Family-OfficeEasy

3 min read · 474 words

What the seat actually does

Past a certain size, a family stops being a private banking client and builds its own institution: staff, an investment policy, and decisions taken in-house rather than recommended from outside. That is a family office.

The objective is written rather than given. A pension fund has liabilities and a mutual fund has a benchmark; a family office has whatever the family decided its money is for — spending, a business, the next generation, something specific — and the first real work is turning that into an investment policy anybody can act on. Without it the office is a set of preferences that change with whoever spoke last.

• Governance — who decides what, and the policy that makes that answerable.
• Allocation — across public markets, funds, direct holdings, property and the operating business.
• Direct investment, where the office competes with private equity without its infrastructure.
• Everything else a household has — tax, succession, philanthropy, and the reporting that ties it together.

A day, and where it goes

• Consolidated reporting, which sounds trivial and is the single hardest operational task in the office.
• Cash. Commitments called, distributions received, and what the family needs this quarter.
• Opportunities — usually arriving through a network rather than a process, which is itself a risk.
• Managers, monitored rather than merely selected.

What it is measured on

• Whether the policy was followed, which is the only measure that survives a bad year.
• Return against the objective the family wrote, not against an index somebody else chose.
• Liquidity available against what has been committed — easily the most common failure here.
• Total cost, all layers included, which in a fund-of-funds shape is more than it looks.

What it touches on this site

• The neighbouring seats — private banking and investment advisory, which is what an office replaces.
• What it invests in — every group under private markets, plus hedge funds.
• The allocation — building one and reviewing it.
• The concentration problem — how much in one thing, which is where most of these balance sheets start.

How it goes wrong

• Committing more than the office can fund. Private commitments are called on somebody else's schedule.
• Deals from the network. An opportunity that arrives through a friend skips the process that would have declined it.
• No policy, or one nobody reads. Then every decision is re-argued from first principles at the worst moment.
• The operating business counted as diversification when it is the largest single position on the balance sheet.

Concepts to master

• Liquidity is a plan, not a balance. Commitments outstanding are a liability with no fixed date.
• Concentration is a decision made daily by not selling.
• Layered fees compound — see costs and fees.
• Diversification is not a number of holdings — see diversification.