Global Partnership Family Offices (GPFO) is excited to announce two research themes that will be guiding our work in 2023: 1. Cost & Efficiency in the Family Office, and 2. Benchmarking Co-Investments.
We lay out below the thesis for this research; the current status of data and information available; and where we add to the body of work.
1. Cost & Efficiency in the Family Office
Research shows that cost management and efficiency have become a concern for many family offices. When returns are good, a few basis points creep in costs can be seen as immaterial, or even go unnoticed. When returns are negative, the cost of achieving these returns become painful to swallow. Recent measures of financial returns generated by the average single family offices turned negative in 2022. The Credit Suisse SFO Index1 found that in 2022, the SFO average performance was –7.63% in US dollar terms at the end of July 2022. As of end-July 2022, small SFOs (<$100m) are down year-to-date by –6.26% on average, medium-sized SFOs ($100-500m) are down by –9.25%, and large SFOs (>$500m) are down the most at –11.47%. Costs erode returns when they are positive, and increase losses in negative return years.
What is happening with SFO costs?
UBS GFO 20222 data shows that over 50% of family offices expect staffing costs to rise over the next 3 years (staffing costs make up 69% of the pure costs of running a family office in 2022).
RBC/Campden 20223 research suggested a total cost increase of 29 basis points of AUM between 2021 and 2022, mainly contributed to by external investment management performance fees.
The UBS GFO 2022 report finds a different figure for bps cost base. The average cost of running a family office in 2022 is reported as 42.2 basis points (bps) of assets under management, but that varies depending on the size of assets [this is 30bps below that reported in the RBC/Campden Report]. In a family office with assets of USD 100 million to USD 250 million, this cost is 58.6 bps. When assets rise to USD 251 million to USD 1.0 billion, though, the cost falls to 42.5 bps. For large offices managing assets of USD 1.01 billion or more, average costs fall to 31.7 bps.
What is driving inefficiencies?
Clearly not all costs are inefficiencies and many are essential. The 2022 FundCount survey4 found that of the family office professionals who participated said that they believe an average of 42% of the 40-hour week is wasted on manual processes across all personnel, up from an estimated that 20% of the week’s working hours in 2019.
According to the FundCount survey, complexity is a driver of manual work. The survey found that almost a quarter (22%) of single family offices have over 26 legal entities in play. Additionally, 53% of respondents are using generalist general ledger accounting software, alongside 54% using non-specialist tools for partnership/investor accounting.
When asked what is the biggest strength of their most critical system, 41% of respondents prized the automated downloading and consolidation of data from custodians, investment managers and brokers. Second, but at only 24%, was how their foundational system excelled at supporting the management, reporting, and accounting for complex structures, which showed how relatively rare such capabilities are.
An inability to ingest, account for, analyze and report on all investments in one system was the biggest weakness cited for critical systems, closely followed by difficulties in producing customized or ad hoc reports. Unsurprisingly then, nearly a third (31%) do not use their primary accounting or investment system for reporting.
To help family offices achieve their cost and efficiency goals, we will be exploring a range of topics, including:
Evaluating and benchmarking the costs of running a family office and identifying areas for potential cost savings.
Exploring the use of technology, and considering whether outsourcing can improve efficiency and reduce costs. What are the non-financial costs of this?
Assessing the trade-offs between cost and quality when it comes to selecting service providers.
2. Benchmarking Co-Investments
Co-investments are becoming an increasingly popular way for family offices to invest in private markets. For the majority of members joining a peer-to-peer family office network such as GPFO, sourcing co-investments is invariably among the top 3 reasons for joining.
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