family office, december 2015

OFFICEFAMILY

Rankings

Alternative Investments

Philanthropy & Impact Investing

Traditional Investments

Crunching the Numbers

2015 Outlook

Investment Horizons

Private EquityVenture Capital

Research

PropertyHedge Funds

Wine

December 2014 | www.bloombergbriefs.com

December 2014 bloombergbriefs.com Bloomberg Brief | Family Office 2

DARSHINI SHAH, BLOOMBERG BRIEF EDITORA family office is, simply put, an office that caters to a family of significant wealth. Worldwide, the number of people with $30 million or more to invest — the kind of folks who would hire a family office — rose 15.6 percent to 128,300 in 2013, according to an annual report compiled by Capgemini and RBC Wealth Management.

One of the greatest challenges a family office faces is build-ing a diversified portfolio capable of prudent growth yet resilient enough to withstand large swings in asset valuations so that wealth can be passed to the next generation.

With that in mind, Bloomberg Brief brings you insights from managers about their investment decisions and philanthropic endeavors, along with rankings of the 50 biggest multi-family offices.

Read outlooks for the year ahead from Paul Sedgwick of Frank Investments, Charles Gowlland and Chris Bates of Smith & Williamson, Lorne Baring of B Capital and Gautam Batra of Signia Wealth. Marcuard Heritage says it will manage a high allocation to credit hedge fund managers. Tom Gauterin talks about the tax benefits of investing in wine. Find out what types of property investment in the U.S., London and Middle East might offer the best returns. Finally, read about the benefits and challenges of philanthropy, and how family offices are using some of their fortune to help ease some of society's ills while aiming to profit through impact investing.

SUBSCRIBE TO BLOOMBERG BRIEFSMaRkET LEadInG InTELLIGEnCEBloomberg Briefs publishes 18 newsletters to help you stay ahead of the markets. Individual and group subscriptions available. Visit www.bloombergbriefs.com to subscribe or take a trial.Or call Annie Gustavson at +1-212-617-0544.

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Family Office | December 2014

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Pekka AaltoGraphic [email protected]+852-2977-6013

Family Office Rankings page 5

Traditional InvestmentsBy the Numbers page 9

Bessemer CIO Braces Families for Geopolitical to Fed Upheavals page 10

Equities 'Attractive Enough to Warrant Optimism,' Frank Investments' Sedgwick Says page 11

Wealthy Families Move Toward Stock Investments, UBS Survey Shows page 11

Smith & Williamson Bullish on U.S., European Equities page 12

B Capital's Baring Bullish on U.S. Equities, Bearish on Precious Metals, Commodities page 13

2015 to Be a 'Rocky Road' for Fixed Income, Signa Wealth's Batra Says page 14

How Family Offices Differ From Other Institutional Investors page 15

Alternative InvestmentsPrivate Equity: Family Offices Join Forces to Make Direct Investments page 17

Private Equity/Venture Capital: World’s Rich Bullish on U.S. as Family Offices Open Outposts page 19

Hedge Funds: Marcuard Heritage to Maintain a 'High Allocation' to Credit Managers page 21

Wine: Taylor Wessing's Gauterin Says Wine 'Attractive' From a Tax Point of View page 22

Property: U.S. Commercial Real Estate Property Revival Gets Boost From Overseas Investors page 23

Property: London's Hotels 'Ripe' for Investment by Family Offices page 24

Property: Dubai a 'Growing Hub' for Global Property Investment Flows page 25

Philanthropy & Impact InvestingBy the Numbers page 27

Taylor Wessing's Hussain, Hine Discuss the Benefits and Challenges of Philanthropy page 28

Impact Investing Forms Part of a Long-Term Investment Strategy, ClearlySo's Mompi Says page 29

Case Backs Brain Device as Wealthy Push Do-Good Investing page 30

INSIDE



Rankings


RANKINGS

Top 50 Family Offices

2014 RANK FIRM NAME LOCATION

2013 AUA ($B)1

YOY % CHANGE

NUMBER OF MULTI-GENERATIONAL FAMILIES

AUA PER MULTI- GENERATIONAL FAMILY ($M)

MINIMUM AUM OF NEW CLIENT ($M)

MFO OR FAMILY OFFICE WITHIN PRIVATE BANK

INCLUDES SFO AS CLIENTS (Y/N)

1 HSBC Private Wealth Solutions Hong Kong 143.5 3% 334 $430

No minimum, $50 included

here2PB Y

2 Northern Trust Chicago, U.S. 116.4 3% 4,340 $27 $20 PB Y3 Citi Private Bank New York, U.S. 100.5 8% NA NA $25 net worth PB Y4 Bessemer Trust New York, U.S. 96.6 10% >2,2003 $44 $10 MFO Y

5 BNY Mellon Wealth Management New York, U.S. 81.2 8% 424 $192 $100 PB Y

6 UBS Global Family Office Zurich, London, Singapore, Hong Kong, New York

67.6 29%4 NA NA No minimum PB Y

7 Pictet Geneva, Switzerland 55.0 -4% >150 $360 $100 PB Y

8 CTC | myCFO (BMO Financial Group) Chicago, U.S. 40.4 11% 335 $120 $25 PB Y

9 Abbot Downing (Wells Fargo) Minneapolis, U.S. 37.4 9% 617 $61 $50 PB Y

10 U.S. Trust Family Office (Bank of America) New York, U.S. 36.2 9% 191 $190 $25 PB Y

11 Hawthorn (PNC Financial) Philadelphia, U.S. 28.2 13% 682 $41 $20 PB Y

12 Wilmington Trust (M&T Bank) Wilmington, U.S. 26.0 -7% 440 $59 $10 PB Y

13 Glenmede Philadelphia, U.S. 24.4 9% 240 $102 $25 for UHNW; $3 for HNW MFO Y

14 Atlantic Trust (CIBC) Atlanta, U.S. 23.6 16% 2,121 $11 $5 PB Y15 Rockefeller & Co. New York, U.S. 18.5 13% 258 $72 $30 MFO Y

16 Fiduciary Trust (Franklin Templeton) New York, U.S. 16.5 13% 1,623 $10 $5 MFO Y

17 GenSpring Family Offices (affiliate of SunTrust Banks) Jupiter, Florida, U.S. 13.7 -13% 357 $38 $10 MFO Y

18 Veritable Newtown Square, Pennsylvania, U.S. 13.1 6% 206 $64 $20 MFO Y

19 Oxford Financial Group Indianapolis, U.S. 13.0 25% 314 $41 $2 MFO Y

19 Silvercrest Asset Management Group New York, U.S. 13.0 21% 420 $31 $5 MFO Y

21 Commerce Family Office (Commerce Trust Company) St. Louis, U.S. 11.2 31% 94 $119 No minimum PB Y

22 Whittier Trust South Pasadena, U.S. 10.0 12% 314 $32 $10 MFO Y

23 ATAG Private & Corporate Services Basel, Switzerland 8.4 5% 52 $162 No minimum MFO Y

23 TAG Associates New York, U.S. 8.4 19% 110 $76 $10 MFO N

25 Tiedemann Wealth Management New York, U.S. 8.3 4% 116 $71 $20 investable

assets MFO Y

26 Bedrock Geneva, Switzerland 8.0 14% 82 $98 $10 MFO Y

27 Spudy & Co. Family Office Hamburg, Germany 7.9 19% 95 $83 $45 MFO Y

28 Fleming Family and Partners London, U.K. 6.9 22% 60 $114 $15 MFO Y

29 Ascent Private Capital Man-agement (U.S. Bancorp) San Francisco, U.S. 6.4 24% 80 $80 $50 net worth PB Y


continued on next page…



RANKINGS…

2014 RANK FIRM NAME LOCATION

2013 AUA ($B)1

YOY % CHANGE

NUMBER OF MULTI-GENERATIONAL FAMILIES

AUA PER MULTI- GENERATIONAL FAMILY ($M)

MINIMUM AUM OF NEW CLIENT ($M)

MFO OR FAMILY OFFICE WITHIN PRIVATE BANK

INCLUDES SFO AS CLIENTS (Y/N)

30 Baker Street Advisors San Francisco, U.S. 6.2 16% 50 $123 $5 MFO Y

31 FS Finance Suisse Zurich, Switzerland 5.8 21% 11 $527 $50 MFO N

32 1875 Finance Geneva, Switzerland 5.5 6% 12 $458 $5 MFO N

33 Bollard Group Boston, U.S. 5.0 0% 8 $625 $100 MFO Y

33 Constellation Wealth Advisors New York, U.S. 5.0 9% 165 $31 $10 MFO Y

33 Laird Norton Wealth Management Seattle, U.S. 5.0 3% 431 $12 $1 MFO Y

36 Gresham Partners Chicago, U.S. 4.6 18% 71 $64 $24 MFO Y

37 Synovus Family Asset Management Columbus, Georgia, U.S. 4.5 8% 44 $102 $10 MFO Y

38 Clarfeld Financial Advisors Tarrytown, New York, U.S. 4.4 7% 230 $19 $5 MFO N

38 Presidio Group San Francisco, U.S. 4.4 13% 128 $34 $10 MFO Y

40 Athena Capital Advisors Lincoln, Massachusetts, U.S. 4.3 0% 28 $153 $25 MFO N

40 Federal Street Advisors Boston, U.S. 4.3 9% 23 $185 $2 MFO Y

42 Aspiriant Los Angeles, U.S. 4.2 13% 88 $47 $5 MFO N

42 Tolleson Wealth Manage-ment Dallas, U.S. 4.2 14% 133 $31 $10 MFO Y

44 St. Louis Trust St. Louis, U.S. 4.1 18% 42 $97 $25 MFO N

45 Monitor Capital Partners Antwerp, Belgium 4.0 7% 79 $50 $25 MFO N

46 Seven Post Investment Office San Francisco, U.S. 3.8 19% 35 $107 $50 MFO N

47 Ballentine Partners Waltham, Massachusetts, U.S. 3.7 23% 74 $49 $20 MFO Y

48 CV Advisors Miami, U.S. 3.5 40% 50 $70 $25 MFO Y

49 Signature. Norfolk, Virginia, U.S. 3.3 14% 67 $49 $5 MFO N

50 Marcuard Family Office Zurich, Switzerland 3.2 -1% 44 $72 $20 MFO NSource: Bloomberg1. Assets under advisement as of March 31 or most recent available. 2. Data provided by HSBC provided was only for clients with assets of $50 million or more 3. The majority of family relationships are multigenerational. 4. Includes transfers from within the bank. NA = not available.

Our ranking is based on data compiled by Bloomberg from infor-mation self-reported by multifamily offices. The list was assembled through research by the Bloomberg Rankings team via a survey of more than 1,000 firms worldwide, using a database of contacts obtained from Portland, Oregon-based FamilyOffices.com.

We received responses from 97 firms.We requested data as of the end of the first quarter of 2014; some

data is for year-end 2013. Change in year-over-year assets under advisement was calculated using the data supplied by the firms.

Single-family offices are excluded. Family offices that are part of private banks are included if the bank has a family-office unit that offers direct and comprehensive investment and noninvestment services to high-net-worth families.

Figures for assets under advisement include only assets man-aged by the family-office unit of the bank. For nonbank family offices, AUA includes wealth directly managed by the offices and funds outsourced to money-management firms.

Money managed for private foundations is included. Money man-aged for pension funds is excluded. Insurance policies and trusts on which advice is provided are included. The ranked firms provide both investment and noninvestment services. The latter may include family meetings, financial education, art consulting, estate planning, family governance, foundation management, business consulting, property management, travel arrangement and shopping assistance.

— Bloomberg Rankings

How We Crunched the Numbers


continued from previous page



RANKINGS

BY ANTHONY EFFINGERElliot Dornbusch runs a family office in Miami for a select group of clients — and he wants to keep it small.

That’s gotten harder in the past two years. Dornbusch is chief executive officer of CV Advisors LLC. CV beat the behemoth family offices for a second year in a row to become the fastest-growing firm in the Bloomberg Markets annual ranking of the richest family offices. The firm saw assets under advisement grow 40 percent in the year ended on March 31, to $3.5 billion. In the prior year, its assets had doubled.

Dornbusch says the firm does no marketing and gets all its clients by word of mouth. This year, CV Advisors added nine wealthy clans, for a total of 50.

