The U.S. is experiencing a rise in the single-family office, a structure that manages the financial affairs of a single, ultra-wealthy family. While they come in many variations, the single-family office is becoming an evermore prominent player in today’s financial management market. According to Forbes, the rise in private wealth in the nation has coincided with the rise in single-family offices.
When done correctly, experts agree that a single- or hybrid-family office can lead to massive profits. And while such a financial management entity is expected to continue to evolve, industry analysts are already eyeing the next phase of this market: family office small business lending. For some, it’s the next big thing in alternative finance.
According to reports, the role of the family office today is about investing the capital of their clients more than simply managing their clients’ money. Experts are seeing a rise in family office investments into startups and SMEs.
For many offices, these investments are a way to promote the interests of their client family. Some wish to invest in local businesses as a way to give back to the community. Others invest in entrepreneurs because the clients themselves are entrepreneurs. Further, these investments do not have to go through fund managers and can instead place their backing directly in a business, allowing them to bypass management fees. Instead, experts are picking up on a new trend in which family offices actually pair up with each other to share intel and research about potential investment targets, without involving a third-party fund manager. A recent study by family office industry experts, titled “Taking The Reins,” found that 90 percent of ultra-wealthy inheritors are very interested in so-called club deals, which involves collaboration with each other to strategize on direct investments.
A 2012 essay penned by Kristi Craig at the Small Business Investor Alliance highlighted that small business investments from family offices can yield returns as high as 17.5 percent. Craig cited Frank Galioto, a partner at family office advisor McNally Capital. “Family offices are uniquely positioned to invest in smaller funds because they intuitively understand middle market companies, have more flexibility around investment size and are not constrained by the need to reach investment committee consensus the way many institutions are,” Galioto said.
Perhaps the most attractive incentive for small business lending by family offices is a regulatory loophole. According to reports, Dodd-Frank exempts family offices from certain requirements for investor protection and disclosure. The exemption stems from the Private Investor Coalition, formed to encourage lawmakers to recognize that family offices do not invest money from outside sources — they are only working with their own funds.
Small businesses can benefit from this trend just as much as their backers, and while many SMEs are unaware of the single-family office investment, this type of funding is gaining momentum thanks to its unique characteristics not found from other backers.
A family office must have $100 million minimum of assets, making them a backer often more secure than some other funding platforms and sources.
There are also more humanistic benefits of the family office investor for business borrowers. Industry exports highlight the ability for SMEs not only to gain access to funding but also to a potentially invaluable business mentor through the family office. Because many family office investors are funding small businesses through personal motivations, experts say backers will often be more patient with their investments because they have often been in a position of heading a startup themselves.
Family offices’ small business lending remains just a fraction of SME financing activities in today’s world. Industry insiders note that family offices are often notorious for being not only elusive but also highly selective in their investments.
But as alternative lending has taken off largely in the U.S. and Europe, these jurisdictions — which collectively hold 91 percent of the world’s family offices — will likely be the first to experience a boom in family office business lending, if there is one at all. So far, however, there seems to be significant traction. “Taking The Reins” additionally found that more than one-fifth of ultra-wealthy inheritors surveyed are involved in direct investments in private companies, and interest is growing.
The role of a family office today often involves helping their clients facilitate their desired investments, according to Flynn Family Office Managing Partner Rick Flynn — a coauthor of “Taking The Reins” — in a recent interview with Forbes.
“As many traditional lenders have curtailed small business lending, a new generation of billionaires is stepping up,” he said.
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