Despite the dampening of an emotional high once felt by those relieved to finally be free from lockdowns, travel bans and other government restrictions, the findings this year are not a story of bleak times. In fact, to date, family offices have been emerging from this period stronger, wiser and wealthier than before. This is because family offices, with their long-term approach, patient capital and nimble structures, are exceptionally well-poised to not only ride out, but to capitalize on, economic downturns.
Topic of the week.
North America Family Office Report 2022
Family offices have boomed in number worldwide over the past two decades, partly because of surging fortunes across tech, finance and real estate. The vehicles, which manage the personal capital of the ultra-wealthy, are lightly regulated, nimble and as public or private as the founder wants.
The mood of North American family offices has dampened but their portfolios outperformed this year’s global average returns according to The North America Family Office Report 2022, jointly published by RBC and Campden Wealth. Dominic Samuelson, Campden Wealth’s CEO, takes this as evidence of the resilience of family offices even in the face of the economic and epidemiological difficulties of recent years.
More than three-quarters of families surveyed saw their wealth rise in 2022. The collective AUM across North American family offices was estimated at US$182 billion. The average family represented from North America had wealth of US$2 billion.
Despite this dampening of an emotional high once felt by those relieved to finally be free from lockdowns, travel bans and other government restrictions, the findings this year are not a story of bleak times. In fact, to date, family offices have been emerging from this period stronger, wiser and wealthier than before. This is because family offices, with their long-term approach, patient capital and nimble structures, are exceptionally well-poised to not only ride out, but to capitalize on, economic downturns.
This was evidenced last year, when we reported that a staggering 86 percent of families saw their wealth increase, while 58 percent saw their family office AUM rise over 2020/2021. This year, most families, 77 percent, have once again seen their wealth rise, along with 56 percent in their family offices’ AUM.
The report, including 179 responses from across North America, also found that:
- Family offices are taking larger positions in private equity to mitigate risk
- Their allocations to private equity helped them outperform peers in Europe and Asia last year, with an average portfolio return of 15% – edging ahead of European (13%) and Asia-Pacific (%) counterparts
- 46% of North American family offices intend to invest more in buyout funds in 2023
- 41% plan to increase direct deals
- Over a third engage in sustainable investing (66% in Europe)
- Almost one-in-four currently has metaverse-related investments, with 13% saying they plan to increase allocations in 2023
- 30% of Next Gens have already assumed control of their families’ operations
- 27% expected to do so within the next decade
- Slightly more than half of families have a succession plan
- Less than 40% feel that Next Gens are prepared for succession
- A large majority (86%) give philanthropically
- Family offices are allocating only 3% of their portfolios to private debt
Nearly half (47 percent) of the world’s family offices are in North America, defined to include Barbados, Canada, the Cayman Islands, Mexico and theUnited States. Europe and Asia-Pacific account for 27 and 20 percent of thewhole, respectively.
More than two-thirds of the North American family offices (68 percent) described their “general economic outlook” for the period of 2022-23 as either negative or very negative. That is almost identical to the figure for the global survey (69 percent).
The Campden Wealth report indicates that 81 percent of the NorthAmerican family offices surveyed cited investment risk as the number one threat to family offices. Consequently, many have shifted away from a riskier growth approach to an investment strategy that balances growth with capital preservation. This year, 51 percent of family offices employed a balanced strategy, compared to 47 percent in 2021.
Protection against inflation is an important part of the preservation part of that balance. It has led to more interest in private equity funds (46 percent of respondents say they will allocate more to such funds) as well as direct investments (41 percent say the same) venture capital (35 percent) and real estate (41 percent).
Dr Rebecca Gooch, senior director of research at Campden Wealth, described family offices as “nimble investors with ample cash reserves, diverse portfolios and a long-term outlook”. This, she added, makes them“able to ride economic waves while also capitalising on opportunistic deals”.
Private equity
If we talk about private equity, then according to the report investment firms for the world’s ultra-rich are planning to boost private equity bets after notching double-digit returns last year, a survey found. Nearly half of North American family offices say they intend to increase holdings in the asset class.
Private equity was the top performer in the portfolios of the 179 firms surveyed, which collectively have an estimated $182 billion of assets under management. Their gains averaged between 21% and 26% last year across direct and fund allocations, as well as venture capital.
“The key story this year is about private equity,” RBC and Campden Wealth said in their 2022 North America Family Office Report. “Looking to 2023, North American family offices plan on increasing their allocations to private equity more than to any other asset class.”
Some of the largest family offices — including that of Peter Thomson, a member of dynasty behind media giant Thomson Reuters Corp. — are major investors in private equity. The firms surveyed had an average of about 27% of their portfolios in the asset class this year, up from 22% in 2021. Thomson’s venture arm has allocated money to more than 80 early-stage companies.
Investments in healthcare, other emerging technologies expected to increase
The pandemic and an aging population made healthcare an attractive space for investors. Three in four family offices invested in healthcare this year and 39% plan on increasing their investment in 2023.