“Our families tend to recommend their friends,” Dornbusch says.In terms of total assets, CV is No. 48

in the Bloomberg Markets ranking, which was compiled through a survey of more than 1,000 firms worldwide. The No. 1 firm, HSBC Private Wealth Solutions, has $143.5 billion under advisement. It grew 3 percent, as did No. 2 Northern Trust Corp. The next three, Citigroup Inc.’s Citi Private Bank, Bessemer Trust Co. and Bank of New York Mellon Corp.’s BNY Mellon Wealth Management, each grew 8 percent or more, as the world’s rich got richer. They were helped by rising financial markets in the 12 months ended on March 31.

Worldwide, the number of people with $30 million or more to invest — the kind of folks who would hire a family office like CV or HSBC — rose 15.6 percent to 128,300 in 2013, according to an annual report compiled by Capgemini and RBC Wealth Manage-ment. Their fortunes accounted for 34.6 percent of assets held by all millionaires, or $18.2 trillion.

Many of CV’s clients are from Latin America. Dornbusch was born in Colombia and raised in Venezuela, where he met co-founder Alex Mann. Partner Matthew Storm is from Connecticut.

Their firm topped the growth chart even though the region was a laggard in 2013. Fortunes held by the $30 million-or-more crowd in Latin America rose just 1.7 percent. By comparison, assets held by the ultrarich in North America rose 19.4 percent.

CV’s growth matches that trend. Its new families were mostly from the U.S.

The second-fastest-growing firm is in the U.S. heartland, a region being rejuvenated by the shale energy boom and new manufacturing. Commerce Family Office, a unit of Commerce Trust Co. in St. Louis, saw assets jump 31 percent to $11.2 billion for the year ended on March 31.

“There’s a lot of good entrepreneurial spirit in the Midwest,” says David Krauss, the family office’s managing director.

CV’s Dornbusch says he beat the big firms by promising a per-sonal touch. Clients always talk to a principal: himself or one of his partners. The wealthy these days are almost always entrepre-neurs, or descended from one, and they like to do business with people who share the same spirit, he says.

“I don’t know how any family would go anywhere and not deal with the owner,” Dornbusch says.

Once a real estate developer in Venezuela, Dornbusch has been managing money since 2002. He started CV Advisors — CV stands for “Clear View” — in 2009. His clients are most interested in preserving capital, not making tons more of it. With that in mind, CV aims to return 6 percent to 9 percent a year.

Lately, CV has been buying invest-ment-grade bonds to get there, sticking with fixed income while other managers warn that inflation will return and destroy performance.

CV is also winning clients because so many are concerned about computer security, Dornbusch says. JPMorgan Chase & Co. disclosed in October that hackers had gained access to the contact information for 76 million households. CV has built its own financial-reporting software in-house, including an iPhone

application that shows stock and bond positions.At Chicago-based Northern Trust, many clients won’t allow

money transfers without a multistep process, says David Blowers, president of wealth management for the company’s eastern region. For example, a client will send an e-mail or fax or make a phone call requesting a transaction. Then Northern Trust must call back and run through a series of security questions before any money moves.

With more and more families seeking the guidance of a family office, attracting clients by catering to their every whim is a growth industry. Thom Melcher, head of No. 11 Hawthorn, part of Pitts-burgh-based PNC Financial Services Group Inc., has added 90 employees in three and a half years, for a total of 186.

“The families are highly sophisticated and discerning,” Melcher says. “There’s no margin for error.”

Dornbusch is hiring too. Yet he and his co-founders will always handle direct communication with clients, he says, and that limits future growth. He has already had to turn some prospects away. There are worse problems to have.

With assistance from Margaret Collins and Judith Sjo-Gaber

Fastest-Growing Family Office in Miami Rides Rise in Ultra-Rich

"The families are highly sophisticated and discerning. There’s no margin for error."

— Thom Melcher, PNC Financial Services Group Inc.

THE NEW HUB FOR PRIVATE EQUITY PE <GO

>



TraditionalInvestments


BY THE NUMBERS BY DARSHINI SHAH & PEKKA AALTO

TOTAL BUDGET ALLOCATED TO INVESTMENT ACTIVITIES (%)

GLOB

AL

NORT

H AM

ERIC

A

EURO

PE

ASIA

-PAC

IFIC

DEVE

LOPI

NG

ECON

OMIE

S

47% 44% 45%52%

42%

TYPICAL INVESTMENT PORTFOLIO, BY REGION (%)

30 10 12 8 10 11 3 7 9

23 14 16 9 8 5 6 10 9

23 16 14 11 6 5 6 10 9

18 17 15 7 5 12 5 13 8

100%

Global

North America

Europe

Asia-Pacific

Developing Economies

25 14 14 9 8 7 5 9 9

EquitiesFixed Income

Real Estate Direct InvestmentDirect Venture Capital/Private Equity

Private Equity Funds

Hedge FundsCo-investing

Cash or EquivalentAlternative Asset Classes

AVERAGE 2013 FAMILY OFFICE OPERATING BUSINESS REVENUE ($M)

GLOB

AL

NORT

H AM

ERIC

A

EURO

PE

ASIA

-PAC

IFIC

DEVE

LOPI

NG

ECON

OMIE

S

314248

360288

380North America

Europe

Asia-Pacific


21 27 21 31

<3 Years3-5 Years

6-10 Years>10 Years

27 25 26 22

33 33 23 11

34 25 26 15

100%

PORTFOLIO HORIZON (%)

Source: Global Family Office Report 2014

Family offices allocate roughly half of their total budget to investment activities, regardless of where they are based, according to the Global Family Office 2014 report published by Campden Wealth in association with UBS.

The report also showed that the typical family office portfolio was diversified across asset classes, with developed-market equities and real estate comprising the most allocations.

Families from Asia-Pacific have a much shorter invest-ment horizon than their North American and European counterparts. About a third of a typical North American portfolio had an investment horizon of 10 years of more, compared with a typical portfolio of an Asia-Pacific family, which had only 10 percent of its assets invested with that time horizon in mind.




2015 OUTLOOK

BY MARGARET COLLINSRebecca Patterson is preparing the investments of the 1 percent for upheaval.

From her corner office in New York’s Rockefeller Center, the chief investment officer of Bessemer Trust Co. is putting $55.2 billion in client assets under geopolitical and economic stress. In July that meant plotting returns against prior spikes in oil prices as conflicts escalated in Gaza and along Russian-Ukraine trade routes. By October, she was mapping out returns from different asset classes when interest rates rise.

"Our biggest focus right now is thinking through the coming Fed rate-hike cycle," said Patterson. "You know it's coming. You don't know when, or how quick it will be, but you know it probably won't be exactly what the market is pricing in."

Stress testing portfolios is one of the changes Patterson has made since joining Bessemer, the world’s fourth-largest multi-family office, from JPMorgan Chase & Co. two years ago. The strategy means it won't take her team days or weeks to respond when there's a crisis, she said.

“We know history won’t repeat but it might rhyme,” said Patterson.The average family at Bessemer

has $45 million in assets under the firm's supervision and the wealth of its founder, steel-mogul Henry Phipps and his descendants, remains the largest relationship.

“My owner is a client,” Patterson said.Such proximity is why chief invest-

ment officers at family offices require “nerves of steel,” especially following the 2008-2009 credit crisis, said Dan Farrell, chairman and chief execu-tive officer of Privos Capital, a global family office advisory firm based in New York.

“The CIO carries the weight of the family’s world on his or her shoulders,” Farrell said.

Patterson sets asset allocation recommendations in gen-eral and the firm’s managers pick the companies in which to invest. Bessemer’s main model allocation, which has a risk profile of 70 percent equities and 30 percent bonds, last year returned 14.8 percent, beating its benchmark’s 12.6 percent gain, according to the company. That allocation returned 7.9 percent compared with 6.9 percent for the benchmark in the 12 months through September.

The benchmark is a composite Bessemer created using the Bank of America Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index, the Standard & Poor’s Global Broad Market Index and Dow Jones-UBS Commodity Index.

This year Patterson trimmed a portion of the investments to small-cap stocks while adding to large-cap equities and commod-ities such as oil and agriculture because she thinks U.S. inflation is showing signs that it will rise over the next several years.

She saw the market downturn in October as a buying opportunity.

"We did go out directly to our clients after Treasuries hit 1.86 percent," Patterson said. "For investors wait-ing for the dip, we believed it was an opportunity, so we recommended adding stocks, mainly in large cap."

While Patterson expects the U.S. to lead global growth next year, she’s also increased allocations to emerging market equities this year, mainly through emerging Asian economies in recent months.

“I’m increasingly biased to having more global exposure,” she said.Phipps founded Bessemer in 1907 to manage his wealth after

selling his interest in Carnegie Steel to J.P. Morgan. The company is named after Henry Bessemer, the inventor of the steel-making process that was instrumental to the success of Carnegie Steel, according to Bessemer’s website. The closely held firm opened to other families in 1974 and now has about 2,200 clients, according to the website. It offers services including investments, estate plan-ning and tax advice, and supervised $97.5 billion in total assets as of June.

Bessemer ranked fourth by assets under advisement among firms worldwide that cater to wealthy families, behind HSBC Pri-vate Wealth Solutions, Northern Trust Corp. and Citi Private Bank, according to data compiled by Bloomberg.

Bessemer uses a combination of internal and external invest-ment managers. The firm runs its own mutual funds including those that invest in small-and-mid cap stocks and global equities.

“There are so many benefits to having some money run inter-nally so you are touching the market every day,” she said. She also judges Bessemer’s performance against external managers.

Investments in alternatives such as private equity and hedge funds are managed by other firms such as Bain Capi-tal LLC and Anchorage Capital Group, Patterson said. Last year she recommended exiting U.S. high yield bonds, which were another asset class that Bessemer invested in for clients using outside managers.

The main goal is limiting risk for families’ investments, Patter-son said.

“Our clients have spent a significant part of their lives building their wealth and don’t want to have to start over,” she said. “The more I can anticipate and plan for what can go wrong, the faster I’m going to be able to react and make sure we do protect their irreplaceable capital.”

Bessemer CIO Braces Families for Geopolitical to Fed Upheavals

Source: Bessemer Trust/ Callie Lipkin

Rebecca Patterson

"The more I can anticipate and plan for what can go wrong, the faster I’m going to be

able to react and make sure we do protect their irreplaceable capital."

— Rebecca Patterson, Bessemer Trust




2015 OUTLOOK

Paul Sedgwick, chief in-vestment officer of Frank Investments, says that equity valuations remain attractive enough to war-rant optimism when com-pared with both history and other asset prices.

The conundrum facing investors again in 2015 is what asset class is going to give the best risk-adjusted return.

Some take the view that bonds offer no income and are expensive when compared with history, unless one takes a very bleak view of the global economic outlook.

Others say stock valuations, driven by central banks’ ultra-loose monetary poli-cies, have risen to unsustainable levels, particularly in the U.S. They believe that as the Federal Reserve removes this stimulus, risk assets will no longer have the artificial crutch they need and are thus vulnerable, a view expressed recently by the Bank of International Settlements.

We believe that although equity valua-tions have rerated substantially in the past couple of years, they remain attractive enough to warrant optimism, when com-

pared with both history and other asset prices.

Historically, equity markets tend not to crash when governments and central bankers are pursuing pro-growth strategies, as is currently the case. When one stands back and looks at the world today, there are many reasons to be worried — the euro area economy, geopolitical tensions and emerging market growth are at top of the list. Indeed, concerns many had that central bank policies would lead to rampant inflation have now turned more to worries that deflationary pressures could return. The silver lining is that central banks are accom-modative, and will remain so for a while.

As a result, we expect equities to make up 70 percent of our portfolio next year, as it has been during the past few years. The balance of the portfolio is held in cash and corporate bonds with maturities extending approximately five years. We do not invest in structured products or use derivatives as a form of leverage.

Frank Investments’ philosophy is based around diversification, global reach and sustainable dividend policies. Hence, our philosophy going into 2015 is very much to stick with these type of companies.

Examples include Reckitt Benckiser Plc, Melrose Plc and Vodafone Plc in the U.K., and in Siemens AG and Sanofi in conti-nental Europe.

We avoid the highly operationally geared sectors, such as airlines and steel manufacturers. Our investment philosophy is that these are sectors you rent during periods of strong economic growth, which is not the case at present, and not buy for the long term.

