, you probably wouldn’t buy a new house and have to pay broker fees and attorney fees only to have to sell it a year later. If you knew you wanted to live somewhere for multiple decades, you’d be much more likely to consider buying a place.
Kamil Homsi, CEO of Global Realty Capital (GRC), talked about the importance of preserving capital. As the head of a huge family office, he’s not focused on any get-rich-quick schemes. GRC focuses on growing carefully across multiple generations. Unsurprisingly, much of his investment efforts are in real estate.
There was wide agreement among the panelists on taking a long-term investment approach. This opens up multi-year or even multi-decade opportunities for them in private equity and venture capital. A number of them are starting to get interested in Bitcoin, cryptocurrencies, and blockchain as investment opportunities. In general, they’re not committing large amounts of family wealth to crypto, but it does represent a small percentage of assets for several of these families. Even the offices that invest in public equities (stocks) take a private market approach and are more focused on the long-term value of the underlying business than any short-term trading dynamics.
There also tends to be a difference between family offices that are formed as a result of operating business success vs investing success. For example, if someone were to start a flooring business, and then sell it for a huge price and use the proceeds to start a family office, they might be more likely to invest in pooled vehicles like funds run by others. When successful hedge fund, private equity, or venture capital investors start their own family offices, they tend to have the expertise to make individual investment decisions.
Sherry Witter of the Witter Family Office started working in investment banking while still in high school, and soon after graduating from college took a job at a well-regarded hedge fund. She has her own well-earned expertise and married into the family of the founder of Dean Witter so both sides of the family have extensive investing experience. Like many of the other families, she invests in some long-term assets like private equity and real estate. However, the focus at her family office is liquid market investments. Much of her family office wealth is invested in day trading with a focus on daily liquid risk control. She’s seeded over 100 traders and managers.
The third theme that came up consistently during the conference was how to prepare the next generation. The people who spoke were aware that young people who grow up with unlimited wealth and little responsibility will often lead wasted and unhappy lives. Homsi spoke intensely about maintaining relationships with his extended family. He spends time personally with younger members of the family and tries to guide them against excessive consumption or drawing unwanted attention to themselves. He won’t give them unlimited funds to spend, but he will give them his time and personal counsel.
He talked about the importance of transparency, having a clear idea of why he wants to make a specific investment, and being able to communicate that to other members of the family. In this way, the ultra-wealthy are very much like the rest of us. They spend a lot of time and effort trying to figure out the best way to raise their children to live good meaningful lives. The money makes some things easier, and when it comes to preparing their kids, can also make things considerably more complicated.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.