Only a limited number of single-family offices will prosper in the future

Single family offices are dealing with dud deals, low returns, investments, high costs and the departure of key personnel.  NextGen would be forgiven for wondering whether succession is worth the effort. 

You could also argue the exponential growth of the number of family offices is simply a creation of the bull market, which has now receded and left them nursing a clutch of over-priced assets. Only a limited number of SFOs are likely to have the wit, and the strength, to prosper in the difficult years to come.

The next generation is calling for more focus on their concerns. But they are also starting to realise they may not want the hassle of managing their family’s SFO

Multi-family offices are circling, keen to prise family office mandates from their principals. Advisers, such as Addepar and Eton Solutions can offer a raft of outsourcing services, to create virtual SFOs.  

Scott Hayman, president of Northwood Family Office, a leading multi-family office provider in Canada, can taste victory. He reckons SFOs worth more than $1 billion, plus the smaller fry, are weighing up their options.

Shaun Parkin of advisory firm Hall Road Investments expects more  outsourcing: “A lot are using MFO/wealth managers as a risk mitigator (due diligence, trading, key person, portfolio construction, capital market inputs etc) when they are making the insource/outsource decision. It can be about costs as well, mostly about appetite to hire/resource and spend on custom infrastructure that can be bought from specialists/off the shelf.”

Hayman says a number of key staff members are approaching retirement, and they will be difficult to replace, unless they are given capital to work on exciting new projects. Recruitment consultant Mark Somers warns that the defection of investment talent could lead to a sense of drift, as administrators are left in charge of the shop. 

SFOs who keep their teams will face cost pressure, as professionals capable of handling private assets and AI demand significant performance incentives. Principals will go on to ask themselves whether they will ever get value for money, in the light of recent disappointments. 

The next generation is calling for more focus on their concerns. But they are also starting to realise they may not want the hassle of managing their family’s SFO. Several of them have set up their own investment vehicles, tilted towards ESG.

The pressure on SFOs has risen further following a recent halving in the value of VC deals, several of which were championed by NextGen Corporate collapses, typified by Sam Bankman-Fried’s crypto firm, FTX, have been deeply embarrassing, given the frequent failure of investors to ask obvious questions of their governance.

Pitchbook analysis suggests that VC cash reserves are winding down, as ventures demand more capital but fail to secure an exit. It predicts the return of zombie funds, last seen following the 2008 credit crisis, which irritate family offices by charging fees as their ventures struggle. 

Markets have gone nowhere, or down, over the last year. Fears of inflation add to the uncertainty. A big push into private markets has been recommended by advisers. But will it work? 

A survey of 188 family offices by William Blair suggests that 70% of family offices have no interest in raising their risk profile.

Family Office Fundamentals, by Mark Somers, highlights the way negativity is affecting principals, faced by continual demand for capital from portfolio companies in need of tighter supervision. They end up having to decide which ventures to back, and which to let go, even whem]n they lack the bandwidth.

Somers’ book offers several case histories. According to Mark Cunningham, managing partner at MFO Holbein Partners. “I’ve got one family where the patriarch is being pestered by his wife, saying: “You’ve made all this money. Why on earth are you spending all your time doing this?” 

“The results are okay. They haven’t been that great. He’s looking at a hybrid family office. Then, depending on how his children work out, he may go full multi-family office. In doing so, he’ll avoid the headache of recruiting and retaining. 

“Entrepreneurs like to make money. They normally have a big team in their family office: they’ve got 20 people. It’s an HR nightmare. It’s a compliance nightmare, as well as a cybersecurity nightmare. Do they really want the aggro?”

Members of an SFO investment team may well choose to resign, rather than enduring the wrath of their principals, If nothing else, an MFO has places to hide, or swap, clients. But SFO principals have no option but to stay put, unless they can find someone to take the problem off their hands.