We tend not to invest directly in emerg-ing markets as it exposes the portfolio to greater currency and political risk. Liquidity can also be an issue as can poor corporate governance. Instead, we get our emerging market exposure from com-panies with an emerging market presence, but whose foundations are in the devel-oped market. Prime examples would be Standard Chartered Plc and Procter and Gamble Co. The downside is you don’t get the gearing from a direct investment into the emerging market itself.

Frank Investments was established in 2005 in the style of a family office. It offers its clients the opportunity to invest alongside the founder's portfolio.

Equities 'Attractive Enough to Warrant Optimism': Frank Investments' Sedgwick

RESEARCH

BY ELENA LOGUTENKOVAWealthy families around the globe have started shifting assets into stocks from bonds, reflecting increasing optimism about the outlook, according to a survey by UBS AG and Campden Wealth Research.

Family offices in North America and in Asia-Pacific regions, which represented about half of those surveyed, shifted toward growth investment from more balanced and preservation strate-gies, UBS and Campden said in the annual report published in September. Some 205 family offices with more than $180 billion in private wealth were surveyed in the first half.

“When you speak to the family offices there is a perception of taking more risk than in prior years,” Philip Higson, vice chairman of UBS’s global family office group, said in an interview in Zurich. “We’re discussing equities and alternatives to fixed income more.”

A typical family office serves a family with seven households across three generations, according to the report. The average

portfolio returned 9 percent in 2013, driven largely by investment in developed-market stocks, it estimated.

In Europe, family offices have remained more cautious, with about 17 percent pursuing growth strategies compared with 44 percent in North America, 33 percent in Asia Pacific and 20 per-cent in developing economies, according to the survey.

“Europe is a step behind,” said Andrew Porter, director of research at Campden Wealth, which is a family-owned business. “Europe has always been more conservative and it faces different geopolitical and macroeconomic challenges.”

An investment portfolio of a European family office typically holds about 23 percent in equities, 16 percent in direct real estate investments, 14 percent in fixed-income products and 10 percent in cash. That compares with North American family offices, which typically have 30 percent in equities, 12 percent in real estate, 10 percent in fixed income and 7 percent in cash, according to the survey.

Wealthy Families Move Toward Stock Investments, UBS Survey Shows



December 2014 bloombergbriefs.com Bloomberg Brief | Family Office12

2015 OUTLOOK

Charles Gowlland, investment management partner, and Chris Bates, investment strate-gist, Smith & Williamson, say an improving U.S. economy will take over from quantita-tive easing as a key driver for markets and that there is potential for euro-area policy to surprise on the upside.

As we enter the winter months, the focus for markets appears to have shifted to the loss of economic momentum outside the Anglo-Saxon world. This was highlighted by the latest World Economic Outlook published by the IMF, an organization well known for being fashionably late for the party, in which it slashed its global growth forecasts for 2014 and 2015, with the spotlight on the ongoing woes in the euro area. This acted as a catalyst for a notable pick-up in volatility, a global stock market sell-off during October and the 10-year U.S. Treasury yield slipping below 2 percent.

For markets globally, the main elephant in the room is the euro area. This has been magnified by a European Central Bank that continues to dither and disap-point with its underwhelming "Diet QE" policy response. Initial take-up by banks of the Targeted Long Term Refinancing Operations came in well below expec-tations and the ECB’s plan to grow its balance sheet through Asset Backed Securities purchases is likely to be a non-starter. All this has left markets feeling like Oliver Twist asking: “Please, sir, I want some more!”

Europe remains in a deflationary vortex of low growth, weak demand and CPI inflation that teeters precariously on the edge of falling into full-blown defla-tion. This is a risk that must be avoided at all costs, with government debt levels remaining highly elevated, as the real value of debt rises in a deflationary envi-

ronment. A key difference between now and 2012, the peak of the euro area crisis, is that back then, the concerns were contained to the periphery economies of Greece, Ireland, Portugal and Spain. What’s clear now is that the region’s core countries including Italy, France and even Germany are being dragged into the downward spiral.

The message from the bond markets, where German bund yields have contin-ued to decline and decouple from their U.K. and U.S. equivalents, is eerily remi-niscent of the deflationary spiral Japan found itself in for the past two decades. Whilst financial conditions in the euro area have improved in recent years, yields on peripheral sovereign debt are no longer into the stratosphere and the euro has weakened, yet the region’s major struc-tural problems remain unaddressed.

ECB President Mario Draghi has stressed the need for an Abenomics-style “three arrows” approach to tackling the euro area’s problems. This is all well and good, but Draghi is finding his wings being increasingly clipped by German policymakers, scarred by history. The Germans have been firmly saying “nein” to signing off on any full-fat QE program. The divergence in the views of Mario Draghi and the Bundesbank is halting any prog-ress for the region. Draghi’s hands may be tied, but the frustration for markets is that they are at the mercy of an increas-ingly dysfunctional European system and politicians are not tackling the necessary domestic structural reforms.

Still, the recent market shake-out throughout asset classes has presented both Wall Street and the High Street with a number of significant positives. The fall in the oil price has lowered the cost of fuel and energy at both a household and corporate level. Lower bond yields reduce the cost of borrowing for governments and corporations and, in the U.S., should feed through to lower mortgage rates.

Subdued inflation levels not only boost disposable incomes, but take much of the pressure off both the Fed and the Monetary Policy Committee in the U.K. to raise interest rates. Below-target inflation levels and the gravitational pull of the euro area’s problems mean rate tighten-

ing expectations continue to be pushed out even further. This continued finan-cial repression remains a positive for equities markets.

So, what does all this mean for asset allocation? Although U.S. equity valua-tions look higher on a relative basis, we prefer to follow the economic growth. An improving U.S. economy, where growth of 3 percent plus is still achievable, should help support corporate earnings that need to take over from QE as a key driver for markets. The continued upward trajec-tory of U.S. earnings per share will also help to alleviate some valuation concerns.

A strengthening dollar would be a mild negative for the U.S. economy, but with just 7 percent of S&P 500 revenues coming from the euro area (against 70 percent domestically), the U.S. market remains relatively insulated from weak demand elsewhere in the world. Non-dollar based investors would also benefit from a tailwind from dollar appreciation.

In Europe, equity markets appear to have discounted an ECB that will continue to underwhelm. However, with expecta-tions so low there is potential for policy to surprise on the upside. There are signs that the Germans are warming to the idea of a full-fat version of QE, or a big take-up of the next tranche of Targeted LTROs in December which could potentially rein-vigorate markets.

We don’t believe the recent rise in volatility is the start of a major change in direction for equity markets, indeed the dips so far have proven good entry points for active investment managers. However, with markets starting to wean themselves off the Fed’s liquidity, this remains a major transitional phase where volatility is likely to persist. With bond yields at historic lows we don’t see much here in terms of capital growth, but with so many unknowns and existential risks still out there, a well-diversified, balanced portfolio seems the sturdiest ship in which to navigate these choppy waters.

Smith & Williamson is an independently owned private client house. A major part of the business has been the provision of wealth management to ultra-high-net-worth fami-lies, their trusts and their family companies.

Smith & Williamson Bullish on U.S., European Equities

Charles Gowlland Chris Bates




2015 OUTLOOK

Lorne Baring, manag-ing director of B Capital, outlines how concern about a slowdown in China and dollar strength affects allocations in the firm's 'balanced' model portfolio.

2015 is likely to be a year of marginally slower growth than this year and we expect global gross domestic product to be around 3.8 percent.

Within that number, we forecast that the U.S. will continue to enjoy a broad-based expansion relative to Europe and Asia, which will see a patchier path to growth. Europe may bump along the economic flatline as the region adjusts to a perennially high debt burden, coupled with troublesome unemployment levels. Asia will reflect sensitivity to China which is attempting the tricky balancing act to switch from an export-led economy to one that encompasses broad consumption as well. The property market in China is wor-risome and could unhinge growth, which currently stands at about 7.3 percent per annum, but which is vulnerable to a hous-ing market correction.

So, what are the asset classes to con-sider when constructing a global port-folio? B Capital separates the pack into seven categories: cash, precious metals, bonds, equities, alternatives, commodi-ties and property.

The following model weightings relate to our 'balanced' strategy for clients with a moderate risk profile and who aim for a combination of capital growth and income to make up the total return. We exclude private equity, which we cover separately at B Capital, and which is not part of our liquid investment portfolio models.

■ Equities, 53%: Equities react well if there is regional growth and we see this as a U.S. story in the year ahead, while being tactically underweight Europe. Earning valuations for the developed mar-kets are not expensive in general follow-ing the recent correction in stocks, so we see potential for both capital appreciation as well a dividend yield component to the

total expected return. The world economic stage is still fraught with risks and central banks are keeping monetary policy loose for fear of sending economies back into recession, however global companies with a strong export franchise should per-form well and can more easily withstand local wobbles back home. The developing world has much potential and a perceived dynamism which attracts capital despite the reduced transparency and increased volatility along the way. In the long term, we believe that emerging markets will out-perform the developed world. Valuations are significantly cheap at the moment but possible U.S. dollar strength, a China slowdown and commodities under pres-sure leads us to temper our enthusiasm in the short term.

■ Bonds, 33%: Bonds offer a return, albeit low, while interest rates hover at multi-decade lows. Investment-grade sov-ereign debt looks expensive. Lower-rated corporates offer some attraction so long as investors understand that the stellar performance of bonds during the crisis will not be repeated in the coming years. In fact, rates will rise at some point which will be a negative for fixed income. We hold 2- to 4-year issues which will mature as yields pick up. In the meantime, it is a low-return environment for bond investors and is a "smoother" of overall portfolio risk in our models.

■ Alternatives, 10%: Alternatives are a wide description for many types of strategies and we look for managers that can demonstrate returns that are truly uncorrelated to financial markets. That excludes funds which trade on the finan-cial markets. With fixed income offering low returns and likely to underperform in the medium term, we seek an alternative asset that can add value to the income component of the portfolio. A direct lending fund which works with operat-ing businesses meets this objective as market volatility has no correlation to the loans issued.

■ Property, 7%: Property can be a useful portfolio asset class as it exhibits ele-ments of capital growth which protects

from inflation, as well as providing a fixed-income type return from rental yields. There are cyclical forces that affect prop-erty and in a period of economic growth, it is a useful inflation-linked investment. We favor commercial property ownership through a fund with a long track record which covers upturns and importantly downturns in the economy.

■ Cash, 2%: It's an era of near-zero interest rates and sub-optimal global growth. Governments have made it clear that short-term monetary policy is going to remain loose. That means that cash will pay nothing for the foreseeable future and so, with no return expected and infla-tion to subtract, we don't see the point in cash except to act as a holding pot during market volatility.

■ Precious Metals, Zero Weighting: Precious metals such as gold and silver, as well as platinum and palladium, have done well during the early years after the global financial crisis. Haven require-ments, cheap money, falling interest rates, lack of confidence in the bank-ing system and general panic sent the shiny metals roaring ahead. Following a 40 percent fall in prices over the last few years, some are tempted to buy, but we are not convinced about the merits of precious metals in a commodity bear market, coupled with low inflation and a China slowdown. Who would buy gold if the world economy is healing itself? It doesn't make sense when compared to most asset classes and the volatile price action over the last three years dispels the myth that gold is a safe haven. In fact, we consider it as just another currency pair to trade like cable or eurodollar.

■ Commodities, Zero Weighting: Com-modities are under pressure due to the slowing China story and, in some cases, a significant increase in supply. Commodi-ties are priced in U.S. dollars and with a strong dollar expected into 2015, we are bearish of the asset class.

B Capital is a multifamily office invest-ment manager with a global macro man-date and an absolute return focus.

B Capital's Baring Bullish on U.S. Equities, Bearish on Precious Metals, Commodities



December 2014 bloombergbriefs.com Bloomberg Brief | Family Office14

2015 OUTLOOK

Gautam Batra, investment strategist at Signia Wealth, says that while longer-term rates will resume their rise, they will be kept in check by emerging market turmoil, geopolitical turbu-lence and equity market volatility. Treasuries will also retain investor interest.

2014 began with a brightening outlook for global growth and a sense that some of the noisiest of geopolitical risks were starting to quiet down. It had become de rigueur in some circles to forecast clouds on the horizon for fixed income, until we saw the big bond market bull run of 2014, and the well-documented capitulation on Oct. 15. The price action in October was a shock to Wall Street analysts, and many are still straining to uncover all of the events that led to the run.

