Family offices represent an essential piece of the financial puzzle, even if they often fly under the radar of market observers. These investors are the financial managers of some of the world's wealthiest families, meaning their investment strategies can cause waves that impact the broader economy—and shape investment trends (more on this below). In recent years, their growing interest in areas like private credit reflects evolving financial trends that may have implications beyond the investment community, affecting everything from start-up funding to real estate markets around the world.
What is a family office?
A family office is a private wealth management advisory firm that serves ultra-high-net-worth individuals or families. It's like having an exclusive financial team dedicated to managing, preserving, and growing a family's wealth.
The concept of a family office isn't new; they've been around for centuries. Historically, family offices were the privilege of royalty and the elite, designed to manage their vast estates. Today, the purpose of family offices hasn't changed much. They still manage wealth, and they still serve families. However, they've evolved to offer a broad range of services tailored to the specific needs of the family they serve. These services could include anything from investment management, estate planning, and tax services to managing the family's philanthropic endeavors.
How does a family office work?
There are primarily two types of family office structures: Single Family Offices (SFOs) and Multi-Family Offices (MFOs).
SFOs serve one affluent family, offering a high degree of customization and privacy. The services are tailored to the unique needs and goals of the family. This can include anything from managing investments, tax planning, and philanthropic advising to coordinating family vacations. MFOs serve multiple families, providing a platform that allows for shared resources and experiences. MFOs can deliver a similar range of services as SFOs, but the added benefit lies in the economies of scale they can achieve by serving multiple clients. They offer a way for families of slightly lesser wealth to access the benefits of a family office without bearing the entire operational cost.
Family offices typically maintain a full team of financial professionals, although the team's size can vary widely depending on the scale of the family's wealth. A small, single-family office may operate with a lean team of five to ten employees, while larger offices managing billions of dollars may employ several dozen professionals, each with specialized roles, and look more like a traditional investment fund.
A family office team typically includes investment professionals who manage the family's portfolio and financial advisors who handle tax planning, estate planning, and philanthropy. Depending on the size and needs of the family, the team might also include legal experts, accountants, personal assistants, and even lifestyle managers. Regardless of the team size, the common thread among all family offices is their mission: to preserve and grow wealth while supporting the family's values and objectives.
Why are family offices interested in private credit?
Due to the current macroeconomic uncertainty, traditional sources of funding like regional banks are reducing their lending activities, leading companies to look for credit elsewhere. This shift sparked a surge in direct loans from non-bank entities, or private credit, creating a dynamic and rapidly growing market. The private credit market, currently valued at about $1.4 trillion, is projected to reach $2.3 trillion by 2027.
Family offices are well-positioned to engage in private credit, especially as they adopt a "risk on" mentality. Their low debt levels allow them to be agile in providing loans, giving them an advantage over other lenders. The attractive returns private credit offers, boosted by higher interest rates, are a significant driver of interest from family offices. Family offices are uniquely positioned to take advantage of the opportunities presented by private credit because they have the patience to wait for loans to mature and the resilience to withstand short-term market fluctuations.
Why are family offices willing to take on more risk?
Family offices are known for their ability to act counter to market trends. Being inherently opportunistic, they're eager to take action when the market is operating under stress. Family offices have significant cash reserves they can put to work as the financial landscape changes, and they can take advantage of asset-backed finance (either as a way to access liquidity or as an investment vehicle). Because they can invest for the long-term, these investors see new investment opportunities emerging as inflation rises, interest rates increase, and stock prices fall.
Family offices are characterized by their sophisticated analysis of market trends over time, understanding the importance of staying invested and remaining confident in the long-term value of their investments. In fact, a recent survey of family offices found they plan to continue taking on more risk—buying more stocks and alternative investments while many other investors are pulling back.
How can technology help family offices manage risk?
Private credit can be complex, harder to track, and more challenging to manage than traditional investments. Family offices have lean teams and limited time to manage complex investments, a disadvantage from a larger banking institution with more resources. However, with advanced technology, family offices can manage the risks of complex investments like private credit even with a small team.
New technology allows family offices to keep a closer eye on their investments and manage their portfolios more efficiently. They can receive instant updates about their investments and be alerted to any potential issues, allowing them to make well-informed decisions and adjust their plans as needed. In the case or private credit or asset-based finance, this may include alerting around debt covenant violations or borrowing base deficiencies.
Technology can also help automate everyday tasks and reports, enhance teamwork, and provide a clear overview of the investment pipeline or the sequence of potential investments, freeing up significant time for the team to focus on other strategic areas.
Want to learn more?
Finley is private credit management software that helps companies with asset-backed loans save time and money by automating routine debt capital management tasks like borrowing base reporting, verification, and alerting. Today, Finley manages over $2 billion in debt capital for customers like Ramp, Parafin, and Arc. If you want to learn more about software that can help you streamline your debt capital raise and management, schedule a demo or take a self-guided product tour. We'd love to chat!