Raising Money From Family Offices
Posted: Jan 11, 2023 10:38 AM ET
A family office is a personalized financial service that focuses on the management of assets and personal wealth of high net worth individuals and families. The primary objective of a family office is to safeguard and grow the financial legacy of the family for future generations. The service includes a range of financial management activities such as investment planning, risk management, tax planning, philanthropic giving, and succession planning.Ā
The name “family office” is derived from the fact that it operates similar to a traditional office, with a team of professionals working collaboratively to achieve the objectives of the family. The team will often include a range of professionals, including investment managers, accountants, lawyers, tax professionals, and other experts who have the necessary skills and experience to provide the required financial guidance.
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In this article, we will discuss the different types of family offices, what they do, when you should consider raising money from a family office, and some potential challenges in working with them.
Types of Family Offices
The family office landscape has experience some notable transformations over the past few years. Variations in regional laws and regulations have lead to the adoption of diverse organizational and governance structures, with three primary classifications acknowledged.
Single Family Office
Single family offices (SFOs) are independent financial management entities that focus exclusively on the needs of one family. These offices are designed to provide personalized and comprehensive financial services that accommodate the family’s specific needs, goals, and values.
SFOs provide the family with exclusive access to a team of specialized professionals who work to ensure the family’s financial affairs are in order. The team typically includes investment managers, tax experts, lawyers, accountants, and other professionals who possess the necessary skills and experience to manage the family’s wealth.
While maintaining an SFO can be costly, it is often the preferred option for families with significant wealth as it provides them with an exceptional level of control, confidentiality, and customized service. Additionally, having an SFO allows families to invest in assets and strategies that may not be accessible through other investment vehicles.
Multi-Family Office
Multi-family offices (MFOs) are quickly becoming a popular option for managing the wealth of multiple affluent families. Many MFOs originated as SFOs and later evolved to include services for multiple families. These offices offer a broad range of financial management services to multiple families under one organization, including investment management, tax planning, estate planning, and philanthropy.
By sharing resources, MFOs offer cost savings and economies of scale to their clients. Instead of each family having to maintain its own team of professionals, they can collectively benefit from the expertise of the MFO’s team, thereby reducing costs while maintaining the same high-quality services. MFOs can also provide access to a broader range of investment opportunities, including private equity, venture capital, hedge funds, real estate, and sports teams, which may not be available to individual families.
Virtual Family Office
Virtual family offices (VFOs) are financial management entities that leverage digital technologies to provide a comprehensive range of services to one or more families. Unlike traditional single and multi-family offices, VFOs operate entirely remotely, allowing families to work together from multiple locations.
With the COVID-19 pandemic, the adoption of VFOs has increased, driven by the need for remote work and the acceleration of digital technologies. VFOs offer flexibility, convenience, and cost savings as families no longer need to be physically located in one place to access financial services. Through digital technologies, families can manage their financial affairs, communicate with their advisors, and make investment decisions from anywhere in the world. Similar to SFOs and MFOs, VFOs offer a range of services, including investment management, tax planning, risk management, and philanthropy.Ā
One of the most significant advantages provided by VFOs is the cost savings that come from no longer needing to pay for office space, support staff, and other expenses associated with running a physical family office.
What Family Offices Do
As we’ve already mentioned, family offices provide comprehensive, customized, private wealth management services to high net worth individuals and affluent families.
In addition to managing financial matters, family offices often provide a broad range of non-financial services to their clients as well. These include managing household affairs, organizing private schooling for children, or coordinating travel arrangements, among others. By providing a full suite of services, family offices help to streamline and simplify the lives of their clients.
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Trusts and foundations are often utilized as part of a comprehensive wealth management strategy, as they provide a framework for succession planning and asset transfer over multiple generations. Family offices are well-positioned to strategically and efficiently administer the assets held within these trusts and foundations, ensuring that the family’s financial objectives are met while maintaining compliance with the relevant laws and regulations.
Why Raise Money from a Family Office?
There are several reasons why a startup might consider raising money from a family office:
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Access to resources and networks: Family offices often have extensive networks and resources, including contact lists, real estate holdings, and easily accessible legal and financial services.
- Customized terms and conditions: Unlike venture capital firms, which often have standard terms and conditions that apply to all their investments, family offices have the flexibility to tailor their investment terms and conditions to the specific needs of the startup. This can include customizing the length of the investment, the level of involvement and oversight, and the exit strategy.Ā
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Opportunities for strategic partnerships: Family offices often have strong relationships with other companies, investors, and institutions, and can provide opportunities for strategic partnerships and collaborations that can help the startup grow and succeed. These partnerships can provide access to new markets, customers, and resources.
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Potential for long-term partnerships: Family offices will often entertain longer-term partnerships with companies and their founders, as they are not under the same pressure to generate short-term returns for a group of investors.Ā
Some Challenges of Dealing with Family Offices
Despite the many benefits, there are a couple of potential challenges that can arise in working with family offices. One potential issue is their level of organization, which can vary greatly depending on the sophistication of the office. This lack of structure and organization within some family offices can lead to conflicts among family members regarding decision-making and the allocation of resources.Ā
Another potential issue is the lack of transparency and regulatory oversight of family offices. Because they are not subject to any regulation, family offices can operate without having to disclose their financial information.
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Finally, family offices may have a more limited amount of capital to invest compared to venture firms. This can be especially challenging for companies that require a larger investment to grow and scale.
Closing Thoughts
Family offices are established for high net worth individuals and affluent families who have significant assets and personal wealth. By providing a comprehensive set of customized financial services, a family office helps to streamline the financial affairs of wealthy households. They also assist with simplifying the complexities in life that come with significant wealth, such as travel arrangements, private schooling, and so forth. With an eye to the future, the primary purpose of a family office is to manage and grow the financial legacy of a family for future generations while also pursuing their personal and philanthropic goals.
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