If the family office/private investment office environment is changing in Europe, then Germany might be the biggest beneficiary in terms of their growing numbers and activity linked to them. In contrast, the UK might be the biggest loser.
It’s difficult to put any absolute numbers on how many private investment offices there are in the UK and Germany. But here are some guestimates based on Family Capital’s databases.
For Germany, thirty of them are part of Family Capital’s 450. Since the launch of the 450, Family Capital has identified an additional eight from a list of another 100 global private investment groups.
Family Capital reckons there are at least 3,000 private investment offices globally. So, if German family offices account for just under 7% of the 550 in Family Capital’s database, it can be assumed they account for roughly the same amount of the entire 3,000 family offices in the world. This means there are at least 200 private investment offices of a certain size (more than €250 million of assets under management) in Germany, again using a very rough calculation. Some
For the UK, using the same calculation, there are at least 230 family/private investment offices of a certain size.
Today, the UK might have more family/private investment offices than Germany, but there are a few factors afoot to suggest that won’t last. In fact, Germany will have the most active family office market in Europe over the next 10-plus years, overtaking the UK in numbers and no doubt assets they manage. Here’s why.
Germany has more wealthy people than anywhere else in Europe. According to a recent WealthX report, Germany has over 15,000 individuals worth $30 million or more. That’s at least 5,000 more than the UK. OK, many of those individuals aren’t in a position to set up a family office – most analysts reckon you need at least $200 million to set one up – but many are, and indeed, more than there are in the UK at this present moment.
More importantly, wealth in Germany is changing – and changing in a way that is much more conducive to setting up family offices than anywhere else in Europe. An increasing number of the country’s 50,000-plus Mittelstand companies will be sold in the next ten years. That will lead to more liquidity events for their owners.
“The families controlling many of these businesses are changing the perception of family entrepreneurship,” says Philipp Bierl from the Institute of Family Business at WHU at the Otto Beisheim School of Management in Germany. “They no longer think it’s necessary to secure the company forever. What’s more important is to secure the family’s wealth.” And, many of them feel, setting up an investment office might be the best way to generate wealth.
Bierl adds that many family owners of old economy Mittelstand businesses face succession issues and, at the same time, see willing buyers for their companies. “The next generation doesn’t necessarily want to come into the business. Many of them see more interesting careers in new economy-type businesses.”
He adds: “Old economy businesses are facing disruption, but, in Germany at least, many know they will get an all-time price for their business if they sell.”
Last year, a total of €11.3 billion was invested in around 1,100 companies by private equity firms in Germany, with the investment volume exceeding the previous year’s level (€6.77 billion) by two-thirds, according to the German private equity and venture association, BVK. Although the increase is expected to be below that in 2018, BVK’s Ulrike Hinrichs, said with the release of the 2017 numbers: “There is currently no indication that 2018 will not be another successful year for our industry.”
Bierl says family owners are looking at all this activity in private equity in Germany and asking themselves the question: “The party can’t last forever, let’s cash in while the times are good.”
He adds: “They know they would have to invest a huge amount of money to potentially get the same price for there businesses in 10 years. And they also see their risk profile as very asymmetrical, depending mostly on the ownership of one asset – their business. So, they think to themselves, ‘we’re better off selling now and to diversify our wealth so to preserve wealth for future generations’.”
Peter Brock, a German-based family office consultant, says the uptick in the sale of businesses in Germany will lead to more family offices being set up. “Domestic wealth in Germany is undergoing changes, where more private family businesses are being sold. Inevitably, this trend will continue to lead to the creation of more private investment offices.”
Examples of family offices emerging from the sale of Mittelstand businesses in the last few years are Munich-based Serafin, Stuttgart-based THI Investments, and the Windhagen-based Wirtgen Invest (see profiles).
In contrast, the environment for family offices in the UK, as well as the potential of new liquidity events that lead to investment offices being created is looking less rosy.
Although Brexit uncertainty looms large in the UK, the issue many families with substantial wealth are more concerned about is the prospect of a Labour government being elected. Most commentators reckon a Jeremy Corbyn-led Labour government would be the most left-wing administration ever in the UK. And that’s making the wealthy nervous. Not only will that potentially stymie wealth creation, but such a government would also put off non-British wealthy individuals to set up UK-based investment groups.
And it is perhaps the second point that will most dampen family office activity in the UK. Out of the 40 UK family offices listed on Family Capital’s 450, 17 of them are owned by non-British or dual passport citizens. That money is much more footloose than money and assets held by UK citizens.
Some of those individuals and families might be looking elsewhere to base their family offices. Switzerland and Luxembourg could be the obvious choices in Europe. But Germany, as its domestic family office market growths, might also offer opportunities, says Brock, even if the country can’t provide the same tax advantages of Switzerland and Luxembourg.
“More external wealth is looking to invest in Germany,” says Brock.
“I have noticed much more Middle Eastern capital looking to buy assets in Germany than even five years ago. Some of the families investing here are looking to set up a presence in Germany, and that might very well be a family office-type structure, whether that is a subsidiary of a family office headquartered elsewhere, or a completely independent family office.”