The family office as mini-conglomerates – consider these best practices

The GE (General Electric) Building in New York, once the headquarters of one of America's biggest conglomerates   Photo by Chris Hondros/Getty Images News / Getty Images
The GE (General Electric) Building in New York, once the headquarters of one of America’s biggest conglomerates   Photo by Chris Hondros/Getty Images News / Getty Images

Are some family offices becoming mini-conglomerates? Well, there must be something in this view because so many are buying businesses in the current private equity boom. And, if Berkshire Hathaway – the model that many family offices try to emulate – is considered a conglomerate, which it is by most people, then the link is even more pertinent.

So, if family offices are becoming mini-conglomerates then here are a few pointers on good management of these types of businesses. They are spelt out, in relation to investing in conglomerates, and not family offices, in a recent note from a US investment group called Massif Capital. Although they pertain to conglomerates, some of these points are nevertheless relevant to family offices building a portfolio of privately owned businesses.

And here’s what Will Thomson, managing partner of Massif, had to say when asked about their similarities. “I could not agree with your general thesis more and it is a trend/something that I have discussed with family office clients. It certainly does not apply to all family offices but many, especially as they get bigger.”

Anyway, here are what Massif reckons are important aspects of successful conglomerates:

  • Have a small corporate office – Interestingly, Berkshire Hathaway maintains one of the smallest corporate offices
  • Decentralised management – This, of course, is linked to the first point. The ability to have a small corporate office is dependent on decentralisation of management
  • Subsidiary specific performance measures and subsidiary accountability – don’t look at the whole picture, but rather the parts of the sum
  • Narrow diversification – don’t buy businesses you know nothing about and don’t try to over diversify portfolios of private companies too much. There’s plenty of anecdotal evidence to suggest that family offices that stick to sectors they know best tend to perform better
  • Only acquire profitable companies – that probably goes without saying. But don’t get in the business of trying to turn a business around. Leave that to private equity groups
  • Only acquire companies where the management agrees to stay on post-acquisition

And here are some things that should probably be avoided if you’re a conglomerate, says Massif

  • Over centralization of decision making
  • An excess of management responsible for management
  • Broad diversification
  • Overly large acquisition’s relative to the size of the company. These types of acquisitions might dilute earnings per share    
  • Repeated management changes at acquired companies

There’s much more around the conglomerate theme in Massif’s note, some of which is very pertinent to family businesses, particularly the Asian family business conglomerate.