Family offices as the source of generational wealth continuity

Today I want to highlight how these Family Offices are structured globally to ensure that wealth transition across generations endures. In a period where we are now starting to see generational transfer of wealth in Africa, there is something to watch and learn from.

To begin with, Family Offices are concentrated in major financial hubs like New York, Chicago and Silicon Valley in the United States, London, Zurich and Luxembourg in Europe with Hong Kong and Singapore in Southeast Asia.

Globally, Family Offices are largely structured around four pillars that ensure preservation and continuity.Firstly is wealth preservation. Estate planning requires oversight on how the assets are structured legally, how they move across generations and how are those assets transferred and held in the most tax efficient manner.

This need has largely grown in the 21st century with the increasing number of private equity funds that have created a global demand for good investments: family owned businesses that need capital injections to scale up or outright sale to these investors who have a better track record of putting together management teams that can extract better value from the underlying business.

Think about how the three original owners of Kenyan coffee house and casual dining chain, Java House, sold their business to a private equity fund back in 2012, which business has turned over private equity ownership a number of times since. Consequently, these “liquidity events”, the sudden arrival of millions of dollars overnight into a founder’s pockets require a readjustment of thinking beyond entrepreneurial effort as liquid capital needs to be managed, invested or distributed.

Secondly is investment management. How does the family deploy funds coming out of a liquidity event, or dividends coming out of the business that are to be used to maintain the family’s lifestyle? Such funds require identification of what is the family’s risk appetite, diversification of investment classes into those that generate cash to maintain lifestyle versus those that allow capital appreciation.

One example locally would be the Naivas supermarket chain, whose gradual sale of stakes over the last decade has seen the Mukuha family’s shareholding move from sole shareholder to a minority stake with various stakes sold to private equity firms.

Without a doubt, maintaining versus distributing the newfound wealth within the family must be an interesting discussion around the dining table at Sunday lunch. If funds are to be preserved for current and future generations where should it be deployed? Invest in private equity, or venture capital? Or stay safe and boring and buy land and buildings? What are the tax implications of holding the assets in companies with family shareholders or trusts with family members as beneficiaries?

Investment management is very different from running a business and has a whole slew of professionals needed to oversee the assets.

The key question then becomes should these professional services be in-sourced into a Single Family Office, or outsourced to professionals who specialise in this, called Multi Family Offices (MFOs).

MFOs can be equated to blending the separate role of pension fund administrators, pension fund investment managers and pension fund asset custodians, all of whom manage various pension funds on behalf of various clients.

The third pillar would be philanthropy. A large number of founders and their families wish to give back to their communities.

This can be done in the form of direct donations, or setting up charitable trusts whose sole objective is to deploy funds into impactful programs in not-for-profit organizations.

A globally famous example is the Bill and Melinda Gates Foundation which manages the philanthropic arm of Bill Gates’ wealth management or the Tata Family Foundations in India, that I wrote about earlier this year. The final pillar is administration, what is called “concierge services” in the old wealth world.

This is where the family’s lifestyle needs are taken care of ranging from paying school fees to schools and universities, paying medical bills, booking travel and, seriously, managing yachts and private jets.

As Africa begins to experience significant generational wealth transfers, these global models offer valuable lessons on how to sustain prosperity while adapting to new opportunities and challenges. Underpinning the success: governance. More on that next week.

Carol Musyoka is a former banker and is currently a corporate governance specialist.