In the light of the year just gone, it’s tempting to see bonds continuing to pres-ent us with positive performance, as after all, the Bank of Japan and the European Central Bank are still in fully fledged easing mode.

However, fundamentals still suggest 2015 will be a rocky road for fixed income as the Federal Reserve and the Bank of England commence normalizing policy in response to firming economic growth and dwindling spare capacity. Consequently, we forecast that longer-term rates will resume their rise, but will be kept in check by emerging market turmoil, geopolitical turbulence and equity market volatility.

As an asset class, bonds tend to do well when the rest of the world is having a bad time, and the global investment landscape is contoured by a number of hazards that will be hard for investors to navigate.

In terms of economic headwinds, China’s growth continues to slow, and the prospect of defaults is the elephant in the room when looking east. Geopolitical concerns are also reaching something close to boiling point in several places around the world and the impact of these

on trade and energy are yet to be fully real-ized. We’re seeing a wait-and-see mentality from corporations with respect to potential disruptions to growth in Europe resulting from the Russian standoff. In response to deflation concerns, the ECB also seems to have fired the last shot with monetary policy, with sovereign quantitative easing likely to require drastic deterioration. Japan is facing the prospect of a consumption tax hike at a time when consumer spending remains sluggish.

All of these stimuli could cause people to turn to treasuries as a safe haven and a stable source of income in the face of economic turbulence. In such an environ-ment, fixed income treasury securities will retain investor interest.

As the prospects for global economic growth improve, fixed income markets will also keep a keen eye on the outlook for U.S. monetary policy following the recent end of the Fed’s balance sheet expan-sion and any subsequent normalization of policy. Investors know that while we are unlikely to see rate rises for some months, any additional QE will face a very high hurdle to be restarted.

This is made all the more likely as vari-ous indicators suggest that benign inflation may not be with us for much longer, which will force policymakers out of easy money policies and could hurt economic growth prospects and risk assets. With global eco-nomic growth bumping along the bottom, a 10 percent correction in equity markets should not be seen as unlikely, as equity market volatility increases around inflection points in the Fed’s monetary policy.

Despite the risks, however, there is some cause for optimism. The global eco-nomic recovery is showing signs of broad-ening, with global growth expected to reach 2.5 percent in 2014, and 2.9 percent in 2015. The BOJ governor Haruhiko Kuroda has reiterated that stimulus plans remain on track and that the central bank can seek to counteract the impact of the sales tax hike yet further if needed. The ECB has committed to balance sheet expansion as needed to avoid a deflationary outcome

in Europe. Equity valuations remain in line with 25-year averages, and dividend yields remain supportive in the current very low interest rate environment. In our view, Fed policy will remain highly accommodative even with the proposed reduction in stimu-lus, and we are seeing signs of moderate growth in China, though growth in broader emerging markets remains weak.

Signia Wealth currently holds a neutral position in equities and runs a regionally neutral strategy. Our focus in the equity space is generating alpha through man-ager selection, direct equities and sector selection. We are underweight in fixed income securities and the duration on our fixed income portfolio is shorter than the benchmark.

It’s true that emerging market debt valuations look attractive, but the downside risks remain. Relatively low nominal yields on high yield and emerging market debt don’t currently offer sufficient compensa-tion for potential defaults if interest rates were to move towards normalisation, so at Signia Wealth we are currently under-weight in these areas.

To find an alternative to the diminishing returns available on fixed income securi-ties, we have increased hedge fund expo-sure. In the current climate, they provide us with an asset with low volatility and stable returns, and the funds that meet these cri-teria are becoming a more significant part of our strategic focus at Signia Wealth.

Across Signia Wealth, a number of our clients’ investment strategies have seen their hedge fund exposure increased by about 10 percent, with the focus being largely nondirectional, using specialist strategies such as merger arbitrage and equity long-short. In particular, we’ve increased allocations to market neutral and relative value hedge funds that help us limit portfolio directionality and protect port-folios against the “shock” of rising yields and greater volatility.

Signia Wealth is a wealth-management boutique specializing in strategic wealth management for individuals, families and trusts.

2015 to Be a 'Rocky Road' for Fixed Income, Signia Wealth's Batra Says

>>>>>>>Transaction Cost Analysis for Fixed IncomeBTCA <GO

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INVESTMENT HORIZONS

Martin Graham, chair-man of Oracle Capital Group, speaks to Bloomberg's Darshini Shah about how family offices tend to be more flexible than institutional investors when it comes to investment horizons, which can be helpful in

the pursuit of attractive returns.

Q: Do investment horizons or returns matter to family offices? A: Family wealth is known for drying up over three generations. So, returns matter. Refreshingly, for those accustomed to the city’s obsession with short-term reporting, family offices are more focused on long-term value generation and wealth preser-vation. Many wealthy individuals remain skeptical about the prospects for large scale growth and very few family offices are looking for capital growth, as opposed to capital preservation. Our clients would rate investment returns in their top five priorities, but not usually as number one. This means clients tend to be happy to lock money up on a medium- to long-term basis, but they need enough cash to live on and this must be taken into account by their advisers.

Q: How does this differ from institu-tional investors, e.g. pension funds? A: Family offices tend to be more flexible in what they’ll consider than institutional investors, which can be helpful in the pursuit of attractive returns. A family knows it’s got the responsibility to not just preserve the wealth, but also to take care of the next generation. So, families are very happy to be in three- to five-year projects. They’re almost custodians of assets. Generally, families are very happy to look over their portfolio once a year. Pension funds on the other hand look at quarterly performance figures. So these sort of institutions have a different, more short-term type of thinking.

Q: So what would a typical portfolio for a family look like?

How Family Offices Differ From Other Institutional InvestorsAverage Investment Horizon of a Family Office Portfolio

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A: Many of our clients tend to be self-made entrepreneurs and have made their money in a particular sector or country. So, they tend to want to diversify their wealth globally. They are very cautious about preserving the money they’ve made. They’re also looking for absolute returns rather than relative returns. For those who are focused on capital growth the choice is obvious — the main asset classes pro-viding long-term capital appreciation are equity, real estate and high yield bonds. Those asset classes performed well, particularly in developed markets, until recently. Family offices had to invest in these areas if they were interested in posi-tive real returns. Now the focus is shifting ever more towards emerging markets.

So, what we see in most portfolios would be 80 percent of assets in public fixed income and equities, utilizing options to manage some of the risk around that. They’re looking for fairly safe returns and so the kind of equities we will invest in will be those with established franchises, good growth, strong balance sheets. Families are also looking for things with quite a high level of income to finance their lives. So they’ll use corporate bonds for the income.

Q: What about the remainder of the portfolio? A: About 10 to 20 percent of the portfolio will be in alternative investments. These will be things like co-investments and private equity funds. We even have a wine fund that some clients invest in.

Q: What do you mean by co-investments? A: For example, we have some property development projects we do and our clients invest in those projects. Our clients are very happy to re-invest some of the money, often in the industry they initially made their money in — they like to keep some skin in the game. They’ll invest in a sector where they’ve got deep knowledge.

Q: But investment portfolios are not the only way to realize meaningful returns on assets.A: No. Careful wealth structuring can itself lead to significant savings and tax efficiencies as well as helping to preserve, distribute and pass on wealth. Another secure option clients may opt for is the use of trusts or foundations in order to provide maximum protection for the assets involved.



AlternativeInvestments


PRIVATE EQUITY

BY MARGARET COLLINSKatie Kalvoda’s interest was piqued when the 40-year-old money manager for a group of ultra-wealthy families heard about a startup urban farm that grows produce in vertical greenhouses.

Kalvoda knew early-stage investments in private companies can be risky. She eventually took a stake in the venture this year with some reassurance. The chief investment officer at Newport Wealth Management in Newport Beach, Cali-fornia, joined a handful of fellow family offices in an alliance that gave them more muscle to get a better price, expanded access to research and broader expertise to track the investment.

“We don’t have this wall of secrecy that we had at one time,” said Kalvoda, who previously worked at fund-of-hedge- funds Collins Associates Inc. and Citigroup Inc. “We’re a block of investors working together with more scale.”

The deal illustrates a recent trend among family offices to team up with like-minded peers for direct investments in companies. They’re trading in some of their traditional secrecy, pooling assets and knowledge to make venture capital and private-equity deals much like buyout firms do in so-called club deals, while circumventing the fees charged by those firms.

Sometimes, the companies they back are local business seeking to make a difference in the community, other times they’re purely financial investments.

It’s a departure from how family offices traditionally invested outside the public markets, which was by committing capital to intermediary fund managers who picked the opportunities, set the terms of a purchase or sale and oversaw the progress. Such third-party firms usually charge management fees of 1.5 percent to 2 percent, keep 20 percent of profits and require lockups of committed money for as long as 10 years.

“This is a relatively new phenomenon,” Raffi Amit, a professor of entrepreneurship at the University of Pennsylvania, said of families that collaborate in direct deals. “The jury is still out on whether this will lead to higher returns on investment capital.”

Single-family offices in the U.S. hold about $1.2 trillion in assets and multi-

Family Offices Join Forces to Make Direct Investments

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Source: 2012 Wharton Global Family Alliance study

family ones manage about $500 billion, according to Bob Casey, senior managing director for research at consulting firm Family Wealth Alliance.

Many made their money by building their own businesses and are big enough to operate like a pension fund or endow-ment, with a staff to pick investments. Family offices also typically provide additional services including accounting, estate planning and concierge products.

There’s little data available yet on the investment returns of these collaborative deals by family offices, said Amit, who is chairman of the university’s Wharton Global Family Alliance, which researches family-wealth management. Families usually don’t publicize their stakes or performance.

According to a 2012 Wharton study of about 100 single- family offices, about 16 percent said they had 10-year returns, net of taxes and fees, of more than 10 percent annually. About 18 percent of respondents had returns between 7 percent and 9 percent. Among the group surveyed, 42 percent didn’t answer questions about their performance, the data showed. The Standard & Poor’s 500 Index of stocks gained 2.9 percent annually while the Barclays U.S. Aggregate bond index saw annualized returns of 5.8 percent.

The appeal of investing together or forming a partnership to take a stake is that fees are lower and families can better understand the business they invest in, Casey of the Family Wealth Alliance said. Family offices involved will divide the due diligence by interest and expertise to increase efficiency and maxi-mize their resources.

“Since the financial crisis there’s been a question about whether the value-add from an intermediary fund is worth the cost,” said Ashby Monk, executive director of the Global Projects Center at Stanford University, which studies the movement of financial assets globally. “For these big families there was this perception that they were often getting screwed by Wall Street.”

Kalvoda, whose firm serves as the investment office for a group of related family members, can rattle off the details of the San Diego farming company including how its vertical- greenhouse technology isn’t dependent on soil, how it offers Californians local food they love like cilantro, and how it creates jobs in the community and benefits the environment.

For this investment, two family offices analyzed the marketplace and the busi-ness model, while a third office deter-mined the fair value of the company.

Continued on next page…

Average Allocations by SFOs to Select Investment Types (%)




Kalvoda’s firm did a background check on the start-up’s managers even though some of families knew the entrepreneurs personally, she said. Kalvoda declined to name the startup or her co-investors. The families she invests with usually have at least $500 million in assets, she said.

Since May, Kalvoda said she's been approached by a billion-dollar corporate pension plan, a Fortune 500 family and an investment consulting firm to co-invest with her family office group as the trend gains momentum.

Ward McNally, whose family founded mapmaker Rand McNally, has been advising family offices on joint invest-ments as managing partner of Chicago-based McNally Capital, which serves as a merchant bank to family offices. One of the biggest challenges is reviewing enough deals to find an attractive one, said McNally, whose firm in 2010 helped 12 family offices create an alliance called the Cleantech Syndicate with $1.2 billion to invest in clean-energy companies.

About 22 percent of family offices had three or more people in their office tasked with the sourcing, screening, monitoring and exiting of direct invest-ments in 2010, according to a survey by McNally’s firm. That percentage has almost doubled as of this year to 35 percent, said McNally.

Even with added staff dedicated to direct deals, families are finding alliances valuable — especially to locate invest-ments globally. SandAire, a multi-family office that manages about 3.5 billion pounds ($5.6 billion), formed the Wig-more Association with other family offices in 2011 to share research. The eight

members are based in the U.S., Brazil, Germany, Canada, Australia, the United Kingdom and Mexico.

