Family offices are highly bespoke structures. While no two families are the same, no two family offices should look and behave the same way as they should be the most personalised answers possible to the families themselves, their needs, affairs and dreams.
Due to its versatility, “family office” is a term still in search of a definition. I am reluctant to give a definition but if there has to be one, it would be:
“A neutral platform that organises, strategises and manages family wealth, family business and family affairs and allows the family to over time explore, navigate and travel its own unique, transformative journey to betterment and sustainability.”
In other words, the family office is not a static concept but a roadmap with which we work and also a perpetual work-in-progress that reflects how the voice of the family evolves over time.
In a space that is as diverse and versatile as single family offices, it becomes immensely interesting and fruitful to observe the current trends.
Polarised Reactions To Digital Assets
Family offices are known to be receptive to alternative asset classes such as hedge funds and real properties. The latest addition to the list of alternative investments is digital assets such as cryptocurrency (especially bitcoins) and crypto-assets funds and security token offerings. I have seen polarised reactions to digital assets with some family offices shying away from such asset class unless they have acquired a thorough understanding and reasonable level of confidence in the market. Some family offices readily embrace the trend and gain exposure to diversify the portfolio that usually relies heavily on more traditional assets and tap into the potentially attractive upside delivered within a short span of time.
Some even take a step further and become players themselves by setting up and offering crypto-funds and virtual banking platforms. Among ultra-high-net-worth individuals (UNHW), there is also a group whose wealth is derived from operating virtual investment or assets platforms. Generally, family offices led by the younger generation, or those who are more entrepreneurial and alpha-seeking, are more inclined to include digital or electronic assets in the portfolio.
Asset holding structures such as a family trust should be adjusted to cater for the inclusion of this relatively novel asset class. For instance, the definition of trust properties is broadened to include “digital or electronic assets of any description” and “cryptocurrency, virtual commodities, and digital keys and codes”. A trustee is given the power to invest also in “digital or electronic assets (including cryptocurrencies)”.
Another aspect to be mindful of is to widen custodian arrangements of digital assets under the trust to “accounts digital or otherwise”. Custodian and deposit taking institutions typically referred to in trust documents might lack the required infrastructure and are unwilling to keep custody of digital assets so separate arrangements are warranted.
Sharing Talent By Fund/Product Offering
It is not uncommon for younger family members who drive the formation of single family offices to have a long term plan and vision to expand the target service recipients to distant family members and friends. In other words, the single family office is to be converted to a multi-family office. There will be regulatory client segregation and privacy implications, but this is a logical step to take for some. So far, conversions are not as prevalent and very few single family offices succeed as planned to become multi-family offices. Multi-family offices in the market currently are mostly set up as such at the outset and are often fund managers servicing a relatively small number of UHNW families.
It does not mean that without conversion into a multi-family office the single family offices are not sharing their talents and experience with other families. They are simply taking a detour and become more selective. Rather than offering across-the-board family office services, they take deeper reflection on the family’s own strength, expertise and visions and share these qualities through innovative funds, products, and structures.
They are usually spin-off projects riding on the success of the family in a certain sector or industry. Often it takes the form of securitisation of assets or businesses, combining the strength of the family and financial engineering knowledge and experiences of the younger generation. The family offices back, partially, these self-incubated funds or products and make available interest for subscription by other families or family offices. The lead family office works with licensed fund managers or issuers if required by the law.
Family Offices In Multiple Locations
A few years ago, an often asked question that came from clients was “where should I set up the family office?”. This is still a valid question, but there is also a group of clients now asking a different question: “I want to set up family offices in different locations, how should this be done”? These families have in mind at least two locations for the family offices. This is usually driven by the globalisation of the family assets, family business, and family members. Our work becomes even more interesting as the design and implementation involves examination of regulatory, tax, cost, functionalities, immigration rules, and integration with the family system.
I have witnessed increased mobility of family members and family office activities, such as diversification of bank accounts and location of assets driven by internal needs of the family and external geopolitical and social factors. There are European, Central and Eastern European family offices expanding to Asia (with Singapore and Hong Kong as obvious choices). There are also Asian families setting up additional locations within Asia. Central and Eastern European and Middle East family offices are looking to acquire an extra hub in London. The United States and Canada are popular locations while Australia is an occasional choice.
