Family Offices are one of the least understood capital sources in the real estate industry. While there is an adage that says, “if you know one family office, then you know one family office”, our Managing Director of Capital Markets, Steve La Terra, discovered some commonalities while conducting a deep dive analysis into this component of the real estate private equity world.
WHAT’S A FAMILY OFFICE?
Family Offices (FO) are typically established to diversify a family’s wealth beyond the business that created their wealth. Often established by an entrepreneurial patriarch or matriarch to provide for future generations, FOs seek to create generational wealth. Establishing a FO generally makes financial sense when there is $100M or more of investable capital. It is common to find FOs investing for the long-term, which makes real estate a viable option.
Family Offices can be categorized as either Single Family Offices (SFO) or Multi-Family Offices (MFO). A SFO is limited to one family, although may include multiple generations. Investment decisions within a SFO are generally made by an individual or a small number of siblings. A MFO is a collection of two or more families that invest together. They tend to operate by committee with consultants such as accountants or attorneys providing deal flow, expertise, and professional services.
KEY INSIGHTS INTO FOs
- Family dynamics matter. The internal family dynamics play an important role in the investment strategy of a FO. Anything from who the decision makers are to how they all get along can impact how their capital is deployed.
- The first rule. When it comes to investing, the first rule for FOs is don’t lose principal. The second rule is to understand what the family wants first, then make a pitch, but only if your opportunity aligns with the family’s goals.
- Plenty out there, if you can find them. There are 3,000 to 5,000 SFOs and 10,000 MFOs in the United States today. Most FOs are relationship-based, do not market themselves, and prefer anonymity.
- Reputation is everything. When considering a new operator relationship, FOs will look to reputation and established competence as primary drivers. FOs will do extensive diligence on a new operator through their trusted advisers and their networks of high net worth friends/investors.
- Keep a Plan B. A FOs investment goals can change suddenly, especially when family dynamics change (i.e. marriage, divorce, etc.) or during the period of a generational shift leading to a shift in investment appetite. Always have a Plan B.
- Communication is key. It should also be noted that the Family Office universe is quite small and word travels fast, so make sure you provide prompt, honest communication, especially when things don’t turn out as planned. FOs can be very understanding and sympathetic partners, but not if they feel that information is being withheld.
- What makes it worth it. FOs can be reliable partners who will often open doors to additional capital sources, make investment decisions rapidly, can be very patient and have return requirements that may be more flexible than traditional private equity sources.