In our last article, we examined the key findings of the latest benchmarking survey by Northern Trust and the Wharton Global Family Alliance to see how these entities are navigating geopolitical and economic uncertainty. According to these findings, ESG investment and succession planning emerge as a clear pathway to ensuring the longevity and prosperity of family legacies.
I thought it would be helpful to provide another view on the topics of ESG, Private Investments and succession planning in general. Especially when the third or even fourth generation starts to slowly take over at the helm of the HNW family council, contrasting values that make finding compromises very difficult, if not impossible. ESG, Venture Capital, whatever latest fad in finance, etc. are just tools in a toolbox.
Building a Future on Solid Foundations
A family needs to create a cohesive understanding of what they want to achieve together. This cohesion is best formed around an energizing idea that brings everybody together. The first step is always to form this cohesion. Without cohesion among family members, no tool or framework will help you in the long run. Not everybody will agree – this is perfectly normal and to be expected after several generations. If it really is not possible to work together with a fraction of the family, it might be best to part ways most amicably before relationships start to deteriorate further. Some families allow family members to split from the family office to pursue their own ideas. It must be noted that this move is most often to the detriment of the departing family branch due to the scaling effects of keeping the wealth together.
And yes; dominant coalitions within a family will try to sway the direction of the family office in their own best interest – this is part of the inevitable problem of agency. But this domineering does not need to be bad as such: at the very least we have someone in the family pulling in one direction – ensuring that it is to the benefit of the family is part of family governance structures.
Making a Real Difference
But we come back to the most important question that many HNWI families have not sufficiently answered: What are we going to do now to give our family a better future?
Once this is answered, a lot of questions around ESG and Private Investments (especially Venture Capital) become much clearer: perhaps some investments, despite an acceptable ESG score, are just working contrary to what the answer is to the above question. Maybe I am just old-fashioned, but I do believe that if you invest in something you need to be intimately aware of what it does, how it does it and what the competitive environment looks like. Yes, I do understand that it takes a lot of time and expertise and it is frustrating at times – but with the use of opaque ESG metrics (with consultancies on the other side advising companies on how to improve their ESG metrics – I hope to make a real difference and not a cosmetic change that improves some scoring metric) is a bit lazy.
Venture Capital: A Double-Edged Sword
I have seen cases where there was ample funding available in family offices for the latest fad but nearly nothing for young family members wanting to try to scratch the Entrepreneurial itch. Again, the answer to the aforementioned question should help a family define its own big hairy audacious goals and how to achieve them through Internal Venture Capital (i.e. a family member starting something) or External Venture Capital (the normal Venture Capital with all its inconveniences in terms of objectives, vagaries, intransparencies, lack of meaningful control and additional cost layers).
One point I strongly agree with is that, especially, Private Investments require a multitude of skill sets to monitor and assess such investments. It takes a Family Office of considerable size to in-house these skills and professionalize the Private Investments within the asset allocation of a Family Office. So the calculation on the back of an envelope would look something like this: Let’s assume you would have to add two dedicated analysts with a salary of 200k and 300k for the other, and you would set the expectation that annually, the benefit in performance against an ad-hoc decision-making process would be 1 %, you would look at an annual commitment of around USD 50m to break-even. I am consciously not looking at the total commitment, as once done, you have little influence (especially with External Venture Capital). If we assume that we will invest on average for eight years, I would arrive at a total commitment of around USD 400m.
Succession Planning as an Ongoing Imperative
Succession is not a one-off process. It does not have a beginning or an end. But far more important than starting a succession process (whenever that may be) is having clarity about where the family wants to go. There is often a lot of ambiguity around a vision statement (even worse if it has been created by a committee). Goal alignment, as it is called, is the most important determinant of a successful transition from one generation to the next. This goal alignment is not just required among family members, but also among the closest advisors (including the Family Office – which may be sometimes more difficult for a Multi-Family Office – especially so if the values of the Multi-Family Office are ambiguous as well).
The Essential Tools for Navigating Complexity
Reflecting on the complexities of ESG, private investments, and particularly succession planning, it becomes evident that specialized knowledge and tools are imperative for navigating these waters effectively. Our expertise as a Family Office is anchored in precisely this domain—creating and utilizing specialized tools that not only aim to preserve wealth but also to ensure its meaningful transfer to succeeding generations. With a deep understanding of the nuanced dynamics within family offices, we’ve developed comprehensive guides on succession strategies that reflect our insights into the crucial role of the Most Trusted Advisor in planning for the future. Furthermore, our commitment to fostering generational continuity is exemplified in our innovative approach to strategy creation, exemplified by our upcoming release: the Family Council Canvas. This tool represents our dedication to assisting families in articulating and achieving their collective visions, ensuring that the transition of wealth is not just a transfer, but a continuation of a legacy that honors the family’s core values and aspirations.
Conclusion
In drawing together the insights gleaned from the Northern Trust and Wharton Global Family Alliance survey, it’s clear that Family Offices are navigating a complex landscape marked by both challenges and opportunities. Amidst the tumult of global changes and the nuances of wealth management, the core takeaway remains steadfast: the foundational question of ‘Why’ your family office exists is paramount. Understanding this ‘Why’ is the cornerstone of strategic decision-making, guiding your approach to ESG, private investments, and, most crucially, succession planning. By anchoring your strategies in a well-articulated set of values, you not only ensure alignment with your family’s vision but also set the course for a future where your legacy and wealth are preserved across generations. Remember, the strength of a family’s legacy lies not in the wealth it amasses but in the clarity of its purpose and the unity of its members in pursuit of shared goals. As we continue to witness the evolution of investment trends and governance practices, let this be a reminder to all Family Offices: being clear about your ‘Why’ will illuminate the path forward, aligning your family’s compass towards a future where values and vision meet to create lasting impact.
