How the family office became one of the world’s fastest wealth generators

The family office, which handles the investments of the ultra-rich, has become one of the fastest generators of wealth in the world from the US to Hong Kong and Singapore. An institution that dates back more than 150 years — when American financier John Pierpont Morgan first came up with the term to describe the personal investment arm for his growing art collection — has become a cornerstone of the financial system.

The sector has expanded from a small number of groups in the 1980s to about 15,000 offices worldwide with an estimated $5.9tn in assets, according to a report in January by US media group Forbes, citing the Economist Intelligence Unit and DBS Private Bank.

Some wealth managers expect the number of offices to grow further, enriching both the ultra-rich individuals they serve and the global economy. “We are extremely bullish on the family office,” says Hannes Hofmann, head of the family office group at Citi Private Bank. “Wealth of the [ultra-rich] sector is being generated at a very fast rate and that is a good thing for the world economy and the financial system.”

As these offices have become bigger and more sophisticated, their reach has extended to corners of the world economy that were previously no-go areas because they lacked the financial firepower and expertise. Now, they offer services to small and medium-sized companies in markets in Latin America, such as Mexico and Chile, and Asia, where high interest rates and undeveloped financial sectors make it hard to raise capital from local banks.

Although the industry is diverse, ranging from single-family units with a handful of staff to multi-office groups representing several families and managing hundreds of millions of dollars, it faces a number of risks that could check growth.

First, the vast transfer of wealth to the next generation — estimated by data provider Wealth-X at $18.3tn by 2030 — may prove less than smooth. Some families could suffer from the so-called third generation curse, where money is lost because of infighting and poor decisions, as the founder and wealth creator becomes less involved in the business.

Second, family offices are increasingly investing in riskier private markets in search of higher yields, moving away from the traditional safer approach built around balanced portfolios. According to Citi’s Family Office and Investment Report for the first quarter, there were larger allocations to private equity across all regions.

A survey of 54 private banks around the world by Professional Wealth Management, published in March, also showed 88 per cent expected to increase their level of investment in private equity for their clients this year, while 90 per cent said they would increase or maintain levels in private debt. Equity (94 per cent) and fixed income (91 per cent) remain popular too, but the growing appetite for higher-yielding private equity and debt comes with risks as well as rewards in markets that can deliver both big winners and big losers.

Third, the world has become a much more dangerous and uncertain place, with wars in the Middle East and Ukraine, and simmering tensions between China and Taiwan. UBS’s Global Family Office Report for 2024 points out that the risk of a significant geopolitical conflict is a big concern for family offices, both in the near and medium term. At two large family office conferences in Singapore and London hosted by Deutsche Bank Private Bank, attendees said geopolitics was the theme most affecting asset allocation decisions. It is clearly a threat that could disrupt markets and upend some portfolios.

There are other risks, such as inflation and cyber attacks, but some wealth managers shrug them off. They say families are better equipped for succession and the transfer of wealth as they have improved governance and oversight and set out defined investment goals, which in turn should help them navigate riskier private markets and deal with geopolitical dangers. “There have always been geopolitical tensions in the world and family offices are largely diversifying to manage those risks,” says James Whittaker, head of UK at Deutsche Bank Private Bank.

Gerard Aquilina, a family office adviser, stresses that greater professionalism and financial experience means most groups are equipped to make the right investments, as they have diversified their holdings and hired top bankers and asset allocators to manage their portfolios.

Citi’s Hofmann adds: “Family offices are becoming smarter. They are employing good people and they are diversifying. There is always a risk with any investment, but family offices can continue to be a success story and benefit the world economy.”

Asset managers and advisers admit there are risks, but in the main they still expect the sector to continue growing. They believe family offices will play an increasingly important role in the financial system and create more wealth for their ultra-rich owners, while at the same time boosting the global economy by providing capital and financing for companies and institutions. 

© The Financial Times Limited 2024.
All Rights Reserved. Not to be redistributed, copied or modified in anyway.

Money.it has hosting rights to certain limited Financial Times articles. This is not a live feed of Financial Times content.