Post-pandemic wealth growth has enlarged family offices, triggering a Wall Street, private equity, and financial advisor gold rush.
A new gold rush has been sparked among Wall Street firms, private equity funds, and investment advisors to manage the fortunes of the world’s richest families as a result of the post-pandemic wealth boom. This explosion in family offices has been caused by the wealth boom that occurred after the pandemic.
Some estimates suggest that family offices now manage more than $6 trillion in wealth, which places them ahead of the approximately $4 trillion that is managed by hedge funds. They have rapidly grown into a significant force, rivalling numerous sovereign wealth funds, endowments, and large corporations, in the financial markets, mergers and acquisitions, cryptocurrency, and real estate. According to industry experts, family offices will play an increasingly more significant part on the investing stage as the wealth of nations throughout the world, and particularly Asia, continues to increase.
Andrew Cohen, executive chairman at J.P. Morgan Private Bank, described the magnitude of the world’s wealth as “enormous.”
According to Forbes, between the market lows in March 2020 and spring 2022, the wealth of the world’s billionaires climbed by an estimated $5 trillion to over $14 trillion. This growth occurred between the time period of March 2020 and spring 2022. Despite the fact that recent losses in the stock market, cryptocurrency, and other asset classes have reduced some of those gains, the rich (particularly in the United States) are still sitting on mountains of capital generated via fiscal and monetary stimulation. According to the Federal Reserve, the wealth of the richest 1 percent of Americans in the United States has increased by an additional $11 trillion since the beginning of 2020, bringing the total to $45 trillion as of the first quarter.
Although the majority of family offices work with investors who have a net worth of at least $100 million, there is an increasing number of family offices that handle billions or even tens of billions of dollars’ worth of assets. They are inherently secretive, and the majority of them aren’t compelled to disclose their positions or assets by the national financial regulators in their respective countries.
According to figures provided by Campden Research, there were more than 7,000 family offices around the world in 2019. These offices were responsible for handling up to $6 trillion, and experts in the field believe the number has likely only increased since then. According to estimates provided by the accounting company EY, more than 10,000 family offices around the world oversee the fortune of a single family, with at least half of these offices having been established in this century.
Families desire a greater degree of autonomy.
In addition to an increase in wealth, the transition to family offices is also being driven by a change in the way the wealthiest families handle their assets. They want more control and less dependence on traditional wealth management firms, which are known for their expensive fees, mediocre performance, and aggressive sales tactics. As more wealth is passed down from one generation to the next, younger investors are expressing a desire for greater involvement and “values-driven” investment strategies. In addition, the wealthy people of today, many of whom amassed their wealth by founding and then selling multinational corporations, require a similarly comprehensive strategy for their own financial holdings.
Many billionaire hedge fund managers are also switching to family offices in the hopes of obtaining looser regulation or escape from the constraints of benchmarks and the requirements of outside investors. In recent years, for example, John Paulson and Leon Cooperman have both transitioned their businesses to become family offices.
Family offices have been around for hundreds of years, and John D. Rockefeller and J.P. Morgan were two famous people who used them to manage their wealth. Most still do “concierge” work for wealthy families, like making travel plans, managing the jet and car fleet, paying bills, and taking care of properties. Most of the time, they also take care of taxes, estate planning, and issues related to the next generation taking over.
The larger family offices of today, on the other hand, work more like full-service global investment firms. They buy and sell stocks, bonds, currencies, cryptocurrencies, and commodities. They buy both homes and businesses, as well as land, all over the world. They put money into private equity and venture capital funds and make more and more acquisitions and deals with new businesses.
Family offices have become a hot growth area for Wall Street banks and wealth management firms because of this growth. Goldman Sachs, JPMorgan, Bank of America, Citigroup, Credit Suisse, UBS, and Deutsche Bank are all hiring more people and growing their family office businesses. Their goal is to get more business from family offices by giving them access to the same services and expertise as other institutional clients. This includes trading, credit, private equity, due diligence, technology, and hedging.
