Single and multi-family offices are increasingly employing highly experienced investment professionals to target better yields, but external managers still have a role to play in helping them do the “dirty work”, said family office executives.
Speaking to attendees at the AsianInvestor 6th Family Office Forum in Hong Kong on May 20, Shiraz Poonevala, director of investments at Thai single-family office GP Group, said he enlisted external aid to solicit deals and conduct due diligence before jumping into an investment.
He noted that if a certain project “passes the smell test and looks promising”, the family office then hire third-party domain experts to offer their opinion.
“I have a domain expert, my job really is to evaluate, using my investment banking skills, [such as] minor structuring and valuation, and then we hire external parties for due diligence,” the industry veteran said. “So you would always do accounting, legal … through third-party professional managers and then we go ahead and close the deal,” he added.
When it comes to the operational side of the family office, Poonevala noted that he employed fairly basic internal hires, mainly hiring analysts, human resources and some legal experts.
The latter could prove particularly important. Poonevala said a minor legal due diligence setback over a recent deal in Vietnam offered GP Group a lesson that the cost of having an external manager do its work incorrectly is “pretty high”. So the family office is trying to become more professional and corporatised, to minimise such issues.
Deciding what tasks to outsource to third-party managers can be a challenge, as Harvey Liu, senior portfolio manager for Fountainhead Partners, can attest.
“We try to distinguish what kind of job I do and what kind of job the hedge fund managers do because we were confused a lot,” he said, noting that this delineation can be important.
He recounted how he had personally helped his clients gain a 40% return from a hedge fund portfolio that he actively managed over two years. He was pretty happy about that – until he realised that he could have captured an additional 20% on top if he hadn't tinkered with the original portfolio at all. “All my hard work, to help my clients lose 20%, that's very disappointing,” he admitted.
In part because of this experience, Liu said he has changed strategy to focus on long-term trends and let his external hedge fund managers do all the “dirty work”, because he cannot find the time to do it while running a multi-family office.
“They [hedge fund managers] trade all the time, 24 hours looking at the monitor…they can identify really exotic investment opportunities and they go to tier-three, four cities in China for field trips – that's something I cannot do but they do much better than me,” he said.
“Now I give money to them, let them manage their part,” Liu noted.
HIRING THE RIGHT TALENT
Speakers agreed that it remains difficult to find and hire talented individuals who truly understand the needs of wealthy families.
Philippe Legrand, chief executive and founder for multi-family office London and Capital Asia, said at the same panel that family offices need “people that have been around the block, who can talk about issues and discuss at different levels with whoever your counterparty [is] in the family”.
That’s easier said than done. Each family is different, with different priorities. Some have an influential patriarch overseeing all major decisions, while others have several generations of members that want to help oversee the deployment and investment of family wealth.
“One of the issues is always ensuring that everybody gets involved and it's not only the one that shouts the loudest that's gets heard,” Legrand said.
To build a multi-family office with successful investment functions, he said he needs to get more than one family on board to make a certain decision. That can be challenging.
A study done by Singapore-based multi-family office Golden Equator noted that family offices are becoming keener to invest in alternatives but differences in generational skills and attitudes among wealthy family members have posed an obstacle to these ambitions.
Those problems are multiplied once the preferences of several families are factored in. Not all wealthy families have the same tolerance for risk and reward, Legrand noted.