Your Family Office strategy.
How do family offices invest their principal capital? There are no fixed investment regulations that apply. Family offices tend to follow their own individual investment policies and they are generally subject to the more relaxed regulations applicable to companies, trusts and foundations. However, the degree of freedom enjoyed by family offices is reduced in proportion to the level of services provided by thirst parties and the number of families served by the family office.
Family offices are able to diversify their exposures very broadly as a result of their relatively larger capital bases, making them similar to small or mid-sized institutions. Family offices are also generally better able to think and invest on a more long-term basis, and they primarily pursue wealth preservation in order to pass on assets to the next generations. Many prefer direct investments, and where organizations have an entrepreneurial principal, they are more likely to get directly involved in the investment process.
Many family offices take an open approach to their investment policy and try to avoid conventional investment paths. This can be seen in the way that many invest in alternative investments, such as yachts, horses, art, forests and farmland, or car, wine or watch collections. This enable them to spread risks while reflecting the personal preferences and passions of family members.
The type of investment strategy a family office pursues is a function of sourcing capabilities, desired control, liquidity needs, investing experience, and family office infrastructure. Family office investment strategies generally fall in three broad categories: (i) third-party managed, (ii) public direct, and (iii) private direct. Often family offices use a mix of these strategies to diversify investment exposure and improve risk-adjusted returns.
Third-party managed investing consists of family offices using asset management funds to invest their capital. Families can make high-level decisions around how to allocate their capital between industry sectors and asset classes at the fund selection level. Below fund selection level, however, they have limited influence over investment decisions.
Direct investing involves the family office making the decision to invest capital into a specific asset or security. This requires the family office to do its own research and due diligence in the investment process. The family office is also responsible for continuing to follow asset level performance and manage its portfolio of these assets on a day-to-day basis.
Public direct investing is centered on liquid debt, equity securities and derivatives that trade over a public exchange. These investments are made through the use of public information and are subject to regulatory requirements that both protect and constrain the investor. Unless very large positions are accumulated, public direct investing provides very limited influence over the underlying asset’s management and strategic decisions.
Private direct investing focuses on taking a more active role in the deal process and underlying investment. The family office will often be more involved in business decisions and strategy for the entity or asset. The investment can be structured as debt, equity, or as a specific asset purchase (e.g. real estate). Information can include both public and non-public items. Regulatory requirements are more looser, giving the investor greater access to information but more limited protection.