African Wealth Owners Ask: Do I Need A Family Office?
There are approximately 145,000 high net worth individuals (“HNWIs”) in Africa, with combined wealth holdings of approximately $800billion. This number is expected to grow by approximately 36% over the next decade. Despite this large amount of wealth on the continent, most wealthy African families do not utilize family offices to manage their wealth.
What is a family office?
A family office is a wealth manager set up to professionally manage a family’s wealth and investments. The specific functions and activities it undertakes can range from core investing and wealth management activities, to also include business planning, philanthropy, legacy planning, structuring, estate planning, tax planning and governance. Family offices are typically staffed with investment professionals, accountants and lawyers.
A family office can be used as a vehicle to support multi-generational wealth preservation and growth: This is particularly important for African families, who tend to have a lower success rate than their global counterparts in terms of succession, with only 2% of family businesses surviving beyond generation one, compared to the global average of 33%.
The decision to start a family office is influenced by a range of factors including:
1. What is the family’s objectives in relation to wealth?
2. What are the asset levels?
3. What is the nature of the assets that the family owns?
It is important to have clarity on one’s wider objectives in relation to family wealth: Some families seek to achieve wealth preservation solely, whereas others also seek to preserve the family’s legacy and maintain cohesion within the family. In the case of the former, such families can opt for third-party private wealth managers in private banks, whereas in the case of the latter, they may consider setting up a family office, as it is highly personalized and bespoke.
Asset levels and costs
Families with sizeable amounts of wealth (min $100m of investable assets) can benefit from managing their wealth directly through a family office, as opposed to using a private wealth manager. With a family office, a wealthy family can benefit from a highly personalized bespoke one-stop-shop service. Further the family may be able to do so at a lower cost than a wealth manager, given lower levels of overheads.
Assets Under Management (“AUM”) - $150m
Option 1: Family office: Annual costs in running a family office - $1m
Option 2: Private wealth manager: Annual fees paid (1% AUM) - $1.5m
Analyzing the two options solely from a cost perspective indicates that the family office is preferable assuming AUM of $150m. It is unlikely that the costs of running the family office will be directly proportional to the AUM, unlike under a third-party wealth manager. This is why advisers typically cite $100m in AUM as the trigger point where wealthy families should start to consider setting up their own family office.
However, this does not take into consideration other factors such as quality of service, risk management, governance and regulatory requirements. To match the quality of a private wealth manager, it is likely that a family office would have to invest considerably in recruiting high-quality executives and advisors.
Nature of assets
One needs to consider the nature of assets that the family owns and the degree of specialized services that may be required. In the instance where the family’s assets are largely stocks, bonds and mutual funds, a third-party wealth manager could manage the wealth. Whereas where the family has specialized or alternative investment assets, such as operating businesses, entrepreneurial ventures, private equity, real estate, infrastructure and passion assets such as art and antiques, one may consider a family office.
It is also possible to have a hybrid model whereby more traditional investments are managed by a third-party wealth manager with the family office providing an oversight function, and the family office directly manages other specialized assets.
Most wealthy Africans (multi-millionaires) have a high propensity to hold cash and residential real estate. This presupposes that a family office structure would be better suited to manage their wealth.
One needs to consider the location of where the family office will be. Some families prefer onshore – the benefits include greater proximity, lower cost and better understanding of the business culture of the origins of the wealth of the family. On the other hand, one may find it difficult to find appropriately skilled personnel to run the family office.
Other families opt for offshore family offices in jurisdictions such as London, UAE, Switzerland, Singapore or Mauritius – where the family office industries are better established and as such have a wider pool of potential employee candidates and advisors.
Mauritius in particular is a fast-growing attractive destination for African wealth management – a tax-friendly, safe jurisdiction with strong ownership rights, Mauritius has a thriving and growing banking, wealth management and fund management sector.
There are pros and cons in creating a family office: family offices are highly personalized, allow the family to preserve confidentiality, exclusivity and lower fees. Further families can choose which additional high value adding bespoke services that they require, such as education consulting of the next generation, legacy business planning and philanthropy, and they have full visibility on the snapshot of their wealth centrally. However, this comes at a cost – at inception, families would have to spend considerable amounts of time and money in investing in the right personnel and advisors to set up a family office optimally.
Wealthy African families can optimize the use of family offices in managing their wealth. There are examples of thriving family offices in Africa, such as the Danjuma Family office (managing the Danjuma family wealth) and Heirs Holdings (managing Tony Elumelu’s wealth). These can serve as a model.
As families in Africa require support when it comes to managing their assets and identifying the right solution, I regularly attend conferences with a focus on African family businesses and educate participants on the many opportunities of managing and structuring their wealth. My next participation will be at the Africa Family Office Summit, 19-20 Feb 2020 in Mauritius.
Nike Anani is the founder of Nike Anani Practice Ltd, a consultancy that assists African business founders in creating family offices.
Africa Wealth Report 2017, AfrAsia Bank
Africa Wealth Report 2017, AfrAsia Bank