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2024-10-16
Family offices have experienced remarkable growth and transformation in recent years, with larger firms increasingly adopting a more professional approach. Once operating as wealth management solutions for affluent families, relying on trusted relatives and banking connections to manage their financial affairs, these entities have evolved into strategic and sophisticated organizations focused on wealth growth and preservation across generations.
Many family offices are now prioritizing investments in alternative assets and assessing internal rate of return (IRR) alongside social and environmental impacts. To effectively manage diversified and complex portfolios, family offices require skilled talent and must be prepared to navigate the complexities of shifting geopolitics, tax regulations, and rapid technological disruptions; these factors have collectively contributed to the emergence of new roles within the sector.
Why explore this topic?
Single-family offices can manage billions in assets under management (AUM) and collectively account for US$5.5 trillion in AUM worldwide. According to a Deloitte Report*, this sum is set to rise to US$9.5 trillion by 2030. The anticipated growth of family offices signifies a threat to traditional investors as they compete for the same investment opportunities. For family offices themselves, this growth potential can only be realized if they have talent strategies in place to serve their ever evolving structures and ecosystems.
International Outlook
A trend within family office is an increased international presence and investment focus. This brings about the need for geographically mobile talent, skilled in a variety of markets and jurisdictions. According to the same Deloitte report mentioned above, more than a quarter (28%) of family offices now operate multiple branches as a result of the growth in the sector. Additionally, 12% are looking to set up another branch, with North America and Asia Pacific emerging as the most appealing regions—34% of family offices are focusing on each of these areas, compared to 24% for Europe.
The choice of a secondary branch is often influenced by historical links connected to the operating company, tax incentives, investment opportunities, favorable tax laws, and regulatory environment. According to a report by family office advisory firm, Ocorian*, 78% of respondents have established offices in a new jurisdiction within the past five years, driven by tax and regulatory considerations, and the need to diversify investment portfolios and mitigate risks associated with geopolitical factors. There is an increased focus on co-investment opportunities as wealth/family offices grow in the UAE and Asia.
The Middle East offers investors many wealth creation opportunities because of its location between Europe and Asia, favorable tax and regulatory environment. As such, we’re seeing an increase in family offices from Europe, Asia, India and even the U.S. setting up bases in the region. American hedge fund investor Ray Dalio, for example, opened a branch of his family office in the Abu Dhabi Global Market (ADGM). This branch is said to oversee a range of activities, including Dalio family investments and philanthropic efforts.
This international outlook has created more demand for individuals with experience investing in different countries, robust professional networks across markets, expertise in implementing investment strategies in different countries and specific cultural understanding of how family offices/family enterprises operate in that region.
Evolving Structures Require Sophisticated Leaders
The same Deloitte report suggests a significant number of family offices integrated within family businesses will increasingly evolve into independent entities (38%). They also foresee an expansion in service offerings (36%), a broad adoption of operations-based digital technologies (33%), and a rise in sustainable investments and operations (32%). As this trend unfolds, inevitably there will be an increased demand for specialists to work across these functions.
This move to professionalization has seen the emerging role of the family office leader. While job titles vary, the Head of Family Office, President, CEO, or COO covers a breadth of specialties. Sometimes described as the “expert generalist” these are highly adaptive leaders that can oversee multiple functions of a family office. They can coordinate a diverse team of specialists, investigate new technical areas with ease, manage outsourced service providers, help define strategy, and importantly work closely with the Principal and family stakeholders.
These skilled generalists often come from diverse professional backgrounds. In the USA, they may have started their careers in investment banking or wealth management, then transitioned to family office. They typically bring extensive professional networks and have strategic and problem solving skills. Over time, they accumulate essential knowledge about the family and the intricate relationships among service areas, partners, and family members.
The Ocorian Family Office Report indicates that 44.5% of surveyed family offices strengthened their leadership over the last 5 years. Today’s family office heads must juggle multiple responsibilities from overseeing investment activity, liaising and managing family members, overseeing team members, legal considerations, operations, technology, and HR.
Asset Allocation and Diversification
Each investment team within a family office has its priorities, culture and risk appetite. In recent years, there has been a transition towards greater diversification into alternatives. A well-diversified portfolio can help protect against market volatility and still align with a family's financial goals and values. Regular assessments and adjustments are crucial to adapt to changing circumstances and market dynamics.
CIO-Led Investment Teams
As Michael Thrasher points out in his recent Institutional Investor article*, there are many ways to structure a family office investment team. There is the option to completely outsource, build an in-house team or adopt a hybrid structure where you create an investment firm as the sole LP. Michael highlights the increasing desire for family offices to build investment portfolios like those of institutions. According to a Citi* report published in Sept 2024, 60% of family offices have built a CIO-led investment team, formed investment committees and created associated investment policies. Citi surveyed 338 family offices.
