Studies of some of the world’s wealthiest families show that rarely would family wealth pass hands beyond three generations. The family office has however evolved over time to address some of those needs, according to Idowu Thompson, a highly experienced Private Wealth Manager and currently Group Head Private Banking at FirstBank of Nigeria.
To Esiri Agbeyi, Partner & Head Private clients and family business unit, PwC Nigeria, one of the issues that confront family businesses is the risk of fragmentation of wealth, especially when there are several heirs. The family office is a strategic initiative to address such a situation.
Agbeyi and Thompson in this conversation with Oghenevwoke Ighure, discussed the role of family offices in Private Wealth Management.
What exactly is a family office?
Esiri: Family offices have evolved over time, and therefore definitions have changed. Traditionally, they are another arm of a family business set up to segregate investment funds and grow them for several generations.
They also tend to wear several hats in the sense of meeting the specific family needs.
It’s said that when you see one family office, you’ve seen one. Each is different because they’re particularly matched to the specific needs of the family. They can go beyond investments to concierge services, administrative duties or meeting tax compliance obligations across jurisdictions or managing luxury assets.
Family offices in North America have significant assets under management, where they’re starting to invest also in businesses other than the legacy business that first generated the wealth.
One family office will therefore differ from the other depending on the family needs.
Family offices are increasingly important players in Private markets because family businesses play the long game. Does their ability to weather major volatility without looking for exits make them sought after partners for Private Wealth institutions?
Thompson: In a broader context, family offices may be considered as extensions of full-service investment firms, or in a broader sense wealth management firms set up to achieve the goals of sustainability and transfer of family wealth. Like Esiri said, some may focus on limited areas such as lifestyle concierge; while others may focus on structures and decisions around investments and the family wealth. One of the primary goals of having a family office structure is the ability to achieve sustainability for a family’s generational wealth. From historical studies of some of the wealthiest families around the world, you would find that rarely would wealth pass hands beyond three generations, the family office has however evolved and addresses some of these needs. It is important to recognize that over and above having the right structures, the quality of advice and management of investments within these vehicles, are both crucial for continuity. You may have the right legal structure, but if you don’t have the competent professional advice, or guidance for example around efficient asset allocation, or planning for the appropriate time horizons, then it is also possible to erode value of such assets held within the family office structure well before wealth passes on to the next generation. Regardless of these the family office remains a very useful structure for the orderly preservation and transfer of generational wealth.
Will you say that family offices are a source of long term financing, that is, patient capital, and do you think management teams or companies seeking patient capital will find family businesses graceful partners because of their ability to weather a great deal of volatility?
Thompson: I would say Yes, but I will also add that we are going through a period of evolution. If you review the landscape of family offices all over the world, you will find that the structure is quite popular in North America, the Middle East, Asia and Europe; while it is a trend that seems to be picking up within Africa addressing the growing complexity of the needs of the new multi-jurisdictional African wealth.
Patient capital, again, is a bit subjective and why do I say that;? one of the goals of the family office is to ensure the sustainability and orderly transfer of wealth. Patient capital may not necessarily offer this conveniently or fall within the risk appetite of families prospected to fund such vehicles.
Patient capital for some investors may be considered rather speculative when compared with other investment options as investment grade bonds. Some may however offer significantly higher long term returns to compensate for the risk and longer duration. Family offices notwithstanding form a viable source of patient capital. I believe that we are seeing more wealthy families show interest in these vehicles for the allocation of a portion of their family wealth.
As stated, patient capital, quite often also results in higher-than-average returns where the prospects of the outlets are well evaluated and managed. Technology covering areas like ecommerce, payment systems and more have become immensely popular just as some of the private equity funding recipients have also become immensely successful. More startup companies with founders of African origins are evolving as Unicorns in the technology space. If you flip back a few years you would find that quite a few of them have outperformed in both earnings and valuation.