The Morgan Stanley Family Office unit, which is also growing, began adding family offices to a new platform for tracking assets last year. So far, more than $25 billion worth of assets have been added.
Daniel DiBiasio, who is in charge of the Morgan Stanley Family Office, said, “They think more like institutions than like families.” “We think that these “individuals” deserve a business-to-business relationship more than anything else.”
More family offices are also going out on their own to buy private businesses, take part in them, and start new businesses. According to a survey done by UBS on its family office clients, about a third of a family office’s portfolio is in stocks, 11% is in fixed income, and about 10% is in cash, all of which have stayed pretty stable. The amount of money that family offices put into private equity and direct investments went from 16% in 2019 to 21% in 2021. This was the biggest jump of any asset class. The rest is made up of property and other assets.
Over the next five years, more than half of the offices plan to put more money into private equity. This is the most of any type of investing.
Family offices now have to compete with venture capital and private equity firms for deals because they can buy and fund companies directly. MSD Partners is an investment firm that grew out of Michael Dell’s family office. It recently hired Gregg Lemkau, who used to work for Goldman Sachs, as its CEO, and it bought a 50% stake in digital consulting firm West Monroe last year. The deal came after MSD Capital bought Ring Container Technologies, a company that makes plastic containers, in 2017.
BDP Capital Partners was started by the well-known banker Byron Trott. It has put about $30 billion into 41 companies, most of which are run by families or their founders. Most of the money came from business owners and family offices.
Family offices that make direct investments get better returns and are rewarded for having longer time horizons. When business founders sell their companies and start a family office, they often want to stay involved in the industries they know best and use their expertise to help new businesses get off the ground.
Sara Hamilton, who started the Family Office Exchange, said, “This new wave of first-generation liquidity from founders is driven by the potential to do it again and again.” “They want to share what they know with people in other fields and make a real difference. Maybe 35 years ago, the goal was to have enough money and keep it. Today, that’s not the case. Now it’s time to look for chances.”
Countries are also vying for the benefits of family offices. Singapore just made a Family Office Development Team to lead and coordinate efforts to bring in more family businesses. There is no capital gains tax in the city-state, and family offices can apply to have their income tax-free. In Singapore, the Global Family Office Circle has been started by the Wealth Management Institute to attract more family offices. The GFO Circle says that the number of family offices in Singapore has grown by more than 100% since 2019.
Nicky and Jonathan Oppenheimer’s family office, which is part of the diamond dynasty, just announced that it will open an office in Singapore. Sergey Brin, who helped start Google, and James Dyson, who made a lot of money with vacuum cleaners in the UK, have both opened family offices in Singapore.
Why we need more supervision
But the growth of family offices has also led to more calls for more rules. Single-family offices don’t have to register with the SEC as investment advisors because they only work with one family. Even family offices that help more than one family usually get an exemption from the SEC that lets them keep their filings secret.
Archegos Capital Management, which was run by former hedge fund manager Bill Hwang, lost billions of dollars last year. This led to calls for more information and rules. Rep. Alexandria Ocasio-Cortez, a Democrat from New York, wrote a bill that would require family offices to register as investment advisors with the SEC unless they manage less than $750 million.
Dennis Kelleher, CEO of the non-profit advocacy group Better Markets, said, “The Archegos explosion blew away any reason why family offices shouldn’t be subject to regulation and transparency.”
Kelleher said that Archegos disproved the two main reasons for exempting family offices: that they pose no systemic risk and that they don’t hurt regular investors because they only invest for one family. Kelleher said that the fact that Archegos blew up its $1.5 billion portfolio to $35 billion and caused huge losses in a number of publicly traded stocks shows how important SEC rules are.
But so far, the family office lobby has been able to fight back against new rules. They say that regulation wouldn’t have stopped Archegos from losing money because it lied to its brokerage firms.
In the meantime, experts say that even if there is a recession, family offices will still be able to do well because they are flexible, quick, have good balance sheets, and have a lot of patience.
Hamilton said, “We’re talking about investors who plan to keep their money for 100 to 200 years.”
