Family Office
Definition and Development
A family office is an organization whose primary purpose is to manage and grow the wealth of one or more families. According to estimates, there are more than 10,000 family offices worldwide.
The first family offices were founded in the United States in the early 19th century; in Germany and Europe, the functions of a family office were traditionally handled by private banks. Since the 2000s, family offices have been experiencing a boom worldwide. The main reasons for this are the desire for greater control over one’s own financial affairs and the desire for greater diversification to minimize risk.
Establishing a Family Office
In some cases, entrepreneurial families establish a family office following a liquidation event, i.e., a (partial) sale of the company. In other cases, the cumulative financial returns (dividends) reach a level that allows for the involvement of a family office. The founders of family offices include both company founders and family business owners of later generations, as well as other high-net-worth individuals.
Family offices are often, though not always, organized as a limited liability company (GmbH); a family office is not bound to any specific legal form. Family members may be part of the management, but they do not have to be. The name of the family office often does not reveal the owner family. Depending on its scope and objectives, a family office may consist of a small team—in extreme cases, a single person—or a larger organization.
Types of Family Offices
There are four distinct types of family offices. A single-family office manages the assets of a single family (typically with assets exceeding 300 million EUR). A multi-family office, on the other hand, provides asset management services to multiple entrepreneurial families. A multi-family office may, for example, arise when a single-family office expands its services to include additional entrepreneurial families. Since the term “family office” is not legally protected—particularly in Europe—banks and other financial service providers sometimes also refer to their divisions as multi-family offices.
An embedded family office is not a separate legal entity. Instead, parts of the family business additionally take on the asset management responsibilities for the owner family. The virtual family office, on the other hand, is a special form in which a family’s asset management is handled with lean structures and minimal staffing.
Responsibilities of Family Offices
One of the most important responsibilities of family offices is managing the assets of entrepreneurial families. This encompasses multiple asset classes. Typical asset classes managed by family offices include, among others: real estate, commodities, liquid assets, funds, and equity investments. Depending on the owner family’s risk profile, the focus is on preserving or growing the family’s wealth. In addition, alternative investments such as impact investing are playing an increasingly important role.
Furthermore, family offices have shown increased interest in startup investments in recent years. Both the age of the family office (i.e., whether a succession has already taken place within the family office) and whether the family still owns the core business influence the family office’s investment behavior. In addition to these wealth-related tasks, some family offices also provide concierge services for members of the entrepreneurial family.
Direct Business Investments by Family Offices
A 2018 study by WHU found that approximately 50% of single-family offices invest in direct equity investments. This places them in direct competition with private equity. Compared to private equity, family office investments are often characterized by a longer target holding period (often unlimited, in line with a “buy-hold-selectively-sell” approach), smaller investment amounts, and a stronger industry focus. In addition, after making an investment, family offices often intervene less in the operations and strategy of the acquired company and instead act as passive owners.
Related terms include family holding and family equity.