The technical question to ask is “where to do what?”. While many determining factors are relevant, the regulatory requirements across the multiple locations are of paramount importance. In some locations, the family office is formed as a single family office which is qualified to be exempted from licensing and in some locations, the family might desire to engage in highly regulated activities and they are prepared to obtain the required licenses and/or work with a licensed co-partner or co-manager depending on the actual activities and locations.
Venture Philanthropy And “Archangel” Investing
One of the family office projects I enjoyed most was a venture philanthropy fund backed by a number of reputed families. It took the form of a limited partnership in which a charity is the special limited partner and the general partners and the limited partners (which are mostly family offices and a specialist fund dedicated to socially impactful themes) are receiving a lower fee and/or return. The charity receives the rest of the payout. This is a very attractive model since the investors are not passively making a donation to the charity. They invest in a revenue generating fund and the charity does not get funded unless the fund make successful exits.
This is only one of the many examples of venture philanthropy combining charity with business. Many families offices are “archangel” investing without knowing it. It is a term I have used to describe the devoted, impact-generating approach to supporting a business or project funded and executed by a well-organised family office. There is really no boundary to “archangel” investing but innovation in finding solutions to existing issues is often a key ingredient. Family offices may obviously invest in projects bred by entrepreneurs who are not related to the family. It is equally possible for the patriarch to be a board member or a spokesperson or even to mobilise family resources to increase the awareness of, and lend credibility to, the business or venture.
The concept of “archangel” investing can be extended to include an enhanced version of internal incubation programs provided to family members. Some families have rules in trust documents or family office bylaws that reflect the wishes of the family to support new ventures in certain industries to strategically complement or avoid competition with the core business of the family. Some families require that the incubated entity be owned exclusively by the family member and the family trust until a later stage of capitalisation or even the pre-IPO round. Some are more open to funding the family member by just providing a loan interest-free or at a lower-than-market interest rate and do not insist on taking a stake in the incubated business.
Appreciation Of Religious And Spiritual Capital
An encouraging trend is the appreciation of the importance and the willingness to acknowledge and find ways to enhance religious and spiritual capital through family offices. Religious capital represents the family’s belief in an organised form of religion such as Christianity, Buddhism, Hinduism, etc. and how the family embraces the values particular to such religion’s tradition and faith system. Spiritual capital is different from religious capital in a sense that it derives from the family members’ (usually the leaders’) belief or mystical experience in direct connections with Source, which could be totally independent from and does not require the participation in any organised form of religion.
Such practices help give the family its unique voice, an identity to which its members can relate and a way of thinking in knowing and realising its dreams. How, really, can a particular family be defined? Its net worth? Its ranking on the rich list? How much political and social influence it has? How many magazine covers the family members have graced? All these are about looking outward for recognition. They are not the true identity of a family, which can only be found by looking inward.
Religious and spiritual practices provide the best opportunity to turn inward. There are clients who are open to or suggest meditation and/or prayer before or at the end of meetings with us and among themselves. We have even had occasions in which meditation is used as a means for everyone to re-centre when the family encounters obstacles during a meeting. Other tools known to be used by family governance advisors include intuitive enquiry, ancestral connection, family constellation, and transpersonal psychoanalysis. Spiritual practice and education have also been requested to be included as must-have ingredients in the family system.
Patricia Woo is Partner of Squire Patton Boggs and co-head of the firm’s global family office cross-practice team. She is a fund, trust and tax lawyer noted for her practice in helping global ultra-high-net-worth families set up, restructure and operate family offices. Patricia is a Chartered Alternative Investment Analyst, Certified Tax Advisor, member of the Academy Community of STEP and Certified Islamic Finance Executive. She is Adjunct Associate Professor at the Faculty of Law of the University of Hong Kong, Adjunct Assistant Professor at the College of Law of the National Chengchi, University of Taiwan, and winner of the High Net Worth Award (Hong Kong) of International Advisory Experts Award 2020.