For various reasons, a growing number of single-family offices are considering providing selected investment capabilities and opportunities to ultra-wealthy non-family individuals and families. This goes beyond the likes of co-investing or even single-family office consortiums. In these cases, the single-family office directly takes fees for helping other investors or creates an aligned firm that does.
In evaluating the investment returns of many single-family offices, they often represent “smart money.” Many single-family offices have produced superior, and some outstanding, investment returns over extended time frames.
Some ultra-wealthy family members and non-family senior executives see this as an opportunity to expand and bring in additional ultra-wealthy families as clients who profit directly and benefit by having more money to invest. In a survey of 239 single-family office senior executives, about 35% said there was strong interest in providing investment expertise to ultra-wealthy non-family clients.
While none of the single-family offices have taken action to establish a mechanism for taking fees from these ultra-wealthy non-family investors, nearly three-fifths of the single-family offices are currently co-investing with other ultra-wealthy families. Co-investments are usually in the form of club deals. Sometimes, a single-family office consortium is set up. However, for these single-family offices, the rationale is usually factors such as deal flow, better terms, and the ability to participate in more significant transactions.
There are various reasons for ultra-wealthy families with single-family offices to consider providing investment expertise to other ultra-wealthy families. The most prevalent reason is to leverage their single-family office's investment proficiencies and capabilities. Nearly 65% of the single-family office senior executives considering the possibility say the motivation is to capitalize on their investment prowess.
In many situations, the idea of delivering investment expertise for a fee is being prompted by other ultra-wealthy families. About two-fifths of the single-family office senior executives point to strong interest from other ultra-wealthy families in helping them invest.
Because of demand and the “mystique” of many single-family offices, what is likely to happen is that more single-family offices will convert to multi-family offices or establish separate multi-family offices operating parallel to their single-family offices. Converting their single-family offices often goes beyond providing investment expertise. Commonly, the “new” multi-family offices will offer a broad range of capabilities mirroring what they provide their founding ultra-wealthy family, enhancing their appeal.
The complication is that there are differences between running a high-performing single-family office and a high-performing multi-family office. For example, with a single-family office, there is only one ultra-wealthy client with whom the executives become intimately familiar, enabling them to be exceptionally responsive. In contrast with a multi-family office, there are several to many ultra-wealthy clients, and the level of intimacy is usually meaningfully less. Thus, the client experience is different.
A decisive difference is that most single-family offices are not commercial enterprises. They exist to serve their ultra-wealthy family, undeterred to lose money on the potation so long as it serves the family’s needs. Multi-family offices are established to make a profit, often a considerable profit, requiring them to function differently.
Without question, the number of single-family offices transitioning to multi-family offices will accelerate. However, it will take more than other ultra-wealthy families desiring to benefit from the investment management expertise of the single-family office to make these enterprises successful.
Russ Alan Prince is the executive director of Private Wealthand a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.