value proposition for the italian pe marketdocenti.unimc.it/lorenzo.salieri/teaching/2015... ·...

1

Discussion materials

Family Offices Business models and reasons to exist

Macerata, October 2015

Agenda

1. What does a Family Office do?

2. Asset allocation

3. Structure, governance and decision making

4. Costs and budgets

2

A few definitions

3

Ever heard of this Family Office?

4

Or this?

5

Or this?

6

Cascade Investment LLC

????

Or this?

7

Where are FO’s located?

8

Typical generational shift… impacts what a FO does

9

What does a Family Office actually do?

Portfolio

management and

investments

Tax advisory

Reporting

consolidation / risk

mgmt

Philanthropic

management

Estate planning

(multi-generational

wealth planning)

Lifestyle

management

“Fleet” management

“Hard” Family Office

services

“Soft” Family Office

services

Potential services provided

10

Highly

diverse!!!

The reasons why and why not?

• Control of investment process

• Governance

• Alignment of interest

• Potential higher returns

• Centralization of risk

• Centralization of other services

11

The reasons why The reasons why not

• Cost

• Evolving legal and tax requirements

• Competitive offerings (MFO’s)

• Difficulty retaining good talent

Who does what in the Family Office value chain?

Family Family Office Portfolio

management

Banking and custody

platform

“Allocators”

Direct investors

Determine investment

needs in terms of

- Returns

- Liquidity

- Risk

Determine lifestyle and

other needs

Provide guidance and

oversight of Family

Office

Manage family’s portfolio of Investments, either through selected

funds or direct investments

Brokers

Custodians

Relationship banks

“Service” providers

Technology providers (e.g., information and research, book-keeping, compliance)

Tax advisory Legal services

Private bankers

Regulators

Illustrative value chain, irrespective of business model

12

Example of private banks – what services do they provide to FO’s?

• Fairly standardized

• Mostly focussed on

Investment

Management

• No lifestyle

• How dedicated is the

team???

Example of services provided by MFO’s

15

A changing landscape

• How have SFO activities changed since the financial crisis?

• NEW ENTRANTS: direct investing, risk management

• LEAVERS: information aggregating & reporting, estate planning

2007

Top 4 SFO activities, 2007 vs. 2012

Asset allocation 3.4

Manager selection & planning 3.3

Information aggregating & reporting 3.1

Estate planning 2.8

2012

Asset allocation 3.3

Direct investing 3.2

Manager selection and monitoring 3.1

Risk Management 2.9

Source: The Wharton School “Benchmarking the Single Family Office: Identifying the Performance Drivers 2012 15

16

The make or buy decision

16

What determines a make or buy decision?

Agenda


2. Asset allocation



17

Asset allocation – plenty of literature…

• Today’s objective is NOT to define where to invest

• BUT to provide an overview of investable asset classes and possible approaches

• There is

• Plenty of literature on portfolio construction

• Plenty of theories on stocks, bonds, liquidity, etc.

• Plenty of macro-economists debating items such as:

18

Asset allocation – plenty of literature…

19

Asset allocation – ILLUSTRATIVE portfolio

Traditional

investments

Alternative

investments

Infrastructure

Real estate

Hard assets

Cash / liquidity

Fixed income

US equities

Non-US equities

Hedge funds (only

select and small mgrs)

Direct Private equity

Others (e.g., PE

funds, or FoF’s)…

Water, gas, roads, etc

Real estate

Commodities, art,

collector autos, etc

5%

Investable asset classes Illustrative allocation

30%

20%

10%

5%

15%

0%

0%

10%

5%

0-5%

Expected returns

3%

7%

7%

10%

20-25%

--

--

3%

2%

Lower risk asset classes generated a blended 5% return

Alpha generating assets at +20%

Wealth preservation asset classes, often unlinked to return expectations

Total return

8-10%

Alpha-generating assets can give the portfolio a kick

Important though not to lose money on traditional invest.

The volatility of portfolio must be constantly monitored

20

65%

20%

10%

5%

--

5-6%

12-15%

15-18%

7-8%

20-22%

7-8%

--

Volatility

Asset allocation – common approaches to portfolio construction

Sandbox model

Diversified

institutional model

Invest only is what you understand…

and where you have an angle…

and based on key investment criteria for portfolio construction (e.g., liquid vs. illiquid assets) Hybrid model

• Only used by certain Single Family Offices and the smallest Multi Family Offices

• Focus on one specific sector or asset class

• Perhaps that same class that the family knows well

• Long term approach to investing

• Employed by literally all Multi Family Offices

• Usually 60-70% of the portfolio are placed in traditional and liquid asset classes

• Remainder allocated to more ambitious

• Combination of the two models above

• Leverages any specific know-how in a space/industry whilst keeping the more balance view of the Diversified Institutional Model

