Forest and sun

Family offices: practice ≠ theory

In theory there is no difference between theory and practice; in practice there is.
– Often attributed to Yogi Berra

Family investment offices have several theoretical advantages but the execution matters. I’ve met more than 75 family investment offices over the years. There are family investment efforts that can compete with the best of them. But there are many with below average or even worse results. When you’ve met one family office, you’ve met one family office. But there are a few common practices of high-performing family offices:

1) Aligning their capabilities with their ambition.

Many family offices meaningfully under-estimate the difficulty and time involved in building a successful investment office. So, they under-resource the effort and try to do too much with a small team. A family office can have a lean team but must scale the complexity and ambition to match. Plus, building an investment program does not happen overnight (it will take 3-5+ years in the alts space and 7-10+ years to have a real sense of performance).

2) Defining the goals of the family office and investment program.

What is the purpose of the family’s wealth? Of the investment program? Is the goal to preserve wealth? Build wealth? To invest in areas the principals are passionate about?

Is there a long-term return target or benchmark? How are the goals set? When are the goals revisited? Has this been thought through and clearly communicated to the investment team?

3) Staying the course on strategy and priorities.

Chasing performance or the latest shiny object might be fun (and can be okay for a small portion of the capital). But shifting priorities often is a recipe for below average or money-losing results. How do you build any edge if the strategy changes every year? Like an individual saving for retirement, family offices should have a plan and stick with it.

The same evidence that applies to individuals applies to family offices. Those that “trade frequently” or try to time the market underperform those that stay the course year after year.

4) Designing and establishing thoughtful governance.

This is hard to get right but is probably the most important determinant of long-term success. How are priorities set? How often are priorities revisited? How and when are investment decisions made? Who has a vote? How much authority is invested in the team?

Overpromising and underdelivering or reversing course at the 11th hour damages credibility.

5) Hiring the right people.

This follows – in part – from #2. First off, there are many talented people in family offices. Family offices should solve for both capabilities and values (long-term, etc.). For example, a disciplined office shouldn’t hire someone who wants to close a deal every six months.

To attract and retain talent, the compensation model and investment program need to be aligned. Family offices need to pay “market” to attract the best people or certain capabilities.

6) Understanding the limits of their expertise.

Most families have had tremendous success in one or more areas (or they wouldn’t have or be thinking about starting a family office). But that expertise usually doesn’t translate. The skillset and behavior necessary to acquire wealth are different from keeping it.

7) Appreciating the competition (especially for direct deals).

There are ~1,900 buyout firms in the U.S. (per Pitchbook). Most of them aren’t household names. But they are still pretty good at what they do. Plus, there are thousands of family offices, many with direct investing teams. Almost everyone “in the game” has a large network, lots of money, and many are long-term. Don’t discount the competition.

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