Some Wigmore members joined last year on two deals in private companies in

the U.S. and U.K. investing more than $20 million combined. Due diligence was first done by the family based in the region of the investment opportunity and then each member interested does follow-up research themselves, said Marc Hen-driks, chief investment officer at London-based SandAire. The investments are in early-stage businesses in the technology industry or startups based on a new pat-ents, said Hendriks, who declined to give the companies’ names.

“We are strong believers in investing in pre-IPO companies,” said Hendriks, who was previously chief economist at firms including Societe Generale and Swiss Bank Corp.

The challenges of direct deals don’t

end with due diligence, said Stephen McCarthy, who helps manage his family’s investments as senior vice president of New York-based KCG Capital Advisors. Families also must come up with a plan for management post-investing and appoint a leader because many of the investments may not see profits or an initial public offering for years.

Families participating in direct invest-ments generally haven’t abandoned funds altogether. They usually allocate 12 percent to 14 percent of their portfolio to them, according to data compiled by the Family Office Exchange, a network of pri-vate families with an average of $450 mil-lion in investable assets. They also have 10 percent to 12 percent of their assets in private equity funds and the same propor-tion in real estate.

Kalvoda said families should consider setting up a separate entity for these co-investments as she did to make sure their entire family offices aren’t forced to register as investment advis-ers and therefore reveal financial details. The registration requirement stems from the Dodd-Frank Act of 2010 and exempts family offices that are owned and controlled by family members, don’t advertise or provide investment advice to nonfamily investors.

The added effort to do direct invest-ments is worth it because of the ability to create scale and tap into each other’s expertise, Kalvoda said.

“With like-minded and friendly inves-tors along for the ride, you can leverage each other’s strengths,” she said. “When it comes to negotiating, you ultimately carry a bigger stick.”

PRIVATE EQUITY…Continued from previous page

private equityFundraising trends, expert commentary and people newsBRIEF newsletters For proFessionals, From proFessionals. BrieF<go> www.BloomBergBrieFs.com

"With like-minded and friendly investors along for the ride,

you can leverage each other’s strengths. When it comes to negotiating, you ultimately

carry a bigger stick." — Katie Kalvoda, Newport Wealth Management




PRIVATE EQUITY AND VENTURE CAPITAL

BY MARGARET COLLINSAs the U.S. powers the global economic expansion in its fifth year, the world’s rich are counting on American companies to help increase their fortunes.

At least a dozen family offices, with fortunes made in Europe, Asia and South America, have opened U.S. outposts in the past two years or are making direct invest-ments in corporations from Silicon Valley to the East Coast. Their view is that the Federal Reserve’s aggressive monetary easing, a shale oil boom that’s lowered energy costs, and improving corporate balance sheets give the world’s largest economy an edge over other regions.

Peca Ltd., a London-based firm started in the 1990s by a family that made its wealth mainly in financial services, has made about two-thirds of its private-equity and venture capital investments in the U.S. while reducing investments in Europe, said Anselm Adams, who oversees the firm’s alternative investments. A German family that founded an automotive com-pany opened an investment office in New York this year to find deals in the automo-bile, textile or luxury industries, according to a person familiar with the matter.

“They are looking for diversification and more exposure to the U.S.,” Patrick McCloskey, managing partner at Aeterna Capital Partners, said of the firms. “Many family groups are trying to manufacture yield in a very low-interest-rate environ-ment and are looking for unique and customized ways to do so.”

McCloskey’s firm last year opened a New York office for a rich European family looking for deals in the U.S. In September, he helped his client finance a video-distribution company with a loan that pays the London interbank offered rate plus as much as 11 percent.

Family offices manage $4 trillion in assets globally, about 55 percent of which is based outside of North America, accord-ing to a 2014 study by London-based researcher Campden Wealth. Affluence has grown fastest since 2013 in the U.K., Korea and Denmark, according to a report this month by Credit Suisse Group AG.

The U.S. is “a big bright spot in the world,” said Stephen Cecchetti, professor of international economics at Brandeis

World’s Rich Bullish on U.S. as Family Offices Open OutpostsAverage Family Office AUM and Total Family Net Worth

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Source: The Global Family Office Report 2014

International Business School in Waltham, Massachusetts. As the Fed winds down unprecedented stimulus, the European Central Bank is contemplating its own quantitative-easing program to tackle the weakest inflation in five years, and Japan is continuing purchases.

Peca has been attracted to venture-capital deals in the U.S., said Adams, who declined to name the family he works for, citing privacy reasons. The firm has taken stakes this year in The Bouqs Co., an online flower-delivery business, and Circa, a mobile news service, Adams said. Both are closely held companies based in California.

The family office generally invests $1 million to $3 million, working alongside private-equity firms rather than through funds because it pays no fees or carried interest on co-investments.

“One of the things we’ve been very active in, in the last two years, is the venture capital scene,” Adams said in an interview via Skype.

McCloskey’s firm usually seeks equity and lending transactions in companies with enterprise values of $5 million to $100 million, he said, declining to name the family sponsoring him for privacy reasons.

Aeterna helped finance RLJ Entertain-ment Inc., a Silver Spring, Maryland-based video content distributor founded by Robert L. Johnson, because it liked the

business, management and risk-reward profile, McCloskey said. Four other lend-ers were involved in the $70 million deal, according to an RLJ filing.

“There’s so much cash on the sidelines ready to be put to work by families that took money out in the financial crisis or that have operating businesses generat-ing a lot of income that they haven’t put in the market yet,” said John Benevides, president of Chicago-based CTC myCFO LLC, which advises family offices and is a unit of the Bank of Montreal. “They are giving us a shopping list.”

That capital has made finding bar-gains a challenge. Price multiples for U.S. private-equity deals are the highest since 2007, and some transactions are being done with less leverage as more equity is being contributed to the average deal, said Andrew Lee, head of alternative investments for the chief investment office at UBS AG’s wealth-management unit, which oversees $1 trillion. Those factors may make it harder to see returns as attractive as in the recent past, he said.

“We’re more cautious on allocating aggressively to U.S.-focused private-equity opportunities,” Lee said. “On a one-off basis there may be situations that may make sense.”

Valuations have also risen in U.S. Continued on next page…




venture-capital deals, particularly for later-stage companies, Lee said.

One area where family offices find opportunities are private companies look-ing for a new, private owner, said Francois de Visscher, whose Greenwich, Connecti-cut-based firm advises single family offices and family-owned businesses.

Every day, about 10,000 Americans born between 1946 and 1964 reach retire-ment age. Many of them have built busi-nesses, don’t have an heir to take over and want to sell, said Robert Elliott, vice chairman at Market Street Trust Co., a multi-family office established to manage the wealth of the Houghtons, founders of glassmaker Corning Inc.

The U.S. is “a good hunting ground, particularly with this generational shift,” Elliott said in an interview.

“Some wealthy families from countries like Colombia, Chile and Belgium have even established single-family offices in the U.S. with the intent of accelerating their American direct investment activities,” said de Visscher.

More than 40 percent of the 330 members in the Family Office Exchange are buying at least one private company a year, said Sara Hamilton, founder of the Chicago-based group.

The deals are part of a larger trend among family offices to find investments themselves. The number of family offices seeking equity stakes or lending oppor-tunities directly grew 45 percent this year at Axial, an online network that connects companies to capital, said Peter Leh-rman, the New York-based firm’s CEO.

“We get at least one call a month from

a family company that is ready to sell and wants to sell to another like-minded family instead of a private-equity firm,” said Ham-ilton, whose group is a network of private families around the world with an average of $450 million in investable assets.

The New York firm that’s been investing money for the German automotive family was in talks earlier this year to buy a family-owned business based in Califor-nia, said the person familiar. The family is looking for public or private companies in the automobile, textile or luxury industries with enterprise values between $250 mil-lion and $300 million. The transaction fell through, the person said, because of the seller’s lack of speed in closing the deal.

“It doesn’t come without risks,” Aeterna’s McCloskey said of international invest-ments. “It’s easier said than done.”

PRIVATE EQUITY AND VENTURE CAPITAL…Continued from previous page

Economics ETFs Municipal Market

Economics Asia Financial Regulation Oil Buyer’s Guide

Economics Europe Hedge Funds Private Equity

Asia Corporate Treasury Hedge Funds Europe Real Estate

Bankruptcy & Restructuring Leveraged Capital Reserve (free brief)

China Brief London (free brief) Structured Notes

Clean Energy & Carbon Mergers Technical Strategies

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HEDGE FUNDS

Hansjoerg Borutta, group executive committee member of wealth man-ager Marcuard Heritage, discusses why he has a "strong" preference for credit, globally-focused long-short, and event-driven managers.

There is a growing uncertainty about the real state of the global economy and the development of their asset values. There is no doubt that the global economy is weak despite the pursued zero interest rate policy by many central banks. Inves-tors and consumers alike increasingly have the impression that the transmission mechanism in the developed economies is broken. Additionally, geopolitical risks have started to trouble minds as well.

Given the fragility of the global econ-omy, we are confident that the U.S. inter-est rates will remain low for longer. As the corporate balance sheets are strong and default rates low, we continue to like credit and loans to yield-enhanced cash flows. We are aware that leverage in balance sheets has slightly increased, notably in the U.S., but the interest coverage ratio is reassuringly high. Based on this assess-ment, we aim to benefit from still-inter-esting spreads in the credit space, while paying attention to duration risk.

We remain positive that the U.S. economy will continue to grow at a moderate pace over the next few quarters and believe that the rest of the devel-oped world will muddle through with little support from emerging markets. We do not foresee a strong beta market in the coming quarters. Therefore, Marcuard Heritage continues to prefer exposure in equity long-short managers with a prefer-ence for managers who will have shown stock selection skills. We expect also that corporate action will increase as compa-nies, notably those in Europe, will need to

reshape their businesses.For a typical asset allocation, this

translates into a strong preference for credit managers, long-short managers with a global focus, event-driven managers and, to a lesser extent, macro managers.

As a result, a model portfolio will main-tain a high allocation to credit managers with exposures to U.S. dollar, euro and British pound credits and loans. In fact, we overweight European loans as their spread levels are more attractive when compared with the respective U.S. loans. Alongside long-only exposures to short-term, lower volatility, high-yield debt and investments with managers who focus on senior secured loans, Marcuard Heritage also invests in funds that utilize long-short credit, event-driven and capital-structure-arbitrage strategies regarding U.S. and European companies. The beauty of the latter is that these funds can quickly adjust their net exposures dependent on the prevailing market environment as the managers trade actively.

In addition, we keep our exposure to emerging market debt in hard currency which — as an exception to our general view — has longer duration risk as higher yield levels (i.e. above 5 percent) should compensate for the risk we take.

Secondly, we prefer equity long-short and event-driven managers over straight beta long-only equity managers, whose allocation in the model portfolios are minor. We prefer the versatility of active hedge fund managers in this current environment of increased volatility. The chosen long-short managers run with positive net-long exposures, i.e. we have not selected a market neutral equity manager for the time being. In addition, at least some managers are willing to run their books with a pronounced long bias when deemed appropriate. We decided to utilize the experience of seasoned Asian fund selectors to cover our need for Asian equity exposure.

The event-driven funds focus primarily on mergers and acquisitions and special situation equities. They have typically a lower correlation to broad equity markets. The geographical focus is also the U.S. and Europe. If Europe should finally wit-ness a stronger wave of corporate actions with respect to mergers and restructuring, we will be ready to deploy an additional special situations fund.

Macro exposure via a discretionary global macro fund allows us to better face sudden shifts in the markets which we witnessed over the last quarters, as we assume that the markets will still undergo further adjustments in the relative asset pricing. Obviously, this investment capital-izes on fundamental trends in currencies, interest rates, credit and equity markets in both developed and emerging markets.

We currently still refrain from adding CTAs or similar quantitative strategies. We are still cautious that the massive price distortions inflicted by the zero interest rate policies of central banks may continue to hamper their price signal algorithms. Having said that, we have also noted that perfor-mances of managed futures recently started to recover as market volatility increased.

Likewise, we do not allocate to commod-ity-related funds as sluggish global growth and secular excess supply tend to hamper any price advances.