In my opinion family offices clearly should be more involved in providing a more consistent source of patient capital, guided by an optimum asset allocation criterion.
If a family office has significant investable assets, what I would expect is that part of this would go into long term funding or financing of well researched vehicles while others could go into short to medium term outlets.
I would say that family offices definitely are a source and should be a more active source of patient capital as long as the choices are well guided.
In terms of family offices being a good source of long term financing, what are your views on that?
Esiri: My views really lie around the uniqueness of family businesses, which typically stay the long haul.
In times of volatility, experienced for example with the pandemic that we just came out of, a lot more family businesses were willing to make sacrifices in terms of retaining staff, but also depriving themselves sometimes of dividends, for the better good of the business and sometimes of the communities. We observed this in PwC’s family business survey which we run bi-annually.
Family businesses possess social capital that sometimes runs cold in non-family businesses where there is a short-termism, or where you have third parties who are not necessarily attached to the soul of the business and so they’re only looking to make their own returns, whether it’s in form of salaries, or for the shareholders in form of dividends.’
The unique tie, or unique soul that family businesses have, you know, you don’t find in non-family businesses. This is also mirrored in family offices whose investment goals are more likely aligned with businesses that share similar values with them and therefore can wait.
It boils down to how you match the family office to the intending portfolio company that’s looking for that investment and once you have that mark, it’s easy to then see equity being given over and above dividend extraction. In Nigeria, there aren’t so many family offices while in North America, you would often find family offices as limiting partners in funding arrangements; and now we’re beginning to see a lot more family offices now doing direct deals, and playing the role of private equity investors.
When you look at private equity funds, they generally tend to have an exit period of about 5 to 10 years, however, startups need capital for longer. More questions arise like what the funding terms are. PE fund managers are looking to derive huge, carried interest upon exit, but the family office may be looking more to build in society, solving problems in addition to also making a return.
You can compare them to impact investors but certainly not all. I believe family offices can be a very valuable source of patient capital only once you’ve found that ideal match. It requires the right talent to do so.
Within the family business unit, there are relationships that exist that really determine how far family businesses can go. You might have a situation where you have the founder in the business, and then you may have the next gen in the same business, and they are usually conflicting views on investing.
You most likely have a situation where you have people like the boomers versus the millennials, who have different ideas about what should be considered an investment option. How do family offices help to bridge this gap?
Agbeyi: Family offices would usually have a more independent view, separate from the family business. The founder probably started it with a lot of passion and drive different from what the next gen brings. The next gen brings continuity. They tend to be better with structures and processes than visionary founders who are entrepreneurial. As such in very volatile times or changing times, they are a source of stability and to whom the baton can be passed on as they come with a fresh mindset.
Family offices play the bridging role because what they can then do is build off of the individual preferences, whether of the founder or the next gen. This works its way through family assembles or councils. It is on the back of this the family office can design investment policies, and decide what kind of assets best match the family’s profile rather than one individual making all the decisions.
Now if you’ve probably gone through some of those meetings that family assemblies offer or family councils would offer, those kind of screenings have already gone through to then determine that, okay, we would set aside certain funds for a different type of investment, from what we typically have, and how much of that would it be and it would have been done based on facts, data, to support whether or not the family office should go in those lines, as opposed to something that’s just emotionally driven.
The family office, with the talent, coming with an independent view, different from the founder, who was very passionate about building that business from scratch, and the next gen who is somewhat disconnected from what’s driving the founder.
So, it is pretty much a meeting point for the two parties. Where structured right, it can continue to be the bridge for several other family heirs as well who feel the need to invest otherwise, in certain things.
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Sometimes you might even see next geners that are not so much about profit making, they might be more in tune with philanthropy. Family offices play a role in that as well and then start to either formulate the best strategy for going into those areas.
