Passion Investments In Art
Increasingly, family offices are displaying an exceptional spectrum of activities in the colourful space of art, from investing to collecting, displaying, financing, and even auctioneering. Rarely, family offices just happen to become interested and expand into this special asset class; they usually serve families that are already keen on arts and who are sophisticated and well-known collectors or owners of auction houses. Distinct from other asset classes, arts and other collectibles are a hybrid that provide opportunities to families to participate in their passion and diversify the overall portfolio.
Collecting families have in place fiduciary structures to hold the pieces so that they are better organised for succession and tax planning and segregated from structures that hold other assets. Family offices have to find fiduciaries that are comfortable with and know how to deal with the particular types of art, which could range from antiques to contemporary works, and from paintings to installations. Cross border legal and tax issues have to be addressed. Insuring the pieces can be tricky. Not all pieces at different locations can be insured in the same way. For this reason, when they are injected into a trust, trustees might ask for indemnities specific to under-insured pieces. Regular update of status is expected from the family office.
Family offices that support seasoned collectors might be kept busy with immensely interesting works such as the establishment of private museums, loaning pieces to other (public or privately held) museums and supporting charitable causes to provide art education. Some families and family offices are participating in the more commercial side of things. Investment in art funds is a less direct way to gain exposure with fewer hassles. Some family offices act as general partners or provide art-backed financing or securitisation services if they have the talents and expertise in-house or the required external help.
The Appeal Of SPACs
One cannot ignore the popularity of SPACs (Special Purpose Acquisition Companies) when writing about investments currently favoured by family offices. Briefly, a SPAC is a shell company formed by a sponsor for limited purposes to raise capital through an Initial Public Offering (IPO) and then to engage in a business combination in the form of an acquisition of or a merger with a private operating company. A SPAC is usually given 18 to 24 months to complete the business combination. If it does not happen, the SPAC will liquidate and the capital will be returned to the investors. The SPAC issues, on IPO, units consisting of a share and a fraction of a warrant to purchase a share and allows investors to hold or dispose of the share and warrant separately.
Family offices see the appeal in SPACs because they can be hugely profitable. This is, perhaps, not for family offices with a conservative strategy because an investment is made in a company without any existing business operations or even targets for acquisition (though one can argue that the capital will be “preserved” and returned if it is not put to use within the pre-defined timeframe). However, family offices with active alpha seeking behaviour have embraced the potential and versatility this type of investment vehicle has to offer with open arms. They gain exposure by direct investment (sponsoring or co-investing in a SPAC) and/or participation in SPAC funds as manager or investor or, more often, in both roles. Some SPACs and SPAC funds target a certain theme or industry and family offices are inclined to choose what fits in with their own sector preference. Some SPAC investment strategies focus on a certain stage of the SPAC life-cycle, such as reverse IPOs through “De-SPACing” transactions. The US is definitely where most actions happen but soon there might be an active Asian market, as Hong Kong and Singapore exchanges are considering to allow SPAC listings.
Solutions To Healthcare
As a response to the aging population, general growth in health consciousness and the COVID-19 pandemic, life sciences, pharmaceutical, healthcare, and biotechnology are sectors that benefit from steady capital flow provided by family offices. Unlike SPAC investments, opportunities in the healthcare sectors span the full financing cycle from the early-stage angel round in lab research and start-ups to private equity investments in established health care institutions. Potential investments are made directly or through funds or fund of funds in companies that engage in all sorts of health related solutions such as making vaccines and improving mental wellness. Doing good to people and being potentially profitable, the healthcare and related sectors offer multiple benefits, making them consistently attractive for families.
Different from art investments where the space is still dominated by collector families, families looking to invest in healthcare usually have no history in running or investing in businesses in those areas and rarely do single family offices have the in-house expert knowledge in healthcare, nor an existing network of experts with whom they can consult. Single family offices should therefore work with multi-family offices or other single family offices with experience in the space or invest through subscribing for interest in healthcare themed funds or identify a key area they see promise in and gradually build up in-depth knowledge by working with a specialist.