With the current allocation, we are confi-dent to achieve our goals for our customers with rather conservative risk profiles, i.e. to continue to provide positive compound return while managing the downside risk.

Marcuard Heritage is a globally operating wealth manager offering discretionary portfolio management and wealth planning to high-net-worth clients. All the funds proposed for the model portfolios go through a stringent due diligence process with equal emphasis on the investment content and on the fund manager’s risk management setup at all levels. Once approved, the funds will be constantly monitored.

Marcuard Heritage to Maintain a 'High Allocation' to Credit Managers

HEDGE FUNDS EUROPEBRIEF

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LAUNCHES, MANDATES, & PEOPLE NEWS

LAUNCHES, MANDATES, & PEOPLE NEWS




WINE

Tom Gauterin, senior as-sociate in the private client practice at international law firm Taylor Wessing, says wine can represent an investing opportunity for those with a little knowl-edge and enthusiasm.

In 1982, Robert Parker published his assessment of that year's Bordeaux vintage in his Wine Advocate magazine. Contrary to prevailing opinion, Parker claimed that 1982 was a stellar year — and, as he was proved spectacularly right, made his name as a result. Of more significance was that his 100-point scor-ing system became widely recognized and, after years of esoteric, confusing and sometimes downright peculiar tasting notes, made it possible for wines to be compared with a simple number.

A key side effect of attaching numbers to wine was that, almost immediately, wine became much easier to trade. Thirty years on, the sophistication of today's fine wine market has surely exceeded anything that Parker — or indeed anyone else — could have foreseen.

This has particularly been the case with Bordeaux, partly a product of the 'Parker Effect' and partly because the various chateaux produce enough wine to generate meaningful secondary trading. Fine wine even has its own market, the LivEx Fine Wine 100. In recent years, a number of spe-cialist wine funds have been established.

Following ever-greater interest from China, and with two superb Bordeaux vin-tages in 2009 and 2010, the index peaked at 365 in June 2011. However, after poor growing conditions leading to less attrac-tive wines in 2011 and 2012, the LivEx has plunged about 35 percent and is currently trading at the 237 mark.

Confidence in the secondary market also took a knock, with the revelations at the New York trial of Rudy Kurniawan, recently convicted of selling counterfeit wine valued at millions of dollars. Savvy collectors had paid significant sums to buy from Kurniawan's collection, and the industry was shocked to find that the bottles of such legends as Mouton-Roth-schild 1945 and Petrus and Cheval Blanc

1947 were, in fact, a cocktail of other less exalted wines. Caveat emptor indeed.

While claims that a holding in fine wine is an essential part of any self-respecting investor's portfolio can be taken with a pinch of salt, wine nevertheless repre-sents an opportunity for those with a little knowledge and enthusiasm. For the wine-lover who can afford to ride out the ups and downs (and who might be willing to drink up if they incur a loss!), an invest-ment in wine is in fact very attractive from a tax point of view.

Fine wine is usually purchased "in bond" i.e. retained in HM Revenue & Customs-approved warehouses rather than delivered direct to buyers. No excise duty (2.04 pounds, or $3.30, on a bottle of table wine) or value-added tax (paid on the wine and the excise duty) are payable until final delivery. So, if wine is sold while it remains in bond, then neither excise duty nor VAT is ever paid by the seller. Even if in bond, though, wine still forms part of a person's estate for inheritance tax purposes. A wine costing 40 pounds in bond would incur total tax of 10.45 pounds on withdrawal, an effective cost of more than 25 percent. This saving is thus clearly worth securing.

Most wine is likely to be exempt from capital gains tax on any increase in its value. CGT is not charged on wasting assets which, for tax purposes, means anything with a 'useful life' of less than 50 years. This is calculated from the point at which it is first owned by the seller; so a mature Bordeaux (1970, say) bought today would be unlikely to last another 50 years. If one were to buy a top wine from a great recent vintage then it prob-ably would have a useful life of at least 50 years, in which case any growth in its value could be subject to CGT on sale.

Even then, there are exemptions avail-able before any CGT becomes payable. If one bottle of wine is sold for less than 6,000 pounds, no CGT is due.

Since there are very few that will change hands for anything like that sum (most of which will be rare red burgundies made in miniscule quantities), single bottles can usually be sold tax-free.

Several bottles sold to the same individual may, on the other hand, be

treated as a set and assessed on their collective value if they are "similar and complementary" i.e. from the same vine-yard and made in the same vintage. Fine wine tends to be sold by the case, so for some prestigious wines, the 6,000-pound threshold may easily be exceeded. A 12-bottle case of any of the most famous wines of Bordeaux, Burgundy and Califor-nia (think of Screaming Eagle, a collec-tor's item that generally changes hands for 2,000 pounds a bottle) would normally sell for at least this sum, certainly in a good vintage. Collectors tend to prefer to buy wine by the case since that tends to indicate better storage, and so the pre-mium price it attracts could outweigh any tax disadvantage. Even if a taxable gain is realized, each person has an annual exemption of 11,000 pounds to use before any CGT is payable. A canny seller could therefore spread his really valuable sales over a few years if necessary.

Things become less certain when work-ing out how to tell if your wine (bonded or not, individual or case) actually will last 50 years, depending on:

■ The type of wine (sweet and fortified wines last longer; drinkable Sauternes from 1811 can occasionally be found at tastings);

■ The quality of the vintage (there is plenty of Rioja still going strong from as long ago as 1925); and

■ The quality of the wine itself (anyone fortunate enough to taste Hermitage La Chapelle 1961 will quickly realize that it may very well outlive them).

HMRC's view is that a wine "is not a wasting asset if it appears to be fine wine, which not unusually is kept (or some samples of which are kept) for substantial periods sometimes well in excess of 50 years". Sometimes this will be obvious but, in any case where there is room for doubt, it would be wise to seek specialist advice from a reputable wine merchant.

Taylor Wessing is an international law firm, offering legal services to individuals, families and family offices who require multijurisdictional advice on personal wealth structures, international tax planning, commercial and real estate invest-ments, reputation management and immigration.

Taylor Wessing's Gauterin Says Wine 'Attractive' From a Tax Point of View




PROPERTY

The rebirth in U.S. real estate is being fueled by overseas investors such as pension funds, insur-ers and wealthy families looking for an inflation hedge and drawn by de-mographic trends that are expected to stoke demand

for multifamily housing, says Tim Ng, manag-ing director and head of research at Clearbrook Global Advisors. Some of the deals are novel transactions that involve leasing the land under a building to insurers. Buyers of commercial properties are looking beyond gateway cities, Ng tells Bloomberg’s Aleksandrs Rozens.

Q: In your work with family offices, are you seeing more investors from over-seas buying New York City property? What’s drawing them?A: The investors are sovereign wealth funds, corporate pension funds and high-net-worth families. In Asia, family offices would be the families behind the conglom-erates such as industrial and technology companies in Korea. They are looking at commercial buildings. They are looking at both the typical commercial building you will find in a gateway city — Los Angeles, San Francisco, Boston, New York, Washington, D.C. — or multifamily, apartment-type buildings because of inter-esting demographics we are beginning to see.

There is not a lot of office space that is coming online. It is projected over the next two or three years that the overall growth in supply in the commercial office market is only going to be around one percent. In the early 2000s, 40 percent of first-time home buyers were buying single-family homes in the suburbs. Now with the increase in the cost of single-family homes, higher unemployment rates, all of the kids out of school saddled with student debt, that 40 percent has dropped to 27 percent. Those are the dynamics driving the multifamily and the commercial marketplace.

Investors are buying because the market technicals are positive in terms of occupancy, consistency of cash flow and eventual price appreciation. Investors are seeing this wall coming and that is rising interest rates. Instead of taking a hit with rising interest rates, they are looking at real estate as a bond surrogate, particu-larly where they can get cash flow or an interest payment like a bond. They see it as an inflation hedge. They firmly believe that interest rates will be rising here in the U.S. versus other countries and therefore the dollar will be much stronger than their own home country currencies.

Q: Are they interested only in Manhat-tan? What other boroughs and cities are they looking at?A: Manhattan is what they understand. We once asked that question and they said ‘I fly into JFK, I take a taxi and I stay in Manhattan. I won’t take a train or subway to Queens or the Bronx. I under-stand Manhattan.’ They feel it is a very

stable area. Boston, Washington. They are looking at San Francisco. They are begin-ning to branch out into other cities they would consider major cities and/or growth cities such as Chicago, Austin, Texas.

Q: Investment in the properties — does it come in the form of purchasing a hard asset, or does it take the form of buying securities backed by commer-cial real estate debt? Or is it something

else, like construction financing?A: They will not do construction financ-ing. What they really want and care about more so than anything else is the ability to extract the cash flow. They want the coupon element. If they have the ability, they can get a combination of an equity-like return on a portion of their investment, plus the coupon. It is an established building they care about. They care about the rent roll and they care about the loan to value so that the underlying transaction when they do buy a building has enough cash flow to effectively cover the interest cost of the financing. Their rule of thumb is 1.3 times in terms of cash flow versus what the interest cost would be.

Q: Have we had all-cash deals?A: Yes. The transactions we are looking at — one in the Washington D.C. area and a second one that we’re in the process of getting agreements for — are all cash. Now what does that mean? All cash means that the investors themselves are

providing the capital for the purchase of the building. There is no bank financing whatsoever.

Q: Do you expect more banks to sell off their buildings and physical properties in response to changes in the regulatory environment? Will these be mostly in the form of lease-backed deals?A: A number of banks and financial institutions are under tremendous pressure from regulators to lower the overall risk on their balance sheets and are raising tier

one and tier two capital. So, what is an easy way for them to do so? It is to look at all of the real estate they own around the country and have selected buildings they can sell and take off of their bal-ance sheets. What the buyers like is that the bank has owned the building for two decades; they want to make sure the bank is still the main tenant and they may hire them as a property manager to manage the building as well.

U.S. Commercial Real Estate Property Revival Gets Boost from Overseas Investors

"Investors are seeing this wall coming and that is rising interest rates. Instead of taking a hit with

rising interest rates, they are looking at real estate as a bond surrogate, particularly where they can get cash flow or an interest payment like a bond.

They see it as an inflation hedge." — Tim Ng, Clearbrook Global Advisors




PROPERTY

Elaine Dobson, head of residential prop-erty, and Paul Lawrence, partner in the real estate team, at Taylor Wessing, speak to Bloomberg’s Darshini Shah about why family offices are still being drawn to London’s prop-erty market and how hotels are moving from a “purchase” to an “investment.”

Q: Are family offices interested in buying property in London?A: Interest in prime London residential property has remained constantly high over the last 12 months. We are also seeing a prevailing trend on the commer-cial side, with several new high-net-worth investors looking to enter this market. London continues to remain the city of choice for international investors on the lookout for prime commercial, residen-tial and mixed use assets. This trend is reflected in recent research by CBRE, which attributed 72 percent of all invest-ment in central London office space over the last quarter to overseas investors. We regularly see investment coming into the capital from across the globe, with prime assets being purchased by Asian, Middle Eastern and North American buyers.

Q: What is drawing them to London?A: Global geopolitical risk is on the increase and high-net-worth individuals wish to place their assets and families in safe jurisdictions. London is a lead-ing global city — financially, culturally and socially — and the U.K. benefits from a stable political landscape along with a world renowned legal system and transparent tax codes. Unlike some of our European competitors, there is no tradi-tion of introducing retrospective legislation to increase the overall tax burden.

Q: Is the demand in residential?A: We are now seeing investment being spread from the purchase of high-end residential properties for personal use, to value add opportunities. Investors are seeking retail, office, hotel and residential development opportunities where capital growth is predicted over a three- to five-year period.

When it comes to investment strat-egies, global investors differ in their thinking. Middle Eastern investors are relatively unique in that once they have acquired a property they tend to hold onto it for many years and generations. The Far East and China markets are not yet in the same league as the Middle East or Russian markets, and have yet to embrace the concept of a family office and/or structuring. There is though still a significant appetite for commercial real estate from these markets — whether due to portfolio diversification or in some cases political instability.

