Aligning Family Office Costs with Investment Objectives

UBS recently released its 2018 Global Family Office Report covering a range of topics queried from 311 family offices from around the world.  Both investment performance and operational topics are examined, with particular insights into current and future private equity allocations along with what costs are being incurred across a wide range of investment and operational categories.

The report highlights the overall significant performance improvement in 2017 (+15.5%) vs. 2016 (+7.0%) and 2015 (+0.3%).  The two primary strategies contributing to the uptick in performance has been equity allocations as well as private equity, which saw an average return of 18% in 2017.  Buoyed by its strong returns in private equity and real estate, the vast majority of family offices are poised to increase their allocations to illiquid holdings going forward.  One noteworthy takeaway is the fact that 50% of family offices plan to increase their direct deal making going forward, with 33% planning to do the same in real estate.

2017 2018
Private Equity-Direct 9% 14%
Private Equity-Funds 7% 7.6%
Real Estate-Direct 16% 17%
Costs: Accounting/Reporting (SFOs) $251,000 $221,500

Future allocations over the next 12 months:

Private Equity-Funds

  • 15% Decrease
  • 37% Increase
  • 48% Stay the same

Private Equity-Direct

  • 6% Decrease
  • 50% Increase
  • 44% Stay the same

Real Estate-Direct

  • 13% Decrease
  • 33% Increase
  • 54% Stay the same

However, it should also be noted that over the last two years, budgets related to accounting and reporting have actually decreased by 12% ($251,000 in 2017 and $221,500 in 2018.)

There is a disconnect here to be sure.  Illiquid strategies such as Private Equity and non-publicly traded real estate are notoriously difficult investments to analyze and report on.  If investing in third-party funds, a lack of transparency and reporting standards makes apples-to-apples and benchmark comparisons challenging at best.  For those family offices managing a portfolio of direct investments, the data collection, management and accounting needs for proper oversight compounds significantly.  This challenge is further complicated given the complex structure and generational expansion of most family offices.  With allocations going up to such resource-intensive types of investments, operational investments need to be made to support such strategies.  With many family offices still running on MS Excel or portfolio management systems ill-equipped to handle the complexities of private equity or real estate investing (to say nothing of a direct deal program), family offices would serve themselves well in reviewing whether their current accounting and reporting systems are up to the task.