We continue to look at the role of family offices and where service approaches are changing through different practitioners eyes. Here we talk to senior figures from Stonehage Fleming multi-family office.

We asked senior managers at London and Jersey-based MFO Stonehage Fleming for their observations on family office trends worldwide, including nascent but developing interest for family office services in China. The team also discusses managing demands coming from the next generation; and more clients jumping into private markets, through direct or co-investment, and the challenges raised there. Needless to say, in these dislocating times, risk tolerance and even simple geography are being especially tested. Comments about the sector come from Ana Ventura, head of Jersey Family Office; Mark McMullen, group deputy chief executive officer; Richard Hill head of corporate finance & direct Investments; and Mona Shah, director of investment management.

What do you see as the dominant trends in how single and multi-family offices operate (more SFOs merging into multis, more recruitment of outsiders, taking a higher profile in the media, etc) and why?
Ana Ventura: Over the past 10 years Jersey has experienced a significant increase in the number of family offices. This is partly due to the fact that they often ‘migrate’ to jurisdictions that offer stability. Statistics show that over 80 per cent of those migrating to Jersey are UK residents looking for a more certain environment. In our market we are seeing significant growth in both full-scale operations and small private family offices. We find that we work very closely with a number of single family offices who don’t have the range of offerings that we do. We complement them in that way.

What do you see as the biggest challenges for family offices today (costs of doing business, recruitment of the best staff, getting families to agree on goals, other)?
Ventura: One of the biggest challenges for family offices today is catering for the increasing demands of the next generation of ultra-high net worth individuals. Today families aspire to achieving an increasingly diverse set of goals and ambitions. For asset protection and wealth preservation, growing numbers are adding philanthropy and socially responsible investment, for example. For family offices, the challenge is putting together the right mix of solutions for these clients from simple trust and company structures to higher value complex structures involving trusts, companies, limited liability partnerships or foundations.

From what parts of the world do you expect to see the fastest growth in family offices and why?
Mark McMullen: In terms of growth, Europe is continuing to stagnate, the US is still growing but Asia, of course, is where the exponential growth is happening in terms of the creation of wealthy families. These families are ever more global in their lifestyles, education choices and asset holdings, which brings complexity and added risk to managing their affairs. When you are talking about cross-border arrangements it is quite easy to get it wrong and specialist advice and planning is essential.

In China, while some banks have entered the market, the concept of a family office is new for many families. Things are moving, though, and for those who have made their money over the last 20 years, some single-family offices have emerged.

On the investment side, there is a lot of talk and action around private market investing, direct investment that bypasses fund structures. What are the challenges in doing this, given due diligence costs, need for expertise, dangers of over-concentration of some risks?
Richard Hill: The marketplace for private capital is growing and evolving and family offices are playing a significant part in that evolution. As a whole, the market is professionalising and it has become a much more mainstream topic of conversation. Private clients are showing an increasing interest in participating but it should always be considered in the context of an individual or family’s wider portfolio. As advisors, we need to have a thorough understanding of our clients’ risk profiles and their comprehension of the risks and realities of investing into private companies.

Direct investing and co-investing is not without challenges for private investors. One of the main things to consider is the sheer volume of work involved and the specialist advice required. The result is that it can take a considerable amount of time to bring a project to fruition – often six months or more  – and several years to build a diversified portfolio.

The main challenges that private investors face when making direct investments include the sourcing of – and securing access to – high quality investment and co-investment opportunities. There are many opportunities out there, but relatively few are likely to become profitable investments. Most private investors simply don’t have the network and rely on the market to present ideas to them.

If you are able to source opportunities, persuading a good quality company with different funding options that you are the right option for them is the next challenge. You may have to prove to them that what you offer is different?

Another consideration is building a diversified portfolio to mitigate single company investment risk. Should you invest across several sectors or focus on a particular sector, perhaps one in which you have direct experience?

Are you an early stage investor, comfortable with a higher level of risk, or do you prefer to invest in more mature companies?

What is your tolerance for financial loss? Investors should consider who is going to assess this risk for them or carry out due diligence, find specialist expertise and support, appoint lawyers to negotiate agreements and reflect all of the findings in the terms of investment.

Investors should consider aligning their interests with the key stakeholders of a company – founders, management and other investors. Ask yourself if everyone is facing in the same direction and/or incentivised by the same outcome.

And what about the future? You should consider the questions about your appetite to invest further capital down the line and whether or not you are prepared for the investment to be illiquid for a long period. You should also consider the exit before you invest. In some ways, investing is the easy part. Doing so on the right terms and securing a successful exit is much less so.

What investor protections should you have, how do you want to be able to influence outcomes? Or are you an entirely passive investor? We see many private investors taking small, minority, passive investments in private companies without any real investor protections and without doing the appropriate due diligence. It’s likely that they’ll have no influence over the outcome and limited ability to exit their position.

Controlling or monitoring your portfolio of investments once you have invested - who is going to do this?

All of this points towards either hiring your own specialist team, which can be very expensive, or working with advisors that have the experience to address these challenges and to look after your interests. Done well it can be very effective and the relatively higher costs of accessing the asset class properly are more than offset by the investment returns generated.

How significant in your view are family offices as players in fields such as impact investing and sustainability?
Mona Shah: By definition, family offices are very significant as players in sustainable and impact investment. Their businesses are predicated on wealth being transferred through the generations over the long term. This means that we place huge importance on preserving the health of both societies and the planet on which they live.

In fact the families that we look after tend to agree. We surveyed a number of our clients as part of our latest research report (Four Pillars of Capital for the Twenty First Century: The Next Chapter - Practical Wisdom and Leadership for Changing Times). Seventy per cent of survey respondents said they would like to see more socially responsible investment in their portfolio but that in fact only 25 per cent were actually doing it.

Over the next 30 years, over $30 trillion of wealth is going to be inherited by today’s Millennials from older generations. Nine in ten Millennials are interested in sustainable investing, according to Morgan Stanley’s Sustainable Signals report. So our eyes are on the future. There is going to be a style shift and we are ready for that.