It might be that you have to set up a new foundation, but I guess the, the main point is, a family cannot sit by itself to make those decisions and sometimes you don’t want to just have the founder making those decisions, because they might be authoritarian in nature, so that they squash, whatever drive the next gen might bring, and whatever addition they might bring.
The family office can strike the balance and bring the best of both worlds together.
It might be useful to define what exactly private wealth management is and try and draw a relationship between private wealth management and the role of family offices.
Thompson: Private wealth management is a very simple concept, or if I can use the word structure that looks at guiding clients through the wealth journey; the journey from wealth creation, growth, preservation and transfer.
If you’re looking at the goals of a private wealth manager, it’s simply that of sustainability, and not just about the ability to meet the short term return expectations of their clients.
It’s also that of ensuring that the preferences or the wishes of the clients are also reflected in the investment decisions, in the type of actions that are taken on their behalf.
A private wealth manager could operate in two ways, one, and either in a discretionary structure or in a non-discretionary way.
Discretionary structure simply means that the client has extended the discretion to the private wealth manager to take investment decisions with the expectation that the portfolio would yield a minimum agreed return, while investing with certain goals or interests that have been agreed and documented in an investment policy statement or plan document. , This could also cover investing with ESGs, for example as a theme.
The job of a private wealth manager is to properly profile the client and guide them through the wealth journey efficiently. The wealth journey that’s mostly linked to the family office, again, speaks more to the preservation and transfer of generational wealth.
Why do I say so? I was going to add on to what Esiri had said earlier, when we spoke about the family office being a source of patient capital wad that one thing that features as key concern for most founders whether within the single or multi-family office structure is the need to achieve sustainability.
And what generates sustainability?, again, like I alluded to earlier, is driven by the quality of the investment decisions that are taken.
Don’t forget that the family office itself is a structure that leans on multidisciplinary individuals, from your tax, investment insurance to your lifestyle specialists
But the truth is that if you do not have a viable portfolio within that structure then it would be extremely difficult to sustain or achieve the goals of the family office in the first place.
Linking private wealth to the family office, is very simple. The work of the private wealth manager within the family office is; one, to ensure that the investment decisions are closely aligned with the wishes of the founder as set out in the mandate; to ensure that such decisions drive the sustainability of the family’s wealth; and also to ensure that the interests of a family are well protected.
Lastly, the work of a private wealth manager within the family office structure has also become a lot more challenging, and the reasons are not far-fetched. Many families are now multi-jurisdictional; you often find out that the interest of the businesses that the patrons or the founders of these family offices have started may not necessarily be what next generation who are also separated by geography would wish to pursue. Herein lies the need for conversations around the decisions that they would take for the longer growth of the capital that they invest.
The ability to generate consistent and sustainable income to meet the goals and the needs of the family and the next generations remains a crucial role of a private wealth manager operating within the family office structure, regardless of it’s location.
Listening to you talk, what comes to mind, is the concept of future proofing which I came across for the first time in Nike Anani’s book on family businesses. It’s a very interesting concept within the family business circles, because it basically looks at creating the business of the future. Can we say that private wealth management is the secret sauce for building multi-generational businesses?
Thompson: I would answer a resounding ‘Yes’ to that.
Wealth is what drives the ability to invest and wealth is also what oils sustainability within families. One thing we would have to agree is that within every family, you would be certain to have divergent views and opinions.
No two people are or would ever be alike in thought or character. Even when you have a founder that sets up a very tight family constitution, you’ve set up values that have well guided you set up policies around how the inter-relationships and how decisions should be taken and all of that.
The truth is that if the values are not properly imbibed by the next gen, then it basically defeats the essence of having the family office structure and, and it becomes more threatened, so to speak.
Circling back to what you’ve just raised, I believe the most important thing for a private wealth manager within a family office structure is to ensure that you’re not looking not just now but you’re also looking at what you feel would be some sustainable growth for the future.
I lay emphasis on an efficient asset allocation; it’s very important for private wealth managers to be able to separate emotion, from rational investment decisions.