Hiring an institutional-style CIO is expensive and beyond the budget of many family offices. Those below $500million for example are more likely to allocate capital to managers and have an ‘expert generalist’ leader oversee the investments along with other non-investment duties, such as trusts, estate planning, and reporting. While compensation varies across family offices we see institutional-style CIOs earning base salaries of $750k - $1million, with total compensation being closer to $1.5-$2m. The Citi survey indicates that 73% of large family offices with a multi-generational background are more likely to have a CIO and 57% of first and second-gen families have one.
Like the large institutional investors, the family offices surveyed said they are increasingly investing directly. This trend has been reported in numerous surveys and research in the last few years. As public markets remain volatile and private markets expand, there has been an increased push towards private markets as the belief (and proof) is that choosing the right direct investment can yield better returns than public equities and family offices have the ‘patient capital’ to suit companies in the ‘build’ phase of growth.
A survey conducted by Goldman Sachs* in May 2023 revealed that, on average, alternatives now constitute 44% of family office portfolios. In a similar vein, a May 2024 report from Deloitte Private indicated that private equity has overtaken public equity as the leading asset class for family offices, rising to 30% of their investments, a significant increase from 22% in 2021. Conversely, public equities have seen a decline, dropping to 25% of family office allocations from 34% in 2021.
This shift in investment strategy has meant a change in the composition of investment professionals within family offices has shifted to hiring investment professionals with both public and private investment experience or a portfolio manager who is a specialist in a given area/sector.
Private Equity, Real Estate, Private Credit and Venture
Roles have emerged in family offices across the investment teams to accommodate new areas of focus. As referenced in Stryde’s article*, Increased Allocation to Alternatives, family offices take a long-term view of investing as they are without the pressure of quarterly earnings reports. Their ‘patient capital’ makes them important players in private equity and venture capital markets. As such, they have become formidable competitors for deals (and talent).
As family offices have increased their direct investing capabilities, they have hired teams to support and drive all elements of the deal process from origination, through to execution and subsequent portfolio management. These teams include experts with prior investing experience from well-regarded PE firms, corporate finance and top-tier investment banks. Most teams break down into further specialist areas such as real estate, private credit, and other verticals, including tech/AI, and healthcare.
Robert Frank*, a Wealth Reporter for CNBC, highlights that family offices are increasingly taking the place of traditional private equity in significant transactions. He cites the involvement of Michael Dell's family office in the substantial $13 billion acquisition of Endeavor Holdings, a company focused on entertainment, sports, and media, which was made private in April. Additionally, he mentions a family-office-led consortium that purchased PureWest*, an oil and gas firm, for $1.8 billion in May 2023. Frank notes family offices are particularly interested in direct investments in sectors such as biotechnology, artificial intelligence, and healthcare.
The challenge large family offices face is creating a compelling opportunity that attracts extraordinary talent to support such investments. They compete with PE firms, which offer tremendous compensation packages, including carried interest and other long-term incentives. This pressure doesn’t exist at the smaller family offices that outsource most of their investing. But those who need to attract best-in-class talent must compare the opportunity to ensure it is competitive in order to appeal to those with desired expertise.
As family offices professionalize, there is a continued desire to collaborate with external partners in the form of ‘outsourced CIOs’ and other outsourced specialties. The Citi report suggests 32% collaborated with external managers and 20% managed exclusively by an outside party. These statistics suggest FOs appreciate the complexity and cost of hiring a full-time dedicated CIO. Even if the economics of a given family office means an OCIO model is more appropriate, it’s still imperative to have an in-house team/family member who has the skills to objectively manage that provider to ensure the best results over time for a family.
Venture
As family offices increasingly seek opportunities in private venture businesses, they are allocating more time, resources, and capital to venture. This includes the development of in-house expertise to enhance their capabilities as competitive venture investors. Many of these family offices develop a brand separate to the core family office and hire specialists. For example, Jim Pallotta, a Boston based entrepreneur, formed RW3 Ventures which invests in infrastructure, protocols, and applications that are driving growth in blockchain technologies, decentralized finance, and the long-term development of Web3.
The venture capital landscape is challenging, characterized by intense competition and inherent risks, necessitating specialized skills and a particular mindset. It’s not for all family offices! For those who are entrepreneurial enough, it’s important to recruit the right team members. Competing with established venture capital firms can be particularly difficult, which is why the expertise of the staff is crucial. The VC teams are as critical as the startups they support. Hot areas currently in VC include sustainability, net-zero initiatives, battery chemistry, energy, cryptocurrency, blockchain, web3, and big data analysis, Healthtech, and Insurtech.
Luxury & Niche Asset Classes
Fine art, antiques, wine, cryptocurrencies, blockchain technology, luxury real estate and music royalties are all examples of niche assets that appeal to family offices. Niche assets often require a long-term investment horizon and just like other asset classes require specialist knowledge and contacts. Just like other asset classes, the level of investment will dictate whether it is worth hiring in-house expertise or investing in a syndicate. It’s typical to engage with communities and networks related to niche assets to stay updated on trends and opportunities.
These niche asset classes can enhance a family office's portfolio by providing diversification and exposure to unique markets. However, they require specialized knowledge and active management to navigate effectively.
Emerging Technologies
Technology is impacting family offices from both an operational and investment perspective, which in turn is impacting internal resources.
