UK: ‘Passion Investments': A New Avenue For Family Offices?

Last Updated: 7 September 2016
Article by Rosalyn Breedy

Risk-assessment and good governance should not be overlooked when family offices decide to take philanthropy to the next level, writes Rosalyn Breedy.

This article was first published in Spear's Magazine on 31 August 2016.

Warren Buffett, Bill and Melinda Gates, Azim Premji, Richard Branson, Sara Blakeley, Manoj Bhargava, Patrice and Precious Motsepe, Paul Allen, Mark and Priscilla Zuckerberg are examples of billionaires that have chosen to direct their wealth towards solving problems.  They recognised that they had a unique opportunity to improve the lives of many and have set up foundations to do so, giving away vast amounts of their wealth.

Traditionally, family offices had their origins in the landed estate office in the UK and as the investment vehicles of US industrialists such as John. D Rockefeller.  Key objectives have always been to preserve wealth and facilitate its transfer across generations.  According to EY, there are now between 3,000 to 15, 000 family offices worldwide, over half having been set up in the past fifteen years.

One of the attractions of the family office structure is its flexibility. The founders can determine its strategy for investment and distribution, specifying who should benefit and how.

While philanthropy and legacy arrangements have always been a part of family office strategy, these 21st century billionaires are taking philanthropy to a new, more passionate level.  One trend that has emerged in the last couple of decades is increased involvement in sports teams – often called a 'passion investment'.

The new family office investment strategies are reflecting a fresh set of priorities which follows from a major demographic change.  According to Accenture, in North America alone, right now $12 trillion in financial and non-financial assets is expected to pass from the Silent Generation (born in the 1920s and 30s) to the Baby Boomers (born in the 1940s and '50s) and over the next 30 to 40 years some $30 trillion is expected to pass from Baby Boomers  to their heirs (born in the 1960s  and '70s).

The increase in transfer of wealth between generations is replicated across the world but is effected differently.  For example in Asia Pacific, where family companies account for a significant proportion of each country's economy, the transfer of wealth is typically from a first generation entrepreneur who is in their 80's or 90's to the second generation.

The younger generation has few successful role models. Professor Joseph Fan, a professor of finance and accounting at the Chinese University of Hong Kong, tracked the performance of 250 Asian family companies in 2012 and found that their stock values declined by almost 60 per cent in the period from five years prior to succession to three years afterwards.  Having seen what can go wrong if succession and intergenerational wealth is not handled well, founders are setting up family offices to avoid such a risk.

As important as the need to protect and facilitate the transfer of wealth between generations is a desire to retain family harmony as well as fulfilling philanthropic intentions. Involvement in a charity or investment in a sports team can be very appealing on an emotional level as well as financially.

However, it is important to ensure that these activities benefit from governance as strong as the ones used for traditional investment activities. Failure to recognise the risks and treating the team or charity as a business entity can cause a different set of problems.

Certain sports teams have good investment potential as they are not correlated to financial markets and can benefit from strong intellectual property rights, brand licensing agreements, global distribution of goods and viewing rights.  Property assets may also be attractive.

Like any investment there will be risks, for example if a sports team is relegated. Unlike most other investments, a team also has an army of fans who can be very vocal and powerful in terms of their impact on your corporate reputation. In the worst cases, particularly when a club starts to have financial problems, it can quickly become a drain on resources and a distraction from the main family office's main business.

Charitable foundations are no less risky to reputation as there can be huge operational risks depending on the activity and the geopolitical location. If not managed properly, these can range from political issues through to child protection and corruption. Charities also come under scrutiny from a large number of stakeholders with a commensurate impact on reputation, and should not be seen as an activity of secondary importance.

Key to the success of any family office strategy is the matter of governance which needs to ensure regulatory compliance and management of risk with clear reporting and safeguards. With the right governance framework in place, a family office provides a great vehicle for families to indulge their passions, do good work and preserve wealth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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