How To Choose The Right Family Office

One of the buyside career areas that is sometimes forgotten is a family office (FO). A FO is simply an investment office that solely manages capital for an ultra-high-net-worth individual (UHNWI) and their family. These families typically have at least $100mm in net worth, which makes it feasible for them to start their own FO within a field that has less regulation compared to registered investment firms. There are two types of FOs:

1. A single family office (SFO), where an investment team manages capital for one UHNWI and their family
2. A multi-family office (MFO), where an investment team manages capital for multiple families (more like wealth management for UHNWI)

Overall, it is estimated there are a little less than 10k FOs globally.

For purpose of this piece, a SFO is what many will focus on pursuing from the buyside as many MFOs function as traditional wealth management firms. Understanding both the FO industry and what potential role responsibilities include, are crucial in choosing the right FO for your career. Below, we lay out key points to analyze when conducting due diligence on a FO.

1. Understand the FOs goal. There are 2 types of mentalities amongst FOs – One, those who are rich trying to get richer and two, those who are rich trying to stay rich. It is important to identify which bucket the FO falls under as this drives culture, compensation, and investment allocation. Many FOs will have a target % portfolio return that they are trying to achieve each year or for a certain time period. As in, is the FO trying to reach a certain amount of AUM by a particular year and is the wealth being passed on?
2. Understand the FO’s publicity. How does the family spend their money and what kind of information can you find on family members? Are they reserved or public icons (enjoy attention). This can drive whether they are willing to invest in employees, systems (FactSet/Bloomberg, automated accounting/reporting software, etc.), sell-side research, and travel.
3. Understand the Patriarch’s background. If the patriarch comes from a real estate, finance, or broad business background then they will likely run the FO like an institutionalized investment firm. If the patriarch comes from a specialized background such as healthcare, then it is likely they pursue investing in that particular sector, especially if they run direct investing internally. The patriarch’s background and business philosophies greatly drive culture of the FO.
4. Understand the Patriarch’s mission and involvement. Determine how involved the patriarch or family members are in investment decisions and how the investment committee works. Will you have any say in FO procedures or investment process, or do family members spearhead all deals? Does the FO invest capital for the family charitable foundation, if they have one, and how is that portfolio is constructed? A Chinese Wall between family members and the FO can be a good sign that it is less of a political investment process.
5. Understand the Patriarch’s operating business and culture. If the family’s operating business is still in existence, there is a good chance you will be working with people in the company and the culture of the FO will be similar to that of the operating business. If there is cash still coming in from the operating business, the AUM at the FO will greatly grow, which leads to the opportunity for you to manage more AUM over time.
6. Understand the FOs mandate. There are 4 types of FOs:
   1. FO that focuses on asset allocation and therefore outsources the investment work to private equity funds, hedge funds, venture capital funds, mutual funds, etc. Some of these FOs will also co-invest alongside their managers. This is a common type of FO.,
   2. FO that invests only in private companies and runs like either a venture capital or private equity fund. They have the same setup as a private equity fund except they already have the long-term capital needed from the UHNWI. This is a common type of FO.
   3. FO that invests only in public companies and runs like a long-only hedge fund. They have the same setup as a hedge fund except they already have the long-term capital needed from the UHNWI. This is an uncommon type of FO.
   4. FO that invests in external fund managers along with directly investing in private and/or public companies. This type of hybrid model is a growing area in the FO industry and gives an investment team member access to all types of investing across the capital structure.
7. Understand the career trajectory at the FO and potential opportunities available internally. The most common hierarchical structure at a FO goes as follows: analyst -> senior analyst -> VP or PM or MD -> CIO. However, some will also have a PE hierarchical structure. Outside of the investment team, some FOs may have Chief of Staff, COO, CFO, CEO, and President roles. Some FOs may run various PE, VC, or HF pods internally. Will the FO seed you to run a fund?
8. Understand the family dynamic. Completely understand the role responsibilities and whether you will be communicating with family members and/or acting as trustee for certain individuals. Some FOs will also manage family real estate, bank accounts, financial reporting, personal bills, meeting scheduling, aviation services, etc. Know how your time will be allocated and if there are other members who take care of non-investment tasks.
9. Understand if the FO will provide you with experience for a potential exit. Usually folks will exit from another finance career to a FO but sometimes FO personnel will move over to work in PE, HF, VC, endowment, pension fund, etc. depending on the type of work they completed at their specific FO. Remember that no FO is the same, so it is crucial to identify what your investing experience will look like in case you decide it is not the right career for you.

Pros:

• Work/life balance
• Lack of turnover can halt career title progression
• Access to patriarch and ability to learn life lessons from them
• Learn how to run a small business and about the importance of law/taxation
• Access to intelligent investors and funds
• No fundraising/permanent capital base
• Long-term investment mindset
• Job security and stability
• Answer to one client
• Less regulation
• More autonomy to learn about other asset classes
• Autonomy to create own templates and models
• Ability to be patient in deploying capital

Cons:

• Remote or hybrid option unlikely and will likely work in the family business office
• You should not expected to be ever be treated like a family member
• Administrative tasks or ad-hoc tedious tasks (executive assistant- esque)
• Lean team makes it hard to build a culture
• Not many extracurricular activities (company outings, company groups/clubs, etc.)
• Broad and confusing investment mandate at times that can quickly be modified
• Lower compensation
• Lack of guidance regarding vacation time and benefits due to lack of corporate structure
• Ad-hoc memos and deliverables
• Back-office tasks such as trade execution and wiring funds

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