The rise of the family office is a phenomenon that needs no additional documentation. There are 10,000-plus single-family offices in existence, the majority of which have been minted in the past decade. This trend has been well-tracked by investors, fund managers and entrepreneurs alike.
What is less evident from simply observing the historic rise in assets under management and number of family offices is what type of investors these groups have been historically, what they are evolving toward today and how those changes will enable them to influence the global economy going forward.
At their nascence, family offices were predominantly passive investors — a place where the family accountant or consigliere oversaw fund investments that didn’t merit paying a wealth management fee. The main investment purpose of these vehicles was to reduce costs and risk while preserving wealth.
Alongside the rise in assets in the space, a similarly dramatic shift in investment strategies took place. More assets led to bigger budgets and the ability to compete for better talent. With executives and investors increasingly coming from the hedge fund and private equity world, family offices began to gain access to the best alternative funds and eventually the best deals themselves.
According to the 2023 UBS Family Office Report, family offices globally have 19% exposure to private equity, of which 9% is in direct investments and 10% in funds, and an average of 45% in alternative investments — dramatically higher than other pools of capital. In 2023 an estimated $167 billion was deployed directly into investments by family offices.
Today, family offices boast rising assets, top talent and access to premier investment opportunities. The next frontier is for them to use their influence to effect change in their portfolios and communities.
Unlike their private equity counterparts — which are often maligned (rightly or wrongly) by the media, politicians, and business owners for “gutting” companies — family offices are perceived as much more benevolent investment partners by both business owners and general partners (GPs). Business owners are more likely to listen to their family office investors and implement their suggestions for these key reasons:
- Timeline: Like business owners, family offices are generationally focused. They understand the trade-offs between investing in the short term and results in the long term. It also tends to make family offices more patient through market volatility.
- Values: As they represent a concentrated shareholder base with specific goals, family offices are able to advise businesses toward outcomes that reflect more than just profit maximization.
- Credibility: Most family offices made their wealth through industry, and many are still structured as a holding company today. This background as operators makes business owners believe that family offices can offer more value from an operating perspective, versus private equity firms that are often perceived (again, rightly or wrongly) to be financial engineers rather than business builders.
At the same time, private equity (general partners) GPs are likely to listen to the input of their family office LPs for two reasons:
- Consistency: Family offices have proved to be good LPs throughout market cycles, as their ability to take on illiquidity allows them to continue investing when other capital types might not be able to.
- Networks: Given the “clubby” nature of the space, each family office LP tends to be a gateway both to other investors as well as deal opportunities, so developing good relationships with and understanding the needs of family office LPs can be critical to productive business growth.
Collectively, these characteristics position family offices to be uniquely influential in their portfolios. With this in mind, some groups have drifted toward pursuing outright activism — for example, Yamauchi No. 10, the family office owned by the Nintendo heirs, has created an explicit partnership with the U.S. activist firm Taiyo Pacific Partners to invest in Japanese equities.
Some, such as the Rockefeller Family Office, have been very public with their intention to eliminate investment in fossil fuels. Still others, such as the Emerson Collective, are explicitly impact- and advocacy-oriented.
Despite these examples, surprisingly few families engage with their investments in this way. Of those family offices with direct private equity investments, only 20% report being active shareholders. Data is not tracked on any advocacy that family offices engage in with respect to their LP investments.
This is a missed opportunity, as the power of influence can be as impactful as activism without being as dramatic. In particular, concentrated ownership allows family offices to promote values-based outcomes much more effectively than a firm with a diverse investor base. As family offices continue to grow their size and harness their power in the investment community, serious consideration will need to be given to how they want to wield that influence.
As each family office and the industry overall mature, they will need to find their voice — and use it to affect change. Owners should look at their family offices as another way to create a disproportionate impact through what they invest in — whether it be creating jobs, improving environmental and social outcomes, or simply nudging the economy toward some vision of the future they maintain.
Even those family office investors who aren’t explicitly impact-oriented have the ability to quietly push their investments toward initiatives that in the short term impact communities, with the view that in the long term — the time horizon that family offices care about — they will impact business results.