Family offices have become a $6 trillion powerhouse in investing—and deal-making

Published Mon, Jul 11 20226:01 AM EDTUpdated Mon, Jul 11 20224:21 PM EDT

The post-pandemic wealth boom has sparked an explosion in family offices, creating a new gold rush among Wall Street firms, private equity funds and investment advisors to manage the fortunes of the world's richest families. Family offices now manage more than $6 trillion in wealth, according to some estimates, surpassing the estimated $4 trillion managed by hedge funds. They have quickly become a powerful force in financial markets, mergers and acquisitions, crypto, and real estate, rivaling many sovereign wealth funds, endowments and big corporates. As global wealth continues to grow, especially in Asia, experts say family offices will gain an even bigger role on the investment stage. "The size of wealth is enormous," said Andrew Cohen, executive chairman at J.P. Morgan Private Bank. The wealth of the world's billionaires grew by an estimated $5 trillion to nearly $14 trillion between the market lows of March 2020 and spring 2022, according to Forbes. While the recent losses in the stock market, crypto and other asset classes have trimmed some of those gains, the wealthy (especially in the U.S.) are still sitting on mountains of capital generated from fiscal and monetary stimulus. In the U.S., the top 1% of Americans alone added $11 trillion to their wealth since early 2020, with the total reaching $45 trillion in the first quarter, according to the Federal Reserve. Family offices typically cater to investors with $100 million or more in net worth, although a growing number manage billions or even tens of billions in assets. By nature, they are secretive and most aren't required by national financial regulators to disclose their positions or assets. Campden Research estimates there were more than 7,000 family offices worldwide in 2019 managing nearly $6 trillion, and industry experts say the number has likely only grown since then. Accounting consultancy EY estimates that more than 10,000 family offices globally manage the wealth of a single family, with at least half having started this century. Families want more control Along with growing wealth, the move to family offices is also being driven by a shift in how the richest families manage their fortunes. They want more control and less reliance on traditional wealth management firms and high fees, middling performance and product pushing. With more wealth passing to the next generation, younger investors also want more involvement and "values-driven" investing. And today's global rich, many of whom built multinational companies that they sold, demand an equally broad approach to their personal investing. Many billionaire hedge fund managers, seeking lighter regulation or freedom from benchmarks and outside investor demands, are also converting to family offices. John Paulson and Leon Cooperman , for instance, both converted to family offices in recent years. "Maybe 35 years ago, the goal was financial security and preserving wealth. That's not the case today. Now it's about finding opportunities." Founder, Family Office Exchange Sara Hamilton "The world of investing has become more complex, so more families are reacting to that sophistication," Cohen said. "And we're at this transformative time with multigenerational wealth getting passed through." Family offices have been around for centuries of course, most notably managing the fortunes of John D. Rockefeller and J.P. Morgan. Most still handle the "concierge" duties of a wealthy family, from arranging travel and managing the jet and car fleet, to paying bills and managing properties. They also typically handle taxes, estate planning and succession issues for the next generation. Yet today's larger family offices operate more like full-service global investment firms. They trade equities, fixed income, currencies, crypto and commodities. They buy residential and commercial real estate and land around the world. They invest in private equity and venture capital funds, and increasingly make their own acquisitions and startup deals. The growth has turned family offices into a hot growth sector for Wall Street banks and wealth management firms. Goldman Sachs , JPMorgan , Bank of America , Citigroup , Credit Suisse , UBS and Deutsche Bank are all staffing up their family office businesses and expanding offerings. Their goal is to win more family office business by granting access to the same services and expertise as other institutional clients — from trading and credit to private equity, due diligence, technology and hedging. "You could have a family that's in the shipping business with 100 ships," Cohen of J.P. Morgan said. "They might need financing, currency and commodity hedging. Or you might have a family that sold a pharmaceutical business and wants to replicate those returns and is looking for growth opportunities. So you can have multiple asset classes across multiple geographies across multiple generations." The Morgan Stanley