Posted: July 30th, 2017
By: Maureen Gallagher *| Guest Writer
In an era of rising regulation, the super-rich are turning to a different vehicle to steer their massive wealth – the family office. More than just the room in the house with a computer, the family office is a way for individuals to manage their wealth and lives while operating under the radar and away from regulatory scrutiny. Family offices are proliferating and often poaching talented senior officers from big banks to run their operations. Included in these ranks are the family offices of Oprah Winfrey, hedge-fund manager William Ackman, Google co-founder Sergey Brin, and Billionaire brothers Charles and David Koch.
Always on the hunt for higher returns, family offices have taken to bypassing traditional private equity and hedge fund opportunities in favor of direct investment. They are providing financing to startups, buying distressed debt, lending to companies, and competing against buyout firms for acquisitions. Family offices do not have to register with federal regulators, however, if they only provide advice to certain family clients, the family clients wholly own and control the family office, and the family office does not hold itself out to the public as an investment advisor. Single family offices that meet these requirements often remove the family name from their title, increasing their anonymity. Since they do not have to register, tracking the number of family offices is difficult. But estimates have placed the number of U.S. family offices at 3,000 with more than $1.2 trillion in assets. About three dozen hedge funds have converted into family offices since 2011, returning outside capital and escaping reporting requirements that demand hedge funds with more than $150 million in assets disclose their strategies.
Family offices find an advantage in their ability to invest for the long term, making direct investments appealing and practical. These families may also have certain social impact goals that direct their investment strategies, ranging from medical research to the environment. A good family office is focused on transitioning between generations and navigating the trickier aspects of familial conflicts. Also, families willing to go public with their investing and able to conduct disciplined outreach can attempt to leverage their celebrity status to get others to commit money to causes they deem worthy.
Investment bankers are taking notice of family offices, especially those with the ability to buy entire companies, treating them the same way they would buyout firms and often inviting them to be minority deal partners in private equity investments. The family office of billionaire energy trader John Arnold recently invested in Bass Pro Shop’s buyout of Cabela’s Inc., along with Goldman Sachs and several pension funds. Some family offices even join forces to create a network of wealth used to obtain “club deals” similar to private equity deals and confer on investing strategies. Families interested in this type of direct investment seek to capture better returns that do not directly follow the stock market. As the ranks of the super wealthy increase so will their unregulated investing influence, and the future of investment may well be in their hands.
Maureen Gallagher is a second year law student at Wake Forest University School of Law. Prior to law school, she worked for two years as an analyst in the ultra-high net worth group in the Houston office of Citi Private Bank. She holds a Bachelor of Business Administration in Marketing and a Bachelor of Arts in Hispanic Studies from The University of Texas at Austin.