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Inside Family Offices: Uncovering Types and Strategies

Aligning with the Right Family Office for Your Capital Goals

For all the talk about family offices in the private equity and M&A space, their operational intricacies are not widely understood. This is natural — these are private institutions, not listed on any stock exchange. They typically guard their privacy closely and don’t want just anyone to come knocking.

Worse, when business owners and independent sponsors learn about the advantages of securing capital from family offices, they may incorrectly assume that all family offices function identically. This can lead to wasted effort spent courting a family office whose strategic approach is not a match for their capital-raising objectives.

Let’s clear up some of the confusion so you can connect with the right partners for your objectives — what are the best family offices to approach, and what are some of the different strategies they use?

Navigating the Family Office Landscape

A family office is a private wealth management firm dedicated exclusively to a single family or a select group of families. Usually, these families are very wealthy — otherwise, managing their affairs would not require a dedicated office with salaried staff.

This article explains family offices in more detail. In this other article, we describe why they are of particular interest to businesses and independent sponsors looking to raise capital. Simply put, family offices can be a source of “patient capital” that doesn’t come with the pressure of outside stakeholders clamoring for an exit. Families often take an extended, even multi-generational view, which can make them attractive partners for long-term capital plays… provided that the investment opportunity aligns with their focus.

No two family offices are alike, so it’s crucial to understand how they can differ from each other. Let’s look at some of the different ways family offices can be segmented. That way, when you meet one, you can better deduce what kind of family office you’re talking to.

Common Types of Family Offices

To avoid confusion, here are some common ways in which family offices are differentiated from each other with abbreviations:

  • Single-Family Office (SFO) – manages the affairs of a single family.
  • Multi-Family Office (MFO) – manages the affairs of multiple families, often formed when several family offices pool resources for the running of the office.
  • Embedded Family Office (EFO) – a family office that forms a part of a family-run business, usually not a separate entity but rather a department of a greater business that manages the private affairs of a family, not business operations.
  • Virtual Family Office (VFO) – an outgrowth of the digital revolution, a family office that is run online rather than at a brick-and-mortar office, usually to keep the operation lean and efficient.

The abbreviations, while helpful, only scratch the surface. The essence of each family office is its strategic approach. Whether an office leans towards managing investments or providing specialized services can significantly impact its alignment with your capital-raising efforts.

Service-Based vs. Investment-Based

Some family offices are investment-based, with their efforts geared toward enhancing and safeguarding family wealth. Others adopt a service-based model, aggregating various professional services for the family’s convenience within a single entity.

Imagine a service-centric family office as a one-stop shop. Individuals who typically engage separate financial advisors, accountants, attorneys, and other professionals. With a service-based family office, these services are integrated and provided collectively, tailored to the family’s needs. This consolidated service suite could cover areas like:

  • Estate planning
  • Tax planning and compliance
  • Risk management
  • Philanthropy
  • Concierge services

Wealth management and investing are often folded into the package, but be careful — some family offices are more service-based rather than investment-based. In other words, don’t waste your time pitching an investment opportunity to a service-based family office.

Wealth Management vs. Investment Strategies

Additionally, businesses, independent sponsors, and other fundraisers need to understand whether the family office’s strategy is more focused on wealth management or investment.

  • Family offices with a wealth management focus typically allocate and diversify assets within a specified range of investments. Their primary concerns usually include mitigating risk, devising tax strategies, and preserving capital. As you can imagine, these offices might not be the ideal target for ventures that present high-risk, high-reward investment opportunities (like private equity).
  • Family offices with an investment focus take a hands-on approach to managing and increasing the family’s wealth long-term. Their operations are similar to that of a hedge fund, aiming to boost the family’s overall financial legacy. These offices are often open to exploring private equity ventures that have the potential for significant rewards.

Embedded vs. Independent

When considering family offices to approach with investment opportunities, it is important to know if the family office is “embedded” or “non-embedded” (i.e. independent).

Independent family offices are typically established after a major liquidity event (e.g. the sale of the main business). The infrastructure is usually independent of any other business — the office solely exists to serve a family’s independent financial affairs. Embedded family offices, often closely connected to the family business, may prefer investments that complement their existing interests.

Determining the Right Fit For You

A family office rarely falls exclusively into one of the above categories; many are a blend. The absence of certain ideal characteristics in a family office doesn't necessarily preclude a potential alignment. The office may serve a variety of functions, one of which could be the perfect fit for your capital requirements. Dig a little deeper before you rule someone out.

How can you determine whether the investment priorities of a particular family office align with your needs? Consider evaluating the following:

  • Investment team. Investment-focused family offices often have a dedicated team for evaluating and executing investment opportunities.
  • Size and structure. Larger family offices tend to have both a wealth-management team and an investment team. Smaller offices are more likely to have one or the other.
  • Public disclosures and announcements. Look for press releases, news articles, and public disclosures about the investment activities of the office.
  • Job postings. Check to see if the family office is hiring staff members that might indicate an interest in investment opportunities — portfolio manager, deal originator, analyst, etc.
  • Service providers. Family offices interested in investments probably have relationships with valuation experts, private equity consultants, and similar professionals.

Identifying the appropriate family office for your deal is not a matter of chance — it's a strategic endeavor. The right office can provide not only substantial patient capital but also establish a long-term, mutually beneficial partnership that drives growth and success for decades.

At Cap Expand Partners, we specialize in matching your project with the right investors. If you're an independent sponsor or a business owner in pursuit of capital, we invite you to book a call with us. Let's leverage our expertise to connect you with a family office that can help realize your capital goals.

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