Why do I say so? Sometimes, even within families, you find out that the next gen would wish to invest in certain endeavors or want to go into certain areas where hasn’t been the traditional path of their families Such decisions would involve allocation of capital that may not necessarily be assured of protection.
So again, the role of a private wealth manager is a very sensitive one with varying levels of complexity depending on the structure. With a single-family office, it may be easier to have those conversations, you’re dealing with just one point of control in the founder.
If you’re dealing with multiple family offices, then you are dealing with several different families at the same time, the level of attention may not be what you’d give a single family office, or if you’re looking at other structures where basically the family has just simply brought together different professionals, the tax specialists, the investment specialists, and all of that the considerations are also quite different.
But I think future proofing is something that every family has to think about in terms of sustainability. It’s nice to think about the achieving ESG goals as an example , but it’s also important to look at the practicalities and the needs of the families.
It’s also important to look at the culture of the family; like I said, more families are multi-jurisdictional today and children may not necessarily grow up together. If you review the history of the divisiveness that had evolved in otherwise cordial family relationships, you would understand the impact on continuity. Ready examples come to mind some date back decades. like the Dassler brothers; founders of Adidas and the 70 year family feud and split that led to the creation of Puma ;the Ambani’s in India and the founder of the fashion brand Tory Burch. Future-proofing requires having a vision and culture that would keep the family together. What would sustain, what are the growth areas, what would continue to generate revenues, and what would continue to hold the family together These are conversations every single family that ventures into the family office structure must deal with upfront. .
Giving a broader definition of the term future proofing, it looks more broadly at how we can continue the family legacy of entrepreneurship through regeneration, renewal and reinvention to ensure that the enterprise is relevant in the future. How do family offices help this process?
Agbeyi: One of the things that you’re thinking about in future proofing is retaining value and relevance. From a value standpoint, you definitely want to ensure that the wealth you’ve accumulated from the family business continues generations over.
One of the issues that you sometimes have with family businesses is the risk of fragmentation of wealth, especially when you have several heirs. If the founder passes on and then has to hand over shares to all of the children, more importantly Nigeria for instance where you have polygamy, you may find that having to transfer those shares to those many children would cause the wealth to be fragmented.
Because when they then exist, who are they selling their shares to? Probably outsiders, and that’s how control within the family business is diminished and value obviously reduces.
The family office is a strategic initiative to say, let’s set aside some of that wealth that we’ve generated from the family business, because, just look at it, some of the founders that we have even in Nigeria, the form of wealth they’re getting from their businesses now is probably dividends.
There’s a huge dividend payout, whether interim or final. Sometimes, some of them are on the salary scale but of course, when you’ve retired and just playing the role of chairman, you probably are only getting dividends.
Now those dividends, what do you do with them? Do you just retain them in the bank or you’re investing them in other assets and what are these other assets?
Would it still be the legacy business or there are other businesses for instance like tech or sustainably inclined businesses that you need to then spread the wealth into?
The family office is a deliberate effort to ensure that in the midst of that risk of fragmentation of wealth, in the midst of rising changes globally and in business, you will still have focus on preserving that private wealth that has been generated and you have a special purpose vehicle that can be used to procreate it.
It’s also a good melting pot in the sense that you have different individuals from the family with different needs and that then becomes a central point to sort of dilute all of those needs into one and have a more sense of reinventing whatever value had been created before.
So the family office space has that kind of critical role and in most of the continents that we’ve called maybe asides of Africa, almost every billionaire has a family office.
When we look at Nigerian billionaires and the devaluation of the currency, they lose value with every depreciation cycle.
And so in 2015-16 when we had that massive devaluation from I think 150 to 300, all of their wealth was halved already. If you were not intentional about investing in other business sectors, then you hadn’t diversified your risk.
Family offices also play that kind of very important role in the sense that it continues to retain value and relevance within a society.