With only 3% of SFOs confident that they have “leading-edge investment and operational technology”, there is a significant opportunity to incorporate technology advancements within family offices*. At Stryde Search, we are witnessing the incorporation of technology automation, process improvement and technology capabilities being part of briefs across all roles in family office. Additionally, we are seeing large family offices hire Head of IT & Security and the very large have added Chief Technology Officer to the C-suite.
There is a vast opportunity when it comes to investing in AI technologies and many families are rapidly evaluating new ventures as part of their direct investing strategy. Some family offices are taking an offensive position, pursuing AI-focused tech startups with a vision to disrupt industries. Many CIOs will proceed with more caution pursuing a “nuanced approach” as the families they represent focus on long-term wealth preservation versus aggressive growth. Innovative AI ventures can be both pricey and risky with significant roadblocks to setting up the infrastructure needed*, thus not the best option for all investors.
While investing in early-stage tech is not for every family office, exploring funds that include AI-focused ventures can be a more conservative way to invest in such technologies as it offers the ability to diversify capital investments. Another strategy families are using to capitalize on this boom is through investments in verticals supporting the growth of AI, including areas of manufacturing, data centers, and energy. The demand/supply figures in this field are certainly compelling for potential investors.*
HR
Large to very large family offices now have full-time, dedicated HR professionals in place. At the $4Bn level this might be a Head of HR level person, at the $100Bn level this could be a Chief HR Officer. Where the family office is embedded in the OpCo, HR resources are typically shared. Senior HR people frequently manage family dynamics and succession planning, often involved in family meetings and communication. They may partner with external specialists for specific projects, for example, executive development, family education, or executive search. There is a growing number of outsourced providers of HR services aimed at the family office market, which I great for smaller family offices, for example, US based organization, Trove (www.trove.net).
Governance and Reporting Skills
As external regulation changes domestically and internationally, family offices must be structured and governed correctly. This means having relevant in-house knowledge or partnering with appropriately skilled vendors. For example, the OECD’s Base Erosion and Profit Sharing (BEPS) 2.0 initiative and Pillar Two regulations, also known as the global minimum tax, could have a significant impact on family offices globally. These changes may mean family offices face a 15% incremental tax burden on their investments and will require additional reporting. According to a recent EY report* these changes will impact operational, compliance, and wealth management strategies. These rules apply to parent entities in family office structures.
Similarly, mandatory sustainability reporting is a focus area for family offices, influenced by both new U.S. and European regulations. Even if a family office or business does not have headquarters in the EU, it may still need to comply with mandatory reporting if its EU activities are significant. Public or private companies expected to generate around €100 million from EU operations should be planning for the Sustainability Reporting Directive (CSRD)*. These reporting requirements are phased in over four years and vary in nature depending on size and sector of an organization. There are only a limited number of professionals in the market with expertise at the intersection of banking, asset management, wealth management, and investment management who can assist family offices in developing sustainable investment strategies, ensuring transparent disclosures, and enhancing data analytics capabilities.
Challenges in Recruiting for the Latest Skills
Numerous challenges exist in recruiting for emerging roles and the latest skill sets within family offices. While certain positions are in high demand, others, such as those in tax, finance, human resources, and specialized areas like ESG reporting, may not attract as much interest. This results in a restricted talent pool and a competitive market for skilled professionals. Furthermore, family offices may be perceived as less appealing by some candidates due to their limited flexibility. Many family offices evaluate technical skills as well as values such as trust and loyalty, creating an even greater barrier to finding the right talent. Additionally, the absence of clear career advancement opportunities may lead to stagnation in professional growth for individuals within family office roles.
Conclusion
As the number and scale of family offices continue to expand, the range and types of roles within them are also diversifying. While job titles often remain consistent, senior positions now require knowledge across a wide array of areas that were not as prominent a decade ago, including cybersecurity, artificial intelligence, data analytics, and ESG investing and reporting. Each family office has its own unique structure, which affects the mix of generalist and specialized talent, as well as the ratio of internal to external resources.
The ongoing trends of professionalization, shifting regulation, investment diversification, technological disruption and international outlook are undoubtedly leading to the creation of new roles and the evolution of skill sets, with key internal leadership positions essential for coordinating and guiding both team members and external partners. Whatever the size, having dedicated in-house team members ensures that there are individuals who are solely focused on understanding and addressing the family's specific needs. They can, and should, be a constant in an ever-changing socio-economic-political world.
Sources:
2. https://info.ocorian.com/family-office-global-report-2024
4. https://www.privatebank.citibank.com/insights/the-family-office-survey
5. https://www.goldmansachs.com/insights/articles/gs-family-office-investment-insights-report
6. https://www.strydesearch.com/n-and-i-detailpage.php?id=6
7. https://www.cnbc.com/2024/06/10/family-offices-investments-in-private-companies.html
If you have any questions about the content of this article, or you would like to discuss talent requirements in your family office, please reach out to Katherine Travell via kt@strydesearch.com or Lisa Slagel via ls@strydesearch.com
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