Staffing
While SFOs traditionally have sought to hire the highest level of investment talent to serve in key positions, SFOs today are reconsidering whether it might be more cost-effective to outsource all or part of the investment advisory function or other responsibilities, thereby potentially reducing costs and increasing the SFO’s exposure to investment ideas and opportunities. SFOs are increasingly working collaboratively to share investment information and invest in unique opportunities.
SFOs typically require that staff members enter into employment agreements detailing responsibilities and compensation, including deferred compensation, carried interests, and co-investment opportunities. Such agreements also generally include detailed confidentiality and non-disclosure provisions.
Governance
Most family office entities are governed by a board of directors (for corporate entities) or managers (for LLCs) but actual governance activity varies widely. Particularly in light of recent market dislocation and volatility, and the uncovering of massive fraud committed by previously well-regarded fund managers, more SFOs are focusing closely on governance:
- creating effective boards with experienced and independent outside directors,
- developing or reviewing investment policy statements and asset allocations,
- planning for short-, mid- and long-term liquidity needs,
- establishing comprehensive due diligence procedures, risk management and compliance policies,
- providing detailed, comprehensive and timely reports,
- developing family leaders through education and active participation, and
- developing effective decision-making processes at the family, board and SFO office levels.
SFOs for Business-Owning Families
Business-owning families often create SFOs within the corporate
structure, reasoning that using business staff to manage
family office tasks leverages already-existing resources.
However, for a number of reasons families are well-advised
to separate the family office from the business, and to
hire separate staff who will focus solely on family office
matters. First, the financial team for an operating business
doesn’t typically have the time or skill-sets required
to source, select, and manage a wide range of investments,
or to provide the necessary accounting, reporting and tax
support for complex portfolio investments. Second, housing
a family office within the family business increases the
risk that business and non-business assets may be comingled,
or that the non-business assets will be plundered to fund
business shortfalls (or vice-versa). Third, due to recent
regulatory changes, if they share employees, the SFO and
the family business may become subject to additional regulatory
burdens. Finally, strategic issues for family offices are
very different from those for operating businesses, and
deserve separate consideration, planning and due diligence.
When the family business is a hedge fund, private equity fund or other investment firm, the issues raised by housing a family office within the business become still more complex. While the fund company’s investment and accounting teams will have relevant skill-sets, its investment focus is likely to be narrower than the family’s. Furthermore, a significant percentage of the fund principal’s assets is likely already tied up in the company’s funds, and so investment of the family office assets within fund vehicles will only serve to further concentrate, not diversify, the family’s wealth. Improperly commingling fund and private assets may also violate various state and federal regulations.
FOA would like to thank contributing editor Amelia Renkert-Thomas, CEO, Fisher Renkert LLC
