Family Offices and the Internationalisation of Large Family Fortunes

Family offices consolidate the tasks associated with the management of large private or family assets. The family office is the interface of the family or asset holder to tax­es, law, and all areas and aspects of asset management. The "family office" concept has evolved significantly over the past 20 years and has become increasingly estab­lish­ed internationally.

Family offices did not originate in North America, although the term "family office" was imported from North America and large family offices such as the House of Morgan (1838) and later the Bessemer Trust, Rothschild, Rockefeller, or Guggenheim are repeatedly mentioned as the earliest family offices or families with the first ever family office.
 

The merchant family Fugger (Augsburg, 14th century) and the Medici (Florence, from the mid-15th century), for example, bundled their family assets much earlier and managed or controlled them via their own banks. Thus, the first so-called "family offices" can be found in Europe.

  
Since every family and every asset holder has different requirements and preferences for the management of their own assets, there are just as many different organisational forms in the context of deciding which of the services required for management should be provided in-house and which should be purchased on the provider market.
 
The structure of a private family office therefore follows from two primary questions or two dimensions: First, what services do I need to manage my wealth, and second, how do I produce those services? Or to put it an­other way: The often-cited directional decision for "make or buy" is only one dimension in the context of an individual family office structure; the other, the upstream dimension, describes the objective needs situation in the context of the expectations or requirements specified by the asset owner. As a result, we find ourselves in a field of different objectives characterised by heterogeneity – and not just between the predefined, long-term objectives of real wealth preservation and substantial wealth accumulation.
 
Furthermore, the organisational decision made at the beginning is not "rigid", i.e., the structure of one's own family office must – against the background of changing framework conditions and investment strategies – be reviewed and adapted time and time again.
 
In the relationship between the family and "their" family office, trust is the condition sine qua non; expertise can be bought in almost all areas – trust cannot! This relationship of trust and the absence of conflicts of interest is also the primary advantage of a private family office – in addition to the often cited control or unre­stricted ability to act across all asset components.
 
What is shaping the family office landscape today? More diversification, hence, the spreading of assets across different asset classes and into different currencies, economic regions/jurisdictions, continues to be a phenomenon that affects many large private assets. We also include diversification within individual asset classes such as real estate – for instance. Due to the still moderate financing costs with further increasing asset prices, it can be seen in this context that illiquid assets will continue to play an important role in the investment strategy of family offices in the future.
 
In connection with the goal of a broader positioning of assets, the question automatically arises as to how diversification is implemented. The single-family office is usually located at the headquarters of the family business – the search for suitable investments abroad and their valuation and subsequent management are hurdles on the way to internationally diversified assets that should not be underestimated.

Therefore – in addition to the selection and mandating of international investment managers – the exchange of information between family offices is gaining in importance; investment and advisory services from other family offices are increasingly being used. Club deals between several family offices or co-investments are also in­creasingly playing a role. In addition to cost degression effects (due diligence) on the one hand, family offices that have built up experience and expertise in individual areas over years or generations – for example in agriculture, real estate, ship­ping, and corporate investments –  are taking advantage of the desire for more diver­sification in an "entrepreneurial" way: they are opening themselves up to participation by other families and family offices via suitable investment vehicles.

 
The increasing diversification of assets is, however, not only evident in asset allocation but is also clearly visible at the structural level of family offices. For some years now, we have noticed that structural adjustments in the form of increasing externalisation are taking place because of greater diversification (and the associated need for expert knowledge). This development is particularly noticeable in the area of reporting and controlling.
 
In principle, legal and tax advice are particularly externalised, and strategic asset planning is generally inter­nalised. The main reasons for internalisation are the desire for discretion and economies of scale. Ex­ternal­isation is mainly due to the elimination of fixed costs and the increasing need for expert knowledge, with the degree of internalisation generally increasing as assets grow.
 
Due to the recognisable opening to other families and against the background of diversification and inter­national­isation – family offices still represent the most discreet and at the same time most heterogeneous area of asset management.