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In the dynamic realm of family offices, change is the only constant. The family office community is currently facing a host of challenges and opportunities, each reshaping the way these entities operate and invest. From fluctuations in interest rates and liquidity constraints to the ever-looming threats of economic recession and global instability, family offices find themselves at the forefront of a rapidly changing financial landscape. In today’s family office environment, several trends have emerged as noteworthy. These trends reflect both the opportunities and challenges facing family offices.
Michael Kosnitzky, Co-Chair of Pillsbury Winthrop Shaw Pittman’s Private Client & Family Office Practice Group, highlights these as just a few of the trends currently influencing the family office landscape.
Direct Investing
Direct investing, the acquisition of ownership in operating companies by investors, has garnered significant attention. Family offices are drawn to this approach for its potential to align with their wealth-creation objectives. By directly engaging in ventures that interest the family or its members, family offices can optimize returns by avoiding management fees and carried interest. This strategy also affords greater influence and control over investments, allowing family offices to target opportunities that shield them from short-term market volatility and inflation concerns. However, this approach isn’t without its challenges, such as operational risk management, deal sourcing, maintaining control and exit strategies, and rigorous due diligence.
Compensation Strategies
Attracting and retaining qualified investment executives is crucial for family offices. Long-term incentive (LTI) compensation plans have gained popularity, featuring deferred cash or profit-sharing arrangements vesting over several years. Carried interest is another favored incentive, typically offered to Chief Investment Officers (CIOs) and CEOs of family offices with substantial assets under management.
Co-investment opportunities, where executives invest alongside the family, have seen growth. These arrangements often require executives to commit a percentage of capital investment or a set annual amount based on personal net worth. Discretionary bonuses linked to financial metrics and other deliverables are also common, along with indirect benefits like pensions, medical coverage, and equity in operating companies.
Regulatory Exemption
Family offices typically enjoy exemption from the definition of “investment adviser” under the Investment Advisers Act of 1940. This exemption spares family offices from extensive legal expenses, registration, and reporting obligations. Privacy is also maintained as family offices are not required to disclose investment information to regulators.
However, to maintain this exemption, family office investors must be limited to family clients. Improperly structured compensation arrangements or certain deal structures could jeopardize this exemption.
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Succession Planning
As many family offices grapple with succession, effective strategies include developing a shared family vision, defining leadership skills, fostering education and experience, enhancing communication, and establishing a succession process. Identifying roles for family members outside the family office before their entry can also mitigate complications.
Cybersecurity Concerns
The vulnerability of family offices to cyber threats has increased, especially given the public profiles of individuals involved. Lean staff members who travel frequently create opportunities for cyber-attacks. Cybersecurity risks have surged during the pandemic due to remote work. Protecting valuable assets and sensitive information is paramount, necessitating strong security practices, incident response plans, disaster recovery processes, education, and potentially, the hiring of cybersecurity professionals.
Michael Kosnitzky, Co-Chair of Pilsbury, Winthrop, Shaw, Pittman’s Private Client & Family Office Practice Group, highlights these as just a few of the trends currently influencing the family office landscape. Stay tuned for more insights as this dynamic field continues to evolve.