Biotech, which 62% of North American family offices invested in, was the second most popular technology for investment, followed by fintech (59%), digital technology (52%) and green tech (50%).
Looking to 2023, outside of healthcare, the areas most likely to see a rise in allocations are artificial intelligence, with 40% of those invested there planning to increase their allocations, green tech (35%) and biotech (34%).
Sustainable investment
Increasingly, sustainable investing is considered to be of great importance, with more than a third (37%) of North American family offices now engaging in sustainable investing, with a particular focus (77%) on climate change mitigation. This trend is thought to have been driven by next gens, whose influence continues to grow amid a major generational transition.
Next Gens’ influence continued to grow and drove more family offices to participate in sustainable investing. In 2022, 37% of North American family offices engaged in sustainable investing, up from 34% last year and 26% in 2019.
The proportion of their portfolios dedicated to sustainable investing has also increased over the years. In 2020, the family offices in North America who engaged in sustainable investing dedicated an average of 16% of their portfolios to sustainable investments. This grew to 20% in 2022, and is expected to rise to 31% in five years’ time. The most popular sustainable investing theme was climate change, with 77% reporting they invest in climate change mitigation. Other areas of focus included investing in improving fresh water supply and managing water consumption (53%), strengthening health and social care (49%) and reducing pollution/waste (47%).
“As part of a wider trend, family offices have been adopting sustainable investing at a rapid pace in recent years, and it has long been understood that the next generation is a key driver behind this,” says Dr.Rebecca Gooch, Campden Wealth’s senior director of research. “We are in the midst of a major generational transition in which trillions of dollars are changing hands, and here is where we are really beginning to see the effects of this generation’s impact on society.
“It is the emerging generation which is going to feel the effects of climate change more than any that came before it, and this has become a galvanising factor among those who see sustainable investing, mixed with sizeable private capital, as a powerful vehicle to combat it.”
“As we stand at the centre of the multi-trillion dollar transition to the next generation, we are clearly starting to see their influence,” says Mark Fell, RBC’s head of family office and strategic clients.
Succession
Research firm Cerulli Associates projects that overall wealth transferred between 2021 and 2045 will total $84.4 trillion.
For North American family offices, 30% of Next Gens have already assumed control of their families’ operations – with another 27% expected to do so within the next decade. However, only 33% of family offices have a succession plan in place for senior leaders and 40% feel they do not have a next generation member qualified enough to take over.
“Many families are unprepared for the road to successful succession and ensuring that the next generation is well qualified to take over,” says Sylvia Rizk, Director of Client Coverage at RBC Investor & Treasury Services. “And to be honest, talking about the eventuality that you will pass away is a difficult subject. Understandably, family business leaders are emotionally attached to their businesses, and succession planning requires them to say ‘this is what the business looks like without me.’ That’s difficult for anyone to contemplate.”
So how can family offices increase NextGen engagement early on?
“They can slowly integrate them into the day-to-day workings of the family office in limited roles so that they can begin to understand the complexities,” Rizk says. “This engagement not only builds experience, it also builds credibility and trust with the family and the entire team.”
Engaging NextGens may also require the family office to expand the definition of what it does. This could involve exploring new avenues and opportunities for investing, such as cryptocurrency, cannabis or artificial intelligence—developing their interests and talents, but also maintaining the relevance of the enterprise. It may mean allowing them to further explore philanthropy or ESG, for example.
Rizk says the extent of a family’s wealth can be shared with family members in stages as they mature. This can progress from discussing the family office values and beliefs, and the story of the family’s success, to need-to-know information, from the general to the specific.
“Ultimately a succession plan is not so much about what the family office currently is, but about what it hopes to be,” Rizk says. “It’s about people, purpose, values and creating a lasting family legacy for the future.”
“If you believe that one of your children has the makings of a CEO, another could be treasurer, while a third may be unqualified to take on any leading role, those decisions will likely create conflict in the future,” Rizk says. “Formalizing and sharing the succession plan today will bring potential future conflict into the immediate present, and that may be another reason why family offices are reluctant to create and share a succession plan now.”
“It’s essential to have important conversations about the family’s goals and values with the next generation to help preserve the family’s wealth and legacy for future,” said Angie O’Leary, Head of Wealth Planning at RBC Wealth Management. “A succession plan is a must to adequately prepare the next generation to inherit wealth, and it must be revisited often to ensure it reflects a family’s changing needs, priorities and vision.”
Family Offices’ money
In 2022, North American family offices’ total average spend on services stood at US$14.4 million. This includes US$7.4 million in operating costs and US$7.1 million in external investment management administration, performance and custody/report fees.
