The Family Capital 700: The US dominates the family office world

More than one half (355) of the Family Capital 700 private investment offices are in the US, as the world’s biggest economy continues to churn out big fortunes on top of decades, even centuries, of wealth creation. Yes, the country’s colossal wealth has created the wherewithal to facilitate the boom in numbers and size of so many private investment offices throughout America. But there are other reasons why the US dominates the world of private investment offices – here are seven of them. 

History

Rockefeller Family & Associates, set up by America’s first billionaire, John D. Rockefeller, in 1882, is often cited as the oldest example of a family office anywhere. OK, the Rockefeller’s family office didn’t survive or at least didn’t survive as a single-family office. But the die had been cast early on, and since then America’s wealthiest had a template to follow. 

Also, typically, fortunes in America have been much less transient than in Europe – at least in the 20th century.  Fortunes were wiped out by the Great Depression in the US, but in the 20th century, the destruction of capital was much greater in Europe – two world wars and draconian tax policies hurt fortunes in Europe more than the US. 

The boom in wealth in the post World War Two period in the US was so vast that surplus capital generated by entrepreneurs wasn’t all needed for their businesses. And some of this surplus capital began to find its way into private investment offices.  With the example of the Rockefeller family office, the concept of a family office in the US took off among other families/individuals with great fortunes in the 1950s, 1960s and 1970s. 

In contrast, successful entrepreneurs in Europe were ploughing much of their surplus capital back into building businesses from, in many cases, scratch. This was particularly the case in Germany, where family fortunes had been severely disrupted by World War Two and needed to be rebuilt in the post-war period. Family fortunes in the UK, France and Italy suffered severely during the 1970s, and for France and Italy during the 1980s, as governments during these years taxed the wealthy stringently. 

As such, significant wealth made in the last 30 years in Europe had minimal examples to draw upon when setting up private investment offices. In fact, probably most of the examples were across the Atlantic in the US, not at home. 

Significant wealth in Asia, the Middle East and Latin America has mostly emerged in the last fifty years. Even today, fortunes in these regions are linked to businesses, with independent family investment structures less popular. 

Culture

Linked to its history, the US culture around the importance of the individual, particularly in relation to governments and big institutions, has given rise to an ethos much more accommodating to family office-type structures than in other parts of the world. 

Family offices, in some ways, represent the ultimate representation of the freedom of the individual and their families. They give those who own one complete and utter financial freedom. This freedom is also increasingly viewed as freedom from third-party groups like banks, private equity firms, and asset managers. They don’t have to pay third parties a fee for their services – they can bring all these services, or most of them, in-house through a family investment office. 

Of course, the ability to completely control their investments has been a big incentive for the super-rich to set up family offices since the financial crisis of 2008 across the world. But perhaps that desire burns just that much brighter in the US given the well defining role of the individual in society there. 

Management/staffing

Professionalism within the family investment world has developed rapidly in the last ten years. But that professionalism is at its greatest in the US, where an increasing number of the brightest stars in the world of investment – and management – work for family offices. The obvious example of this is Michael Larson, the main investment advisor to Cascade Investment, Bill and Melinda Gates’ family office. Larson could have worked anywhere as a top investment specialist and be paid a sizable amount, but he chose to work for a family office. 

The Larson example is increasingly replicated at other family offices in the US, where they are attracting the best and the brightest with stellar work experience. And that has helped to develop a dynamic ecosystem around family offices in the US – top investment/management talent wants to work for them. That might be happening increasingly in other parts of the world, but America has had a headstart when it comes to staffing, and it will probably keep that advantage for sometime

Advisory ecosystem

Family investment groups in the US can rely on a deep hinterland of advisors to help them. Whether these are lawyers, accountants, bankers, or membership groups, the US has strength in depth when it comes to family office advisors. Yes, a family office advisory ecosystem has grown in other parts of the world, but not to the level of expertise and depth as in the US. Of course, that might matter less when family offices increasingly are global and can seek the expertise of US-based advisors, but it still gives US family offices more external experts to turn to than in other parts of the world. 

Diversity

The sheer size of the country’s wealth has meant that family offices have sprouted up across the US. Although many family offices are based in New York City and California, many aren’t. In fact, many are found in small towns and cities across the US, where the original wealth creation took place. That has led to a geographical diversity of family investment offices not found in other countries. 

Diversity is also very apparent in the wealth behind a family office. For example, many have emerged from family wealth associated with old economy sectors and many from the tech boom of the last thirty years. This means newly created wealth can draw upon many examples of family investment groups to benchmark their own family office with. Whether they made their money from supermarkets in Kansas, or tech innovation in Silicon Valley, there is likely to be an example of a family office-type structure whose family/individual wealth came from a similar background. Far greater diversity in the US helps to fuel a healthy ecosystem. Yes, variety among family offices exist in other parts of the world, but not to the same extent as in the US. 

Innovation

US family offices innovate more than their counterparts in other parts of the world. They led the trend in direct investment, and they are now leading the trend in family co-investment. Given their strength in depth, they can take more risks. For some years now, they have been very active in the venture sector, which for some is paying off handsomely. Their European counterparts are, for the most part, playing catch up when it comes to venture investing. Family offices in the US are now investing in new sectors like legal cannabis and blockchain/cryptocurrencies – more than most of their European counterparts. US family offices will continue to innovate in how they invest their money. That will help them to remain ahead of their counterparts in other parts of the world. 

Transparency

Family investment groups in the US don’t set about being transparent any more than other parts of the world, but because they have done much more direct investing, many of them have become more open. That has created a certain amount of peer pressure on others, which has helped to professionalize their service offerings. Greater transparency also means it’s easier for others to benchmark their services with other family investment groups. That raises the bar for the entire sector. For the most part, family investment groups in Europe and other parts of the world aren’t as transparent, which means they have less to benchmark their services against. That could mean slower professionalization of their services.