Q: You mentioned investments in hotels — Why this particular type of asset? A: Hotels is a sector ripe for international investment. However there has been a notable change in the type of asset being acquired. In days gone by, the stereo-typical high-net-worth investor from the Middle East would acquire a luxury hotel in one of the key cities, such as London, Paris or New York as part of their global portfolio of luxury assets with yachts, mansions and private jets. The purchase was driven more by the kudos of owning a five star hotel — perhaps operated by one of the luxury brands such as Four Seasons or an iconic landmark hotel such as the Ritz in Paris — rather than focusing on the underlying commercial rationale. Often these purchases would be spontaneous, ad hoc and not part of any defined strategy.

Q: And that's not the case anymore?A: No. Whilst this clichéd view may still be true in a limited number of cases, it is now very much the exception to the rule. Today's high-net-worth investor looking to invest in a London hotel will, one, come from a wide geographical base. Qatari

and Asian investors have been particularly active purchasers of hotels over the past couple of years.

Secondly, they are far more discern-ing and views the acquisition of a luxury hotel as an investment and not just a purchase. Today's high-net-worth investor is savvy and well-advised; they are able to invest in a multiple of asset classes. Along with many other sophisticated investors, they view hotels as an attrac-tive option, since it is an investment in both the real estate asset as well as the underlying hotel business.

Thirdly, they are willing to play the role of the developer as well as the ulti-mate purchaser. And last, they will also consider investing in hotels outside the traditional gateway cities of London, New York and Paris, to many European cities, as well as European resorts and second-ary regional locations

It is also fair to say that one thing still holds true. High-net-worth buyers of hotels are not active sellers. They are purchas-ing the assets as a long term hold and perhaps also for future generations. This has in turn, led to a shortage of supply for purchase in a number of destinations, and possibly helped to promote the develop-ment of even more luxury hotels.

Q: Does the investment come in the form of buying the actual property?A: The investment in residential prop-erty tends to be the outright purchase of the actual property, although once the purchase price exceeds 5 million pounds, and if the current ownership is a corporate vehicle, this is an attractive option for the sophisticated purchaser to save on Stamp Duty Land Tax. It has been known for the Far East buyers to "flip" the contract on a new build before actual completion and therefore this could be seen to be a form of investment. The developers have got wind of this and are now, if the contract allows, requiring the buyer to seek con-sent to any assignment of the contract and, in some cases, a share in the uplift.

On the commercial side, whilst typically direct investment has been the trend, there is an increasing number of investors who are looking to invest by way of provid-ing alternative forms of finance.

London's Hotels 'Ripe' for Investment by Family Offices

Elaine Dobson Paul Lawrence




PROPERTY

Jerry Parks, partner and head of real estate at law firm Taylor Wessing, and Henry Faun, surveyor in the International Residential team at Knight Frank LLP, Dubai, speak to Bloomberg’s Darshini Shah about why Dubai property is an attractive investment for family offices and high-net-worth individuals.

Q: Are family offices interested in Middle Eastern property? A: Family offices and high-net-worth individuals are still very much interested in investing in Middle Eastern property. Throughout the whole of the Middle East-ern region, it is estimated that there are currently circa 7,000 ultra-high-net-worth individuals and by 2023 there will be 9,500. In the region it is estimated that around 21 percent of their portfolios are allocated to real estate. There are a significant number of both family offices and their principals considering real estate as an investment both at present and in the future.

Q: What particular regions are attract-ing their interest?A: Recent troubles in surrounding areas have served to highlight the relative stability of the United Arab Emirates, within which Dubai's varied property market has proved attractive. Qatar may be knocking on the door, but its recent appearance on the world stage, with local legislation playing catch up, makes it less tried and tested than the UAE.

In the Middle East, high net worth individual's hub businesses are predomi-nantly located around the cities of Dubai, Abu Dhabi, Doha and Istanbul. The latter city may seem less obvious; however, one legacy of the Arab Spring is the enhanced status of Turkey as a safe haven location for investors from the Gulf and North Africa.

Between 2013-2023, Knight Frank's Wealth Report forecasts that ultra-high-net-worth individuals (those with $30

million of assets excluding their main residence) in Istanbul is to increase by 38 percent and Dubai by 25 percent.

Q: Is it the residential sector they are interested in? Or commercial such as offices and hotels?A: All sectors are available to foreign inves-tors. Commercial developments continue to come on stream, but the strata structur-ing of many office premises makes them unattractive to large scale investors. Hotels are booming in Dubai, but the restrictions on foreign ownership outside designated areas means that the choice can be limited. Residential property continues to offer the most variety in terms of location and quality, as well as allowing an investment that can be utilized by the investor. Middle Eastern investors may consider a portfolio compris-ing both commercial and residential assets, as offices, retail, development land and hotels all of are also of particular interest.

Dubai's office market has a large amount of supply; however, much of this is of secondary quality. This provides high-net-worth individuals with the opportunity to invest in a pre-let development as the local economy continues to strengthen. Residentially, when compared on a global scale, $1 million will purchase about six times more luxury residential property than in London and 10 times more than in Monaco, making it an attractive invest-ment for high-net-worth individuals.

Q: What are the main concerns of investing in Middle Eastern real estate?A: It is fair to say that a concern for all investors in Dubai real estate is the inheritance position and the application or otherwise of Islamic Sharia law. The posi-tion has become clearer in recent years, with the local courts recognizing the wills of non-UAE nationals in most cases. But that position cannot be guaranteed, and cir-cumstances of intestacy still leave investors vulnerable to the application of Sharia law.

Where Jebel Ali Free Zone (JAFZA) off-shore companies are involved, individual shareholders face the same inheritance issues because the devolution of their shares would fall within the ambit of the local courts. The preferred approach, from an inheritance perspective, is therefore

to structure the investments through a JAFZA offshore vehicle which is in turn owned by a traditional offshore vehicle. In that way the inheritance issue is removed from the local jurisdiction completely.

The succession position changes on an almost monthly basis, but the latest news is positive. The locally established common law courts of the Dubai Inter-national Financial Centre have recently announced that they will next year be introducing a facility to register wills dealing with Dubai assets, including real estate. The aim is thereby to render such wills directly enforceable through the Dubai courts. Watch this space…

In addition, whilst there have been recent legislative changes to cool the Dubai market, there is still margin for speculation in the real estate markets. The flipping of off-plan property is still pos-sible and can potentially create unnatural inflation to market prices and therefore potential concerns for later correction.

Q: Why should one invest in Middle Eastern real estate?A: First, there is a wide variety of real estate available, at all levels of the market, in both residential and commercial sectors. The conveyancing process is relatively straightforward, provided you have expe-rienced legal advisers on board and the transfer fee/stamp duty is still lower than in many countries in the world, at 4 percent of transaction value. In addition, there are no inheritance or capital gains taxes payable locally, and neither is there any local tax on rental income. The anonymity of owners is generally respected, and trust structures can be accommodated, provided they are at an offshore level.

At the crossroads between Asia-Pacific, Europe and Africa, Dubai is a growing hub for global property investment flows. Geo-graphically, investment into Middle Eastern real estate can be seen to be relatively safe as it benefits from continuous trade between the east and western markets. In Dubai, real estate investment can also be combined with significant potential return on the investment. Through the whole of 2013, the mainstream residential market in Dubai grew 35 percent year on year, thus provided strong returns for HNWI investors with exposure in the market.

Dubai a 'Growing Hub' for Global Property Investment Flows

Jerry Parks Henry Faun



Philanthropy& ImpactInvesting


BY THE NUMBERS BY DARSHINI SHAH & PEKKA AALTO

OFFICES THAT OUTSOURCE PHILANTHROPY TO EXTERNAL SPECIALISTS (%)

GLOB

AL

NORT

H AM

ERIC

A

EURO

PE

ASIA

- PA

CIFI

C

DEVE

LOPI

NG

ECON

OMIE

S

20%

11%

30%

13%

29%

PHILANTHROPIC ENDOWMENT, AS A PROPORTION OF AUM

37 23 11 20 9

27 30 21 11 11

41 5 23 26 5

42 34 8 8 8

100%

Global

North America

Europe

Asia-Pacific


35 23 17 17 8

<1%1%2%

3-8%>9%

AVERAGE PHILANTHROPIC ENDOWMENT OF THE FAMILY OFFICE ($M)

GLOB

AL

NORT

H AM

ERIC

A

EURO

PE

ASIA

- PA

CIFI

C

DEVE

LOPI

NG

ECON

OMIE

S

42

61

40

18

37

Global

North America

Europe

Asia-Pacific


21 8 20 51

No involvementPlanning within the next 18 months

Yes, but no clear strategy or focusYes, with a clear strategy or focus

10 8 28 54

36 5 16 43

13 10 20 57

100%

PHILANTHROPIC ENGAGEMENT (%)


Globally, family offices not only engage in philanthropy, but do so with a clear focus, according to the Global Family Office Report 2014, published by Campden Wealth, in conjunction with UBS.

While European family offices have the highest pro-portions of AUM dedicated to philanthropy, Europe also has the highest proportion of family offices that have no involvement in philanthropic engagement.

In absolute terms, a family office in North America will give the largest philanthropic endowment ($61 million), compared with $18 million from a family office in the Asia-Pacific region.

7 13 20 60




PHILANTHROPY

Mustafa Hussain, partner in Private Wealth, and Andrew Hine, head of Private Client, Taylor Wessing, speak to Bloomberg’s Darshini Shah about the tax benefits available to family offices in their philanthropic activities and whether there are any cross-border matters to think about.

Q: Why should family offices think about philanthropy?A: Philanthropy can be a satisfying and positive channel through which families elect to fund a particular organization which shares a common set of objectives and values as that of the family.

Charitable giving can also unite different generations within families, establishing common ground and values, whilst opening a dialogue to promote shared interests. It provides a democratic forum for the discus-sion of new ideas and attitudes, the passing down of traditional family values and the opportunity to establish a framework of con-tinued donations by future generations.

The process can also serve to pre-pare younger generations for wealth and responsibility, by developing their busi-ness skills and their understanding of financial stewardship, within the context of accumulated family wealth.

Q: What are the challenges?A: Some families can be deterred by the worry of complicated administration and process. It is not often a straightforward procedure. Collaboration within the family can sometimes lead to disagreement, particularly with reference to the donation amount and the charity to which the dona-tion is made. Another point to be aware of is any relevant regulation which could apply to charitable donations and to bear in mind potential questions which could be posed by tax authorities and charity regulators.

Q: Is it as simple as giving money to a university or charity?A: The family should clearly establish, with the recipient, the purpose of any grant to be applied and confirm that all funds which are not used for the specified purposes should be returned to the family. To ring-fence donations, it is sensible to also request that funds are held in a separate account, specifically dedicated to the purposes.

To monitor the application of the grant, the family should request that the recipient entity regularly provides reports and records for assessment by the family. These could include annual reports detailing the use of the funds, reports detailing the extent of progress in accomplishing the purposes and/or records of receipts and expenditures.

The family may also wish to request noti-fications from the recipient when all funds have been spent, there's any change in the charitable status of the recipient entity and/or there is any delay or cancellation in respect of a specific project to which a donation is intended to apply.

Q: How can family offices make the donation tax-efficient?A: The U.K. offers generous tax relief to charitable donors. The gift aid system grants U.K. taxpayers relief on their gifts, reducing their tax to the basic rate on the sum donated and the charity can reclaim this remaining tax back from the Treasury.

There is limited carry back and no carry forwards so taxpayers wanting to make substantial endowments should ensure that they have sufficient income and gains during the year to take advantage of the relief. Care should be taken and gifts stag-gered over several years to ensure that there is always sufficient income and capital gains tax to cover the relief claimed. This is one situation where a family foundation can be extremely helpful as it allows donations to be made in a year when a family member receives a substantial bonus or makes an extraordinary capital gain, but the benefits can then be paid out to particular charities over the following years or decades.

Individuals with investment portfolios, particularly those standing at a sub-stantial gain, can often benefit more by donating the investments. The capital

gains on the investments are exempt and the donor receives 100 percent tax relief on the value of the gifts to set against their income for the year. In this case, the donor receives the full benefit of the tax relief rather than sharing it with the charity.

Q: Are there any cross-border matters to think about?A: If a family foundation is attractive, it would usually be sensible to use a chari-table company or charitable incorporated organisation as the trustees of these vehicles are akin to directors and can be drawn from around the world, whereas trustees of a charitable trust hold the assets themselves and may be scruti-nized by their local tax authorities.