Investing in healthcare companies requires the family to trust in the key personnel who are the brains behind the projects. Sometimes it goes beyond just how good they are as scientists and the non-compete covenants in the agreements. What really matters might be the integrity of those involved. Intellectual property issues are key in the due diligence process. Relevant representations and warranties and investor protection provisions should be well drafted.
Reflections On Post-Archegos Regulations
A question worth asking is whether single family offices should be, to any extent, regulated. The collapse of the Archegos family office/hedge fund after defaulting on margin calls involving swaps transactions has prompted many to reflect again on this question, shocked by the extent of risks and challenges single family offices (conventionally considered less associated with systemic risk) can present to the industry. Currently, except in Dubai and Qatar, single family offices (if structured to qualify for exemptions pursuant to the laws) do not trigger regulatory or licensing requirements and only multi-family offices (managing third party money) are regulated like fund managers.
Scrutiny of the industry and its activities is essential but regulating single family offices and their interactions with other players is also about protecting the families. Some family offices prefer not to be regulated, feeling they have more freedom and privacy and saving regulatory and compliance costs. But for some families it means that the staff and activities are not subject to industry standards and requirements prescribed by the law. In an attempt to solve this issue, single family offices could adopt an internal compliance manual and have it incorporated in the employment agreement with key executives so that they are bound. But for families without their own internal guidelines and who do not participate substantively in how the family offices are managed, they are reliant on the integrity of the unregulated fund managers and can be left unprotected or at least not sufficiently protected.
“Intuitive” Family Constitution
Trends, like tides, ebb and flow. Hopefully, this one is destined to stay and will never go out of fashion! Family offices are more ready and open to explore how their roles can be expanded to help families and family members see beyond external attributes such as wealth, power and status and understand their authentic inner selves and what they really represent. Particularly, families and family offices are rethinking the role of family constitutions and how effective they are in making families stronger in the long run. Whether the family constitution delivers its value depends on whether the family members are given their true voice. If the family members do not resonate with it, the family constitution is just a pack of inert, lifeless documents that disappoint.
Often, families are just given a constitution with a summary of the key terms in the legal documents. These are the “external data” that are easy to see but represent only a limited part of the reality. To give it life, the constitution should help the family “look inward” at the rationale behind the arrangements and go deeper and explore the fundamental values and other intangible legacies that are to be passed down. One of the many ways to make this happen is the use of “intuitive inquiry”, a transpersonal psychology research method which gives the family a chance to listen to and extract the “internal data”. If the family constitution incorporates both the “external data” and “internal data”, the deliverable will be a more realistic representation of the family members individually and the family collectively.
The family and the family office should participate in the drafting process as much as possible. Intuitive inquiry invites them to share any feedback or response they notice in themselves, such as unconscious images, experience of energy, spiritual and religious experience, body sensations, feelings of empathy and feelings stemming from emotional wounds. It does not require intensive training but it is a fun, yet systematic way for those involved to truly participate in the formative and drafting process of the family constitution.
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 also pursuing a post-graduate university qualification in Consciousness, Spirituality and Transpersonal Psychology to enhance her offerings for ultra-high-net-worth families. She is Adjunct Associate Professor at the Faculty of Law of the University of Hong Kong, and Adjunct Assistant Professor at the College of Law of the National Chengchi, University of Taiwan. She is recognized in Who’s Who Legal: Thought Leaders – Private Client (1st Edition) 2020 and is recipient of and is recipient of 2021 Global Law Experts Annual Awards (Private Client Lawyer of the Year in Hong Kong - 2021, Trust Lawyer of the Year in Hong Kong -2021, and Tax Lawyer of the Year in Hong Kong - 2021), Corporate INTL Magazine 2021 Global Awards (Private Client Lawyer of the Year in Hong Kong and Trust Lawyer of the Year in Hong Kong), and the High Net Worth Award Winner in Hong Kong of 2020 International Advisory Experts Award. She is listed in Euromoney Women in Business Law Expert Guide 2020, CityWealth Leaders List TOP 10 China & Hong Kong 2019, The Legal 500 Asia Pacific 2021, Who’s Who Legal: Private Client 2019 and CityWealth Leaders List 2020. She is also ranked in Chambers HNW 2020 and recognized in CityWealth 2019 International Powerwomen Top 100 and CityWealth 2017 IFC Powerwomen Top 200.