Think at London Business School
What leads PE firms to disclose more ESG information and does it reflect their investment activities? We find out
By Jeff Abraham, Marcel Olbert, Florin Vasvari
From comparative obscurity, ‘family offices’, structures that protect and nurture the assets of successful families, have become a major sector in their own right. Management, which could once have been imagined as the family’s lawyer working out of a back office, has become highly professional, with a scramble to sign top talent. For the sector, big questions include how investment behaviour should reflect the values of the next generation, how the original entrepreneurial spirit can be maintained and the role of philanthropy. These and many other issues were addressed at a two-day Family Office Conference held at London Business School on February 21 and 22, under the auspices of its Institute of Entrepreneurship and Private Capital.
The family office sector has $10 trillion assets under management, but is “one area where we really have no clue what is happening,” according to Professor Florin Vasvari, Academic Director of the Institute of Entrepreneurship and Private Capital. To help fill in the blanks, a wide range of family office executives, the families they support, and academics, ranging far and wide across the subject, covered some fundamental topics around this sector at the LBS conference.
A number of themes emerged, from the image of the sector and its relationship with philanthropy, to the role of family members in the organisation and portfolio selection. But one theme that prevailed was the need for long-term thinking.
The principal of one family office said: “Our focus must always be on the long term,” while Herminia Ibarra, Professor of Organisational Behaviour at London Business School, said such organisations needed to be more nimble, innovative and disruption-proof.
She added that dynamic organisations were those that provided a safe space in which new ideas could be proposed. An attendee from Saudi Arabia said respect for elders in his country had the side-effect of providing just such a safety net for family members and those working for family offices.
Parallel to the need for long-term thinking is the fact that, as with many areas of financial services, family offices have been increasingly expected to define goals beyond simply making the best returns. One attendee, chief executive of his own family’s office, said he was planning for 30 years ahead, for being succeeded by the next generation in his current job.
He defined his approach as “purposeful stewardship”, with the portfolio shaped in accordance with the family’s outlook, meaning that his children could see their values being reflected in the way he deployed the assets.
“If the next generation doesn’t want these assets, then I will have failed,” he concluded.
Giving away money but not power?
Another attendee, involved in running a family office, said investments ranged across venture funds, direct investment, ESG investments and impact strategies, with the office navigating what he called “overlapping perspectives”. The big question, he said, was how to articulate to different generations of the family what the office was hoping to achieve.
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'Family offices are expected to take a disciplined approach to philanthropy instead of simply handing out money.'
The earlier speaker, chief executive of his family’s office, said that the challenge for asset managers is to show that they could deliver and that they can have impact. He said the opportunity for family offices was to make a portfolio exciting and interesting. “The degree of intellectual engagement by the family is critical.”
Alongside the notion of impact investing is the question of outright charitable donations. Family offices have long abutted the world of philanthropic giving, and the whole subject came under the spotlight at the conference. One female speaker, working in the field of prison philanthropy explained that when someone went into prison, she wanted them to emerge in better shape, adding that, when she started, philanthropy was a very male-dominated field.
Family offices are expected to take a disciplined approach to philanthropy instead of simply handing out money. An impact investor, referring to philanthropy, added: “How cool and rewarding it is to do this stuff?” he said. “We need to shout out what we do.” There is no need to have tension between investment and philanthropy. The test for both should be whether or not the family office is doing good.
Is entrepreneurship a threat?
Until she read about it in The Sunday Times Rich List, one member of the audience had no idea how much her parents were worth. She now leads the charitable foundation that they established. Families need to be careful how they treat the next generation, especially when successful parents didn’t grow up with a lot of money. Too much money is probably not a good thing for children. Ideally, children should go to work in the morning and have a sense of purpose.
'Could entrepreneurship be a threat to the successful functioning of a family office?'
In terms of investment strategy, family offices should distinguish between areas where specialist knowledge would be an advantage, and areas where they should be content to take a general approach and move along with the market. As a result, many family offices have become more sophisticated, and are no longer simply concerned with allocating capital.
Professor Vasvari noted: “All serious family offices invest in private equity, but there is a trend towards them undertaking a lot of investments in the private market themselves.”
At what is perhaps the other end of the spectrum is the question of whether family offices can retain the entrepreneurial energy that created the family assets in the first place. Indeed, could entrepreneurship be a threat to the successful functioning of a family office?
Do entrepreneurs create family businesses?
Rupert Merson, Adjunct Professor of Strategy and Entrepreneurship at London Business School, addressed these and other issues in a special session of the conference. His starting point was that entrepreneurs don’t create family businesses; they create businesses that may, in time, become family businesses.
Furthermore, as businesses grow and mature, entrepreneurs may not be the best people to run them. The key skills of the entrepreneur relate to identifying an opportunity and taking the risks associated with creating a business to meet the opportunity – along with building a team, tolerating uncertainty and ambiguity, persistently problem-solving – and dealing with failure, he said. One member of the audience noted, “The point about entrepreneurs is that when everyone else is going left, we go right”.
'Teams composed of similar people may feel they work better, but good decisions are often a product of managed conflict'
A slide listed non-entrepreneurial attitudes, including a belief in the person’s invulnerability, anti-authoritarian streak, perfectionism, know-all behaviour and macho attitudes. Professor Merson added that perfectionism can be dangerous for entrepreneurs. They should simply get out there and do it.
Professor Merson said that such attitudes were likely to change as the business grows and its relationship with the family evolves. The first generation was likely to focus on entrepreneurship; later generations might address issues such as diversification and the codification of corporate culture and values. Even the most realistic entrepreneur may have difficulty adjusting to the role change demanded by business growth. What makes a good entrepreneur does not necessarily make a good CEO, he said.
A partial answer, Rupert said, is “intrapreneurship”, enterprising behaviour in the context of a larger organisation, one example of which would be corporate venturing.
From entrepreneurship to diversity
Professor Merson recalled an entrepreneur who told him that what his business needed was someone else like himself. Professor Merson noted that an assertion such as this failed to acknowledge the importance of diversity – including cognitive diversity – in the senior team as the business grows and matures, a point also made elsewhere in the conference.
Teams composed of similar people may feel they work better, but good decisions are often a product of managed conflict which is more likely to be achieved by a team with diverse perspectives. Lack of cognitive diversity leads to echo-chamber phenomenon and diminishing rewards.
One attendee said it was difficult to recruit to family offices as family offices are considered as providing “less sexy” opportunities for ambitious and capable staff. Another agreed and added that, in terms of getting good managers, family offices are often seen as a bit dull.
Recruiting the next generation
With regard to family members joining the family business or family office, one partner and the head of philanthropy at a well-known family business, said the next generation should focus on developing the best possible career for themselves without worrying too much about whether or not it will qualify them for the family business or office. This way they will give themselves the best chance of ensuring things turn out well for themselves – and may actually increase their chances of being of interest to the family business. “But don’t work on the assumption that you will definitely join the business.”
The chief executive of an impact investment firm summed up: “Family culture: you can chart it, you can plan it, you can scheme it – but it’s already there.” He added: “But the common strand in everything we do is entrepreneurship.”
The inaugural Family Office Conference brought together principals and senior executives in a confidential setting without interference from service providers or entities with commercial interests. Participants were exposed to leading academic and practitioner insights and engaged in joint learning and network building. The conference, sponsored by Schroders , a specialist in Private Assets and Family Office services, covered a wide array of timely topics relevant to business families from addressing their positioning in today's society, family dynamics and governance to investment related themes. Register your interest for next year’s event.