How do the biggest family businesses manage their wealth? Most of their portfolios will be similar to those of any high net worth individual, with investments in listed equities, listed properties, bonds and cash. But there are differences. Family office specialists say family businesses tend to be more aware of where they came from, and how they worked for success. They tend to invest in different areas.
1. Reinvesting in the business and investing in what they know
Kris Vogelsong, head of corporate development at Private Portfolio Managers in Sydney says those who created wealth tend to stay in the area where the wealth was created. “If they generated large amounts of wealth in property for instance, then you would tend to find their portfolios are more heavily weighted to property than you might find with another area,” Vogelsong says.”Those who are more entrepreneurial tend to go for more entrepreneurial exercises.”
“In a way it’s the old adage of you stick to what you know and that scenario does play out among the very wealthy.”
That said, he says there is a difference between family business leaders who inherited their wealth and those who created it.
“The fundamental difference between families who have inherited wealth and those who are wealth creators is that the wealth creators tend to be more entrepreneurial in their approach to investment whereas those who have inherited wealth tend to take more of balanced portfolio view including a variety of different asset classes,” he says.
That might explain why some family businesses are more disposed to riskier investments.
2. Venture capital
James Burkitt, the CEO of family office network The Table Club, says venture capital funds are drawing investment from family businesses. Simply put, they are more entrepreneurial and prepared to take a risk.
“They are bringing in the families because VC is an area where the instos just don’t do it, the private equity guys don’t do it. They’re waiting for these companies to get to the growth stage where they can come in and take positions.
“In terms of the cheque size, it’s smaller amounts. Some of the big families might be putting $2 million to $5 million into VC type businesses but often there is portfolio approach.
“Your typical investment in a VC would be $250,000-$750,000 at first stage. Let’s say they make 30-odd investments and out of those 30, they’ll pick those they think will be real winners and they’ll back those all the way through. They might back three or four.”
3. Offshore investment
Burkitt says an increasing number of family businesses are looking to invest offshore.
“There is a lot of interest to invest offshore for a variety of reasons,” Burkitt says. “The Aussie dollar they feel is overvalued compared to the US. They have been pretty comfortable with the recovery in the US so they can put more capital there.
“They are doing a lot of co-investment with other families across a variety of industries. There’s been a fair bit of interest in VC, in tech. We are seeing the families looking at opportunities offshore in those sectors. The whole Israeli tech thing is getting a fair bit of momentum.”
4. Incubating other businesses
Sue Dahn, investment advisory partner at Pitcher Partners, says many big families have 3-5 per cent of their portfolio in private equity.
“It might be private equity funds, it might be private equity managers or it might be directly into other private businesses that they know of,” Dahn says.
“It’s bigger than high net worth individuals because they have come from a wealth generating private equity type experience, they’ll have networks of people including people who will be raising money for private equity. They’ll be more disposed to incubating start-ups.”
5. Education of the next generation
Dahn says many large families use private equity opportunities to train the next generation of family business leaders.
“The education of the children in private equity is pretty important and that’s where the higher investment in private equity can come in -- because it can be a way of giving their children, the next generation, the experience,” she says.
“Let’s say the private family invests $5-10 million in a private equity start-up. The equity contribution might come with a board seat and that board seat might come with a family member and that member will learn about the running of the business.”
6. Property development
Dahn says family businesses are more proactive in property investment. “They won’t just hold properties as landlords and pass through receiving the rentals and making repairs and doing the maintenance as required,” Dahn says. “You will find a larger proportion of property development happening with a balance sheet strong enough to gear, to take the development risk and to take either brownfields or greenfields sites and turn them into something new.”
The amount they invest in property development can range anywhere from 5 per cent to 85 per cent of their portfolio. “When a family has made its money through property development, property development will be the lion’s share of what they invest back into. That’s for the very good reason that they understand it well. They have existing networks in infrastructure and knowledge that helps them get the good deals in that sector,” she says.