Family offices spent an average of: US$1.5 million (15 basis points, bps) on general advisory services; US$2.4 million (24 bps) on investment-related activities; US$1.8 million (17 bps) on family professional services; and US$1.6 million (16 bps) on administration activities. North
American Chief Executive Officers (CEOs) make an average base salary of US$454k, with an average annual bonus of 42 percent (as a proportion of base salary). The equivalent figures for Chief Investment Officers (CIOs) are US$446k for base salary and 48 percent for bonuses.
Links to consider
- Benjamin Gilbert and David Rosenthal talk about the history of Qualcom
- Discussion with Michael Gayed about markets and money management
- Jack Forehand, “There is no magic bullet to help decide when to change an investment process.”
- Money Market Mutual Funds: Policy Concerns and Reform Options
- Achieving long-term financial security is about investing adventurously now
- Is Wine Fake?
Infographics
Quotes
Books that caught our attention this week
A history of taxation and expenditure in the Western world
by Carolyn Webber, Aaron B. Wildavsky
In this comprehensive analysis of social systems of taxation and budgeting, the authors provide detailed examples from ancient Mesopotamia and Egypt, Greece and Rome, the Middle Ages in Europe, and modern times to show how governments through the ages have raised money and spent it. They examine the two essential activities of government–taxing and spending–against the background of the societies in which they were imbedded and the development of government’s administrative capacities. They also argue that government mobilization of resources involves critical human concerns–waging war and providing for the welfare of the people
Publisher: Simon and Schuster; 1st Edition (January 1, 1986)
Language: English
Hardcover: 734 pages
Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages
by Michael Keen and Joel Slemrod
Governments have always struggled to tax in ways that are effective and tolerably fair. Sometimes they fail grotesquely, as when, in 1898, the British ignited a rebellion in Sierra Leone by imposing a tax on huts―and, in repressing it, ended up burning the very huts they intended to tax. Sometimes they succeed astonishingly, as when, in eighteenth-century Britain, a cut in the tax on tea massively increased revenue. In this entertaining book, two leading authorities on taxation, Michael Keen and Joel Slemrod, provide a fascinating and informative tour through these and many other episodes in tax history, both preposterous and dramatic―from the plundering described by Herodotus and an Incan tax payable in lice to the (misremembered) Boston Tea Party and the scandals of the Panama Papers. Along the way, readers meet a colorful cast of tax rascals, and even a few tax heroes.
Publisher: Princeton University Press (April 6, 2021)
Language: English
Hardcover: 536 pages
Survival of the Richest: Escape Fantasies of the Tech Billionaires
by Douglas Rushkoff
In Survival of the Richest, Rushkoff traces the origins of The Mindset in science and technology through its current expression in missions to Mars, island bunkers, AI futurism, and the metaverse. In a dozen urgent, electrifying chapters, he confronts tech utopianism, the datafication of all human interaction, and the exploitation of that data by corporations. Through fascinating characters―master programmers who want to remake the world from scratch as if redesigning a video game and bankers who return from Burning Man convinced that incentivized capitalism is the solution to environmental disasters―Rushkoff explains why those with the most power to change our current trajectory have no interest in doing so. And he shows how recent forms of anti-mainstream rebellion―QAnon, for example, or meme stocks―reinforce the same destructive order. This mind-blowing work of social analysis shows us how to transcend the landscape The Mindset created―a world alive with algorithms and intelligences actively rewarding our most selfish tendencies―and rediscover community, mutual aid, and human interdependency.
Publisher: W. W. Norton & Company (September 6, 2022)
Language: English
Hardcover: 224 pages
Photos
There’s no film character whose watches are quite as iconic as James Bond. More than just an accessory, his timepieces have been a symbol of status, refinement and utility throughout the franchise’s decades-long run. The spy’s 60th anniversary, happening this year, certainly calls for celebration, and who better to start the festivities than Omega, the company that’s been the official watch of 007 since 1995’s GoldenEye.
Launched in 2022, to celebrate 60 years of James Bond, this 42 mm Seamaster Diver 300M in Canopus Gold™ has a dial made from natural grey silicon. A nod to the sands of 007’s Caribbean hideaway. Circling the dial is a unidirectional rotating bezel with a paving of shaded green and yellow treated diamonds, with two diamonds at 12 o’clock.
The iconic movie opening sequence, featuring Bond in silhouette and spinning gun barrel, plays out on the caseback, beneath a sapphire decorated with micro-structured metallisation. The “moiré” effect animation is linked to the spinning of the lollipop seconds hand.
Fixing the watch to the wrist is a mesh bracelet and clasp in 18K Canopus gold™.
Providing the power is OMEGA’s Co-axial Master Chronometer Calibre 8807. A luxury version of the 8806, housed inside the classic Seamaster Diver 300M models.
The watch is presented in a mango tree box with mother-of-pearl marquetry, 60 years of Bond logo and 60’s inspired dots. The use of mango tree references the song Underneath the Mango Tree from Dr. No – the first James Bond movie.
While no official US price is listed for the Canopus Gold edition, it will set you back somewhere north of $140,000 USD (135,000 CHF).
