Does the COVID-19 crisis present a good opportunity to start a family office?
As health and economic concerns arising from the COVID-19 pandemic continue, no sector of the economy has been immune from the downturn, including family offices.
Family offices have had to face a shift in priorities from growing wealth to preserving wealth and asset protection. It has required careful consideration and flexibility. The pandemic has acted as a stress test to most family office organisation and governance structures, testing the strength of contingency plans.
At the same time, the pandemic has given family offices the chance to capitalise on opportunities rarely seen in the market. And family offices, unlike other more cumbersome financial institutions, have the advantage of being dexterous and efficient, a key capability for investors in the turbulence of 2020.
Flexibility in Responding to Risks
Family offices place a heavy emphasis on finding the right strategic asset allocation and effective risk management. Amidst the continued market volatility, global family offices have shifted towards risk-averse asset classes such as cash and gold, which offer a buffer to their portfolio. The UBS’ 2020 Global Family Office Report showed that more than half of family offices rebalanced their portfolios from March to May with around 25% and 21% increasing allocation to cash and gold/precious metals respectively. Their quick implementation of risk mitigation strategies, including portfolio rebalancing, helped mitigate risks from the deep sell-off in equity markets in March.
Unique Investment Opportunities
As equity prices have taken a tumble and financial conditions tighten, family offices looking to invest in technology businesses might have an opportunity to invest at a lower price compared to before the spread of the virus. There has also been a growth in number of distressed debt funds looking to back companies facing financial turmoil during the pandemic, offering new opportunities for investment. One such fund, the TNB Aura Special Situations Fund looks to back technology companies and help them weather the headwinds during the current pandemic. The COVID-19 pandemic has driven a growth in such alternative opportunities taking advantage of the current value dislocation in the market.
Family offices also open the door to co-investing in private equity and venture capital deals, potentially offering a more attractive return potential, J-curve mitigation in the immediate deployment of capital, and the ability to obtain governance rights if capital commitment is sizable enough. While direct investments are a major focus for family offices, the availability of a co-investment strategy allows a family office to mitigate investment concentration concerns and provide greater access to deal flows.
Generational Planning for the Future
As interest rates hit record lows to deal with the economic fallout, family offices offer a good opportunity to use estate planning tax techniques to reduce future tax liabilities. Making intra-family loans is one such planning technique to consider, where money can be loaned to a family member at a nominal interest rate without being deemed to have made a gift.
Establishing a family office during a time of crisis can also allow for younger members of the family to have their fingerprints on office policy and governance. This would provide a firm foundation for the next generation to continue for future generations.
Opportunity to Rotate into Financial Assets
With most businesses concerned about short-term revenue loss and cash flow during the COVID-19 pandemic, multi-generational family businesses were impacted differently as they had deeper concerns about their survival and well-being as a family business. The loss of a family business could potentially mean a total loss of income for multiple generations. The uncertain pandemic situation could signal the right time to consider exiting the family business and focusing on managing a more mobile portfolio of financial assets instead. This would better diversify the wealth built up from previous generations and ensure future generations can continue to benefit despite the current situation.
While the economic impact of the COVID-19 pandemic has not spared family offices, they have been much quicker in adapting to market volatility. The pandemic has proven that family offices’ business of spreading risk by diversifying into geography, sector, time horizon and investment types in addition to managing a family’s operational businesses, is crucial to preserving family wealth. Family offices are now well positioned to take advantage of market opportunities and shift their focus back to growing wealth.