21

What happens in reality – a practical example

Inflation assumptions

Returns required

2%

(Eur 2mn)

22

Family determines

expenses / lifestyle

Fees to manage

family office

1

2

3

+

+

=

1.5%

(Eur 1.5mn)

1.5%

(Eur 1.5mn)

5%

(Eur 5mn)

Decision on returns required is often very simple and involves the three steps to the left:

1. Make assumption on inflation

2. Determine living expenses

3. Determine costs to run FO

CASE STUDY – a practical example of asset allocation

23


24


25


26


27


28

Agenda


2. Asset allocation

3. Business models, governance and decision making


29

Business models

Virtual family office One or two individuals working for family

Most other service outsourced

Single family office Created for the needs of a single family

Structured approach with multiple team members/competencies

Minimal AUM size to justify expenses

Multi-family office Asset aggregator

Created for the needs of multiple families

Can encompass a shift to a “for profit”/fee charging organization

1

2

3

30

31

Governance and decision making structure

Governance structure Decision making processes

Family office

Board In SFO structure typically family members plus key investment

professionals

In MFO structure typically founding family representative plus

externals plus key investment professionals

External

advisors

Family member 1 Family member 2

Family member 3

Investment

Committee (s)

• Governance to be structured ad-hoc to fit the family’s needs

• Board to meet at least monthly to review portfolio performance and progress on business plan

• Board to receive inputs from family

• Investment committees to be structured depending on types of investments (direct vs. allocation) (see following pages for example of direct investing process)

The Family Office team: what skills does it need?

32

Trust / confidentiality

Indepen

dence

Availabili

ty

Out of the

box

reasoning

Network

Generalist

nature

Financially

literate

Necessary skills, irrespective of what the FO inclination is towards types of deals (direct investing vs. “allocators”

Ability to coordinate professionals

1

2 Ability to negotiate

3 Ability to find the best experts

If a direct investing (e.g., PE) strategy is pursued, the following skills also become important

Ability to source opportunities (i.e., network of proprietary deals

1

2 Business judgement, knowing what makes a good deal

3 Asset mgmt skills (e.g., board experience, identifying full potential, etc.)

33

The Family Office team composition

• Outsourcing vs. insourcing debate should always be considered (insource more value added activities such as portfolio allocation and direct investing, outsource expertise that can be “bought” with damaging service levels or excessive costs

Board

CEO CFO

General

Counsel Tax Accounting

Portfolio

Managers Real-estate

Executive

assistant

CIO

34

Expanding and moving on… considering multiple families or vehicles

• SFO structures typically involve separate limited liability vehicles for each asset class or sub-asset class

• As the business grows, and additional families join, risk and return profiles can be customized by offering participation into various investment programs

• Tax considerations often prevail

Family Office

Properties Ltd Private Equity

Ltd Art Ltd

USA Asia UK Asset 1 Asset 2 Asset 3

Investment funds

managed by FO

SFO structure

Family members

+ addt’l families & funds = MFO

Family 3 Family 2 Family [.]

Bond fund

US Equities Fund

Agenda

1. General considerations

2. Asset allocation and investable asset classes



35

36

Three scenarios analysed…

Light family office structure One or two individuals working for family

Most other service outsourced

Single family office Created for the needs of a single family

Structured approach with multiple team members/competencies

Minimal AUM size to justify expenses

1

2

Private banking Family is actively involved in wealth management

Directly liaised with private banking professionals

The private bank can charge directly or via embedded for other

services

0

Deg

ree o

f in

-so

urc

ing

… a

nd

co

ntr

ol

2-3% all-in fees

At least Eur2-3mn/year

Eur1.5mn/year

Cost estimates assuming a Eur 100mn

portfolio

Eur [1.5-2 ]mn/year but depends on

insourcing/outsourcing debate

37

Private banking fees, above the line and below the line

• In typical private banking context, fees can be in the range of 2-3%

• Asset allocation is an important factor in determining fees

• “Un-transparent” structures with kick-backs also need to be considered

• Private banks often promote more aggressive portfolios as the fees are higher

Top line

fees on

AUM:

50bps Structured

products:

Up to 3%

Advisory

fees

Up to

1%

Fees on AUM:

1 – 3%

Fees charged to the Private Bank

Assets invested in funds

Custody

2-7bps

Administr

ation

5-10bps

Brokerage

Up to

20bps

Brokerage costs

Fees: 1% Fees: 2% Fees: 0.25%

Total fees: circa 2-3%

38

Private banking fees

• Perverse incentives for Private Banks… typically do not offer the most cost effective products to their clients

value proposition for the italian pe marketdocenti.unimc.it/lorenzo.salieri/teaching/2015... ·...

Documents