Family Office unit, which is also expanding, started bringing family offices on to a new asset-tracking platform last year and has added more than $25 billion of assets so far. "They are thinking more like institutions than families," said Daniel DiBiasio, head of Morgan Stanley Family Office . "We've taken the view that these 'instividuals' are more deserving of a business-to-business relationship." More family offices are also venturing out on their own to buy private companies, take partial stakes and form startups. According to a report from UBS surveying its family office clients, family offices have about a third of their portfolio in equities, 11% in fixed income and about 10% in cash, which have remained fairly stable. Family office allocation to private equity and direct investments jumped from 16% in 2019 to 21% in 2021, the largest increase of any asset class, according to the report. The remainder is in real estate and other assets. More than half of the offices plan to increase their investments in private equity over the next five years — the largest share for any investing segment. Buying and funding companies directly means family offices are now competing against venture capital and private equity firms for deals. MSD Partners, the investment firm that grew out of Michael Dell's family office, recently hired Goldman veteran Gregg Lemkau as CEO and last year acquired a 50% stake in digital consulting firm West Monroe. The deal followed MSD Capital's acquisition of Ring Container Technologies, a plastic container producer, in 2017. BDT Capital Partners, founded by famed banker Byron Trott, has deployed about $30 billion in 41 mainly family and founder led companies — with most of the investment coming from business owners and family offices. Along with better returns, direct investments reward family offices for their longer time horizons. Corporate founders who sold their businesses and launched a family office often want to stay active in the industries they know best and use their expertise to help launch new success stories. "This new wave of first-generation liquidity from founders is driven by the potential to do it again and again," said Sara Hamilton, founder of the Family Office Exchange . "They want to share their knowledge across industries and have real impact. Maybe 35 years ago, the goal was financial security and preserving wealth. That's not the case today. Now it's about finding opportunities." Countries are also competing for family office spoils. Singapore recently created a Family Office Development Team to lead and coordinate initiatives that will attract more family offices. The city-state has no capital gains tax and allows family offices to apply for a tax exemption on their income. The Wealth Management Institute has launched the Global-Asia Family Office Circle in Singapore to attract more family offices. The number of family offices in Singapore has more than doubled since 2019, according to the GFO Circle. Among the recent additions: the family office of Nicky and Jonathan Oppenheimer, of the diamond dynasty, which recently announced an outpost in Singapore. Google co-founder Sergey Brin and British vacuum magnate James Dyson have also opened up family office branches in Singapore. The case for more oversight The rise of family offices, however, has also increased calls for more regulation. Because single-family offices only serve a single family, they don't have to register with the SEC as investment advisors. Even family offices that serve more than one family often receive an exemption from the SEC to keep their filings confidential. Last year's multibillion-dollar meltdown of Archegos Capital Management , run by former hedge fund manager Bill Hwang , sparked renewed calls for more disclosure and limits . Rep. Alexandria Ocasio-Cortez, D-N.Y., drafted a bill requiring family offices to register with the SEC as investment advisors unless they oversee less than $750 million. "The Archegos explosion blew away any rationale for the exemption of family offices from regulation and transparency," said Dennis Kelleher, CEO of the nonprofit advocacy group Better Markets. Kelleher said Archegos disproved the two central arguments for exempting family offices — that they pose no systemic risk and that they don't harm everyday investors, since they only invest for a single family. Kelleher said the fact that Archegos inflated its $1.5 billion portfolio to $35 billion, and caused massive losses in several publicly traded stocks, highlights the need for SEC regulation. So far, however, the family office lobby has successfully fought back against new regulations. They contend that regulation wouldn't have prevented the losses at Archegos, which misled its brokerage firms. Meantime, experts say that as financial markets become more volatile and stocks decline, family offices have the flexibility, speed, balance sheets and patience to continue to thrive even if there is a recession. "We're talking about investors with time horizons of 100 to 200 years," Hamilton said.