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Entrepreneurial co-investing family offices to take control of family firms in 2017

The long-term trend of divesting control of family businesses into family offices is expected by KPMG to rise in 2017 as investments diversify and succession looms.

The long-term trend of divesting control of family businesses into family offices is expected by KPMG to rise in 2017 as investments diversify and succession looms.

The increasing intricacy of the family’s investments and activities and succession planning were believed to be behind the trend.

KPMG also predicted the need for a “renewed focus” on how to reward professionals within family offices, in light of the increasingly evident war for talent.

Catherine Grum, London based Head of Family Office Services at the financial advisory firm, said the new year was likely to see more family business leaders considering the split of management of the family’s personal assets and affairs from within the family business to create a stand-alone family office.

 As a family’s affairs become more complex in terms of investments, assets and operations, some families are concluding the business is no longer the right home for their family’s wealth management,” Grum said.

“Equally, in cases where the future of the family and the day to day management of the business have diverged (or are likely to do so in the near future), the next generation will not be as involved with the running of the business but will of course be concerned with the operations of the family office, it makes sense to have a clear distinction between the two parts of the family enterprise.

“Additionally, for some next generation individuals a separate family office may offer interesting career prospects as an alternative to the family business.”

Grum said as many investments were long term, it was entirely likely some will involve longer “exit horizons” than the tenure of the staff managing the family’s portfolio or, at the very least, their expectations around compensation.

“This raises the issue of how to reward and motivate management performance. Part of the challenge is to align the professional manager’s needs with the family’s as only when they are aligned will be both parties be best served.”

Further KPMG predictions for the next 12-months included an increase in the importance of family offices’ capital in the economy, as a source of equity or debt.

Grum said there will be more strategic interest in patient capital as opposed to investments with pre-determined exit periods, which can sometimes dictate how a business gets run.

“Also contributing to this are the benefits of working with experienced individuals who have likely run other ventures, as many of those behind the newer generation of family offices have done. In terms of debt in particular, I expect the independence and decisiveness of family 

offices will increasingly be seen as a useful complement to traditional financing options at a time of economic uncertainty, which may require some of the more traditional debt providers to approach non-core opportunities with greater caution than in previous years.”

Grum said the trend towards ever more innovative investments by family offices not only meets the needs of the business community for investment but also the interests of the family to develop a more diverse portfolio in the context of an economy continuing to offer low returns via a more traditional investing approach. It can also offer some fulfilment to entrepreneurs who, having exited their business, welcome the opportunity for a more hands on investment role than that offered by a portfolio of stocks and bonds, she said.

“There is likely to be a rise in co-investing as family offices diversify their investment portfolio but seek to mitigate their risk exposure, as well as to secure access to opportunities one family office may be unable or unwilling to access alone.

“This requires a greater focus on planning the right structure for an investment, addressing how the benefits and risks will be shared as well as how decisions will be made and how the exit will be managed.”

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