You’ve made it. The company you own has just gone public, and you’ve suddenly received a windfall of $1 billion — cash. What on earth to do now? You could just pop it all in a savings account or invest it in all manner of funds by paying some guy in a suit on Wall Street. Or, as most of the world’s billionaires are doing these days, you could stash it all in a family office.
Never heard of it before? You’re not alone. But family offices have secretly taken over Wall Street, and they’re starting to take over the global financial industry too.
Though estimates vary, many put the total size of family offices worldwide at a staggering $4 trillion. The entire hedge fund industry combined is $3.2 trillion. But nobody really knows just how many family offices there are — or how much money they hold on average — because they are, at their core, highly secretive. “Nobody has full information, it’s kind of a guesstimate,” says Matthew Richardson, a professor at New York University’s Stern School of Business.
Why don’t I create my own entity where I can have 100 percent control, customization and privacy?
Angelo Robles, founder and CEO, Family Office Association
Simply put, a family office is an investment vehicle that a very wealthy individual or family — or sometimes a small group of families — sets up to manage their assets. Instead of paying fees to asset managers at big corporations to look after their money, billionaires hire personal teams and set up personal companies to manage their riches in-house. The rise of the global ultrawealthy has combined with a growing disquiet about high fees relative to meager returns at investment vehicles, like hedge funds and private equity funds, to encourage asset owners to ditch the middlemen and hire their own teams instead. Indeed, the 2008 crisis scared wealthy families into thinking, “ ’Why don’t I create my own entity where I can have 100 percent control, customization and privacy?’ ” says Angelo Robles, founder and CEO of the Family Office Association, one of the largest family office community groups, each of which promotes networking and the sharing of expertise between families.
In recent years, family offices have been able to poach top talent from hedge funds, private equity funds and even investment banks. In fact, a number of family offices have been established when struggling hedge funds have shut up shop; the same team is simply re-tasked with managing the owner’s money — instead of outside investors’. A famous example: Soros Fund Management, which was founded by billionaire George Soros as a hedge fund but now operates as a family office.
So what do family offices do with their secretive trillions? They tend to favor long-term investing in order to preserve wealth over multiple generations, says Richardson. And since they tend to be overexposed in certain industries — the megawealthy have been known to hold on to a disproportionate chunk of the company that made them rich — “Wall Street has to be creative in helping them manage those risks,” he explains. But “family offices are snowflakes,” says Robles. “They’re all different.” And they’re very, very private snowflakes. Because they’re not handling external investors’ money — only the owner’s own riches — family offices don’t have to register with the Securities and Exchange Commission under Dodd-Frank rules, let alone report any details of what they’re investing in. So the ultimate significance of the hidden investment giants in the financial industry remains unclear.
But despite their greater size, family offices are not taking over from hedge funds any time soon, says Richardson. Indeed, about 15 to 20 percent of family office money is invested in existing alternative investment funds. Co-investment is another option with increasing appeal: Family offices can provide huge amounts of liquid capital — the kind of big cash that smaller partners can’t offer — to support big deals. This makes them more akin to the next great source of cash, after pension funds, college endowments and sovereign wealth funds, which have until recently been the biggest players in town, Richardson adds.
Indeed, the financial tide is turning. In the past, the finance industry’s deep seas of cash have been supplied by organized labor, historic universities and resource-rich countries. Today, those trillions are increasingly held by individual families.