OK, so you’ve set up your family office to be a mini-Berkshire Hathaway and as such plan to buy minority, even majority, stakes in listed and non-listed business. You may also be targeting startup investments and real estate. Indirect investments like hedge funds and private debt might also capture your attention. But then you ask yourself where’s the liquidity going to come from for all of this?
In the rush to buy direct investments, some family offices are neglecting the treasury side of their business as they strive to get higher returns in very illiquid assets. Also, when cash is paying nothing, or even a cost to holding it, having much spare money about the place doesn’t make much sense. But family offices still need to pay the salaries of their employees and provide the cash requirements for their family. And in order to do so, maintaining adequate levels of liquidity will be essential.
A UK head of family office says the treasury function might not be particularly glamorous but it is equally as important as any other function of a family office. “You can’t pay the bills with a lot of illiquid investments, despite their potential for superior long-term performance.”
He adds: “We use our treasury function to support direct investments and any running costs, while we are awaiting dividends, loan yield or asset sales from our private equity and real estate portfolio. The treasury function is vital as you can’t really run any family office with overheads without it, and it effectively funds most things, especially over a longer period of time.”
And here’s what his treasury function comprises of: “Our treasury is a mix of cash and equity funds, we don’t have fixed income. We use dividend income, cash and sell funds as and when required. Also, we outsource the equity fund piece to our financial advisor, whom we have a significant minority stake in.”
Clearly, a well-defined treasury function is a requirement for any family office in need of liquidity...and a family office will never function well without it.