Every country has its own system of tax relief and these rarely complement each other, a prime example being U.S. citizens living in the U.K. Donations to U.K. charities do not qualify for relief against U.S. tax and donations to U.S. nonprofits will not qualify for U.K. gift aid.

Q: Is it possible to establish a charity that qualifies for relief in both countries?A: Yes, but this is extremely difficult and it is often easier to use an existing con-duit such as the American Donor Fund operated by the Charities Aid Foundation. Similar problems exist for U.K. residents wanting to benefit foreign charities directly and often, it is sensible to funnel these gifts through a U.K. charity, which can then pass on the monies for specific projects that would be considered charitable here.

The situation is slowly improving within the EU following the 2009 Persche judg-ment of the European Court of Justice. The ruling requires EU member states to give tax relief for donations to any charity estab-lished within the EU provided that charity meets all of the criteria required in the donor's own country. The U.K. tax system was changed to implement this ruling in 2010 and now any EU charity can register for U.K. gift aid provided their activities are charitable under the English definition and the man-agement meet a 'fit and proper persons' test. However, few member states have been as quick to recognize the decision and the EU is still a patchwork of different systems.

Taylor Wessing's Hussain, Hine Discuss the Benefits and Challenges of Philanthropy

Mustafa Hussain Andrew Hine




IMPACT INVESTING

Mike Mompi, director of ventures at ClearlySo, speaks to Bloomberg's Darshini Shah about why family offices should con-sider impact investing and the difficulties it presents. ClearlySo connects busi-nesses and enterprises

with potential investors and corporations look-ing to engage with impact investing.

Q: What is impact investing and how does this differ from responsible investing?A: Impact investing is where investors proactively seek social or environmen-tal returns alongside financial ones. It means investing in sustainable growth and social change through proven market solutions, and family offices are increasingly allocating capital in this way. Responsible investing is invest-ing in funds or businesses that are ethically aligned with a family’s values and aims, and screening companies for negative environmental, social and governance issues.

Q: Can you give examples?A: Impact investing could range from investing in a company that crowdfunds student loans for young people who have been accepted to university but cannot afford tuition to buying equity in a super-food brand that creates sustainable liveli-hoods in sub-Saharan Africa. The World Economic Forum predicts that the global market will reach $1 trillion by 2020 after already reaching $25 billion in 2013.

Q: Why should family offices be involved in this?A: Wealthy families in the U.S. have been key to driving the growth of impact investing, with leading voices from the Rockefeller Foundation and the Omidyar Network particularly. Family offices are also getting more involved across Europe, where impact investing can form part of a long-term investment strategy. Indeed, Mark Houghton-Berry, non-executive director of London-based multifamily

office SandAire, says impact investing is a natural fit for family offices.

Q: There are some, such as the 100% IMPACT Network — a group of family offices, foundations and high-net-worth individuals led by Charly and Lisa Kleissner — that are committing 100 percent of their assets to impact and building a diversified impact port-folio across multiple asset classes.A: Yes. They intend to demonstrate that this sort of portfolio construction is not only possible, but can actually deliver competitive financial returns. While some families are focused, then, on demon-strating market-based returns, others who approach it from a philanthropy standpoint can take on higher risk for higher potential impact.

Q: Do the returns from impact invest-ing actually meet expectations?A: A report from JPMorgan says that 89 percent of impact investors say their investments are meeting or exceeding financial expectations. So, the conversa-tion about long-term wealth and sustain-ability is shifting. Family offices are not necessarily leading the charge to impact investing; private individuals and founda-tions have been at the forefront of this growing trend — but as it grows, family offices need to understand its potential and its challenges, to help their clients invest in the long-term.

Q: Are there any barriers to impact investing?A: Regulation is a factor that is perhaps slowing the growth rate of impact invest-ing in the U.K. In some cases, advisers may find it more prudent to advise a grant rather than an impact investment in this early-stage market due to the regulation and added complexity of an investment in contrast to a grant. The success of mission-related investing by Foundations, including Family Office Foundations, however, suggests there is a place for high-risk seed capital to be in the form of grants or donations, with less regulatory strain for the family, and then

for impact investment to follow once the business or charity has demonstrated their revenue potential and proven their concept.

Q: Any other barriers?A: Family office managers have highlighted the issue of the push for a common lan-guage in talking about this area. Having so many competing terms — “social investing” versus “impact investing”, for example — can alienate families and advisers trying to make sense of this new trend.

Due diligence, particularly for early-stage impact investing, can also be a significant cost to advisers and individu-als, with multifamily offices able to provide additional support in this area. One key issue is finding the right kind of deals; advisors find that many of the high-impact companies looking for capital will not necessarily be out searching for impact investment because they have already found it through traditional capital raising; they are meeting a genuine market need and have real commercial potential.

Q: Is there more of an impact when the idea of impact investing is generated from an individual or family itself?A: Yes. Melwin Mehta, who runs a single family office, says that when he talks about impact investment in the abstract, it’s very easy for the enthusi-asm to die down. So, it’s important to find something that speaks to their very personal concerns as a family — social or environmental issues that they care deeply about.

Q: Does the enthusiasm last from one generation to the next?A: Many advisers find that impact invest-ing can engage next generation investors, who enjoy the values-driven nature of impact investing and the sustainable alter-native it offers to philanthropy. Older family members, too, find that impact investing can be an education tool and engage-ment tool, a way of helping younger generation family members express the family’s values and aims for their wealth beyond simply profit maximization.

Impact Investing Forms Part of a Long-Term Investment Strategy: ClearlySo's Mompi




IMPACT INVESTING

BY MARGARET COLLINSResearchers in Bethesda, Maryland, have spent eight years developing a handheld device to quickly assess potential brain trauma in injured U.S. soldiers and athletes with concussions.

Jean Case and her husband Steve, who co-founded AOL Inc., invested in BrainScope Co., the device’s developer, through their family office in 2008. The billionaire couple say they are using some of their fortune to help ease some of society’s ills while hopefully making a profit. They committed in June to spend $50 million in the coming years on mission-driven investments.

“A new generation of investors is emerging that wants more than just a financial return,” Jean Case said in an interview. “Bil-lions more will go into it.”

With private wealth at a record, rich investors such as the Cases, members of the Pritzker family and Pierre Omidyar are increasingly looking for ways to put their money to work and do good. It’s an investing niche previously limited to a sprinkling of mutual funds that avoided stocks such as tobacco and gun manufacturers. The number of money managers offering impact-investing products has surged 155 percent in the past five years.

Impact investing is still a fraction of the record $152 trillion that the world’s richest had at their disposal last year, according to the Boston Consulting Group. It represents less than 1 percent of that pool, or an estimated $46 billion, according to a May report by JPMorgan Chase & Co.

The impact-investing market may reach $1 trillion by 2020, according to a 2010 report by JPMorgan and the Rockefeller Foundation. The investments are a needed addition in tackling social and environmental challenges in tight fiscal times, said Judith Rodin, president of the Rockefeller Foundation and co-author of “The Power of Impact Investing.”

“There’s not enough capital in the world to solve the big prob-lems with just philanthropy,” she said.

Fund managers raised $2.8 billion for impact investments in 2013, and the target this year is $4.5 billion, according to the May JPMorgan survey of 125 such investors. Pension funds and insur-ance companies were the largest source of capital followed by family offices and wealthy individuals, according to the study.

“Families and foundations are now putting capital behind it at a scale that matters,” said Adam Wolfensohn, managing director at New York-based Wolfensohn Fund Management and son of a former president of the World Bank, James Wolfensohn.

Adam Wolfensohn manages his family office’s impact-invest-ment strategies, and his firm also runs a $250 million impact-oriented fund for investors. It’s invested in renewable energy and companies such as Ujjivan Financial Services, which lends to poor women in India.

The phrase “impact investing” was coined in 2007, according to the Rockefeller Foundation. Proponents say it differs from socially responsible investing because people seek companies they think will make them money and improve society, rather than shun cer-tain ones. The causes that impact investors have backed range from a water project in Africa to a venture capital fund with stakes in companies such as electric carmaker

Many venture capitalists and money managers have invested

for decades in startups or companies that aim to solve world problems but without the label, said Katherine Lintz, chief execu-tive officer of Matter Family Office.

“Our concern is this marketing hype of everyone wanting impact in the name of their funds,” said Lintz, whose firm man-ages $2.7 billion for families. “The social impact should be looked at after the investment hits on all cylinders.”

Among the wealthy, investors include billionaires Omidyar, founder of online marketplace EBay Inc., and EBay’s first president Jeff Skoll. J.B. Pritzker announced last year that the J.B. and M.K. Pritzker Family Foundation was investing with Goldman Sachs Group Inc. to provide preschool education to children through loans.

The demand for investments with an impact has helped push the number of money managers with mission-related investment products to 421 in 2013 from 165 in 2008, according to data compiled by Cambridge Associates, which provides consulting services to family offices and private foundations. Banks including UBS AG, Goldman Sachs and Bank of America Corp. now offer social-impact bonds that finance programs to improve education, prison rates or the environment.

Jean Case, who is CEO of the Washington-based Case Foundation, declined to comment on the total amount that her family office and foundation have devoted to such so-called impact investments, or on their performance. The Cases’ impact investments have mainly been in early-stage, closely held busi-nesses, she said.

At BrainScope, scientists including Leslie Prichep of New York University School of Medicine are using a database of brainwave recordings to create algorithms that would quickly spot abnor-malities in brain functions, said Michael Singer, the company’s president and CEO.

An initial focus is detection of traumatic brain injuries in U.S. soldiers. The company gave the military a prototype, smartphone-

Case Backs Brain Device as Wealthy Push Do-Good Investing

Source: BrainScope Co.

BrainScope is developing the technology to detect the potential for brain traumas in soldiers, athletes and others.

Continued on next page…




based system this year, Singer said in an interview. The device, which was cleared in November by the U.S. Food and Drug Administration for commercial use, aims to non-invasively assess if someone has a brain injury that could need treatment.

“There’s a tremendous amount of economic opportunity,” Singer said. “You can really help the world and you can do really well.”

Jean Case is a member of BrainScope’s board of directors. Her family’s investment was made through Revolution LLC, which was the couple’s family office at the time and is now Steve Case’s investment firm. The firm’s funds, Revolution Growth and Revolution Ventures, aren’t investors in BrainScope, according to spokeswoman Allyson Burns. The Cases have made bets on other startups with their family money including car-sharing ser-vice Zipcar and LivingSocial, a daily coupon site.

Impact investors vary in their expectations for profit. Some mandate “impact first,” meaning they will accept lower-than-market-rate returns in favor of a positive social outcome. Others, like Case, usually expect competitive returns with broad market indexes. About 35 percent of impact-investment funds target returns above 20 percent, according to a 2013 report by the World Economic Forum.

Charly and Lisa Kleissner have shifted almost all of their $10 million foundation’s assets to impact investments since 2005. They seek market-rate gains for their KL Felicitas Foundation’s

assets, the couple said.Family offices and private

foundations have led the way in social-impact invest-ing in the U.S. because they generally have more control over their assets and fewer restrictions on performance than pension funds and other investors, said Raul Pomares, founder of San Francisco-based Sonen Capital, which manages $300 million in impact investments including the Kleissner’s.

Sonen has invested the Kleissner foundation’s money in different asset classes including public companies that are vetted for environmental, social and governance guidelines. The foundation also has put money with private-equity firms such as Zouk Capital LLP, which bets on environmental companies and has made direct investments in businesses including BioLite, a manufacturer of cooking stoves that reduce air pollution globally.

From 2006 through 2012 the foundation’s impact investments gained 2.56 percent annually, according to a report released by Sonen last year. That compares with a 2.38 percent gain by its benchmark, a weighted mix of broad-market indexes such as the S&P 500 and Barclays Aggregate. The three-year annualized returns were 4.4 percent for the foundation and 4.25 percent for its benchmark.

Jean Case said more money will move into a range of invest-ments that focus on social issues.

The $2 billion McKnight Foundation said in June that it’s targeting $200 million in impact investments over the next five years. Investments will focus first on transitioning to a low-carbon economy and sustainable development in Minneapolis-St. Paul, said Tim Hanrahan, a McKnight spokesman.

“It’s 100 percent capital loss when you’re giving grants purely through philanthropy,” Case said. “Then there’s the range of market-rate returns. We think there is room for investors to play in that spectrum.”Jean Case

IMPACT INVESTING…Continued from previous page

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