Why family offices are heading offshore

Australia’s wealthiest families are taking a long-term approach, and that means putting more of their money overseas.

With an estimated $200 billion in spending power, Australian family offices have plenty of investment clout.

And, it seems, a high percentage of the money being invested on behalf of the country’s biggest family businesses is going offshore, thanks to low interest rates, the relatively high Australian dollar and the desires of family members to differentiate their investments.

Family offices – effectively the private investment arms of some of Australia’s wealthiest dynasties like the Rineharts, the Forrests and the Lowys -- work like a private bank dedicated to managing the wealth and affairs of family businesses. They are the vehicles that provide anything, from staff and travel management services, to the supervision of trusts and investments outside of the general business operations.

There are an estimated 250 single family offices in Australia, providing high-quality professional services to Australian family businesses. And each family office in the country has at least $200 million worth of assets, with some having upwards of $500 million, according to an analysis of public information compiled by Family Office Connect. It’s an investment pool in the hands of a few families that rivals the money invested by Australia’s super funds.

Global investment perspective

Significantly, family offices are now becoming the vehicle for the globalisation of Australian family businesses.

FINH in Queensland specialises in connecting Australian family offices with capital, often from like-minded family offices overseas. The firms acts like a matchmaker. FINH co-founder David Harland says Australian family offices are investing their money across a range of asset classes and regions around the world.

The linkages for sources of investment in their own businesses are truly global. While the connections with other family offices and sources of capital can be local, more often than not they come from overseas.

“They are seeking capital from entrepreneurial families that have experienced the complexities of managing operating family businesses,’’ Mr Harland says. “These families have a history of managing businesses over a number of generations.”

These offshore family offices are mainly concentrated in Europe, the Americas and the Middle East.

Mr Harland says that offshore investors often go where private equity fears to tread.  Private equity operates over a five to seven year time frame, but family offices have a much longer-term perspective.

“Patient capital means it doesn’t necessarily have an exit strategy,’’ he says. “They are there to co-invest with the business.”

Jill Nes, the chief executive of BMF Asset Management and BMF International Asset Management, concurs that her family office clients are increasingly looking globally.

“We certainly prefer overseas equities to local equities by a ratio of at least two to one,’’ Ms Nes says. “Those global equities would be direct shares; for example, we might take investments in Google, and Nestle and Samsung.

“In addition to that would be overseas funds. Those managed funds would be mainly equity based and they would complement the existing direct international holdings. Cash would be kept locally.”

She says the investment portfolio is overweight in fast-growing tech and health care stocks.

The focus on global investments makes sense. “Australia is less than two per cent of the world’s markets, so what about the other 98 per cent? Australia is tiny and it’s almost an emerging market on its own because it is so linked to the commodities market and its currency is behaving like an emerging country as well,’’ Ms Nes says.

As if that’s not enough, an increasing number of family offices are looking to invest overseas because of the Australian dollar. “It’s particularly with the stronger Aussie dollar,’’ she says. “When the Aussie was $US1.10 we said this was unsustainable. And also, we have to look at the wage costs in Australia compared to overseas and the ridiculous penalty rates.”

Long-term horizon

Unlike other investors, family offices are in for the long term.

“We always are looking at a five-year view,’’ Ms Nes says. “We would have at least 10 meetings with clients on an annual basis. It’s very intense and very one-on-one, where we all take that five-year view. Ideally we are looking at getting a seven per cent per annum return on that five-year view, more than what we get from equities and what we get from cash.

“With family offices, we want our clients to be with is for 20 to 40 years. It’s about us getting to know the families, the different family dynamics, and building that trust relationship.”

And that, Ms Nes says, means also working with the younger generation coming into wealth, to make it sustainable.

“We are very much into protecting clients’ wealth. Very importantly, it is also about educating the next generation. So we are slowly educating the children about the importance of this wealth, how hard-earned it was, and how to manage it going forward, and having the children being part of that interactive process.”

That remains the greatest challenge facing family offices. Many of the most successful family businesses were set up by hard-edged entrepreneurs who may have never planned for their children to take over.

Creating overseas links and connections is insignificant compared to the challenge of generational transition.

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