Family Offices Are At A Tipping Point!

An Interview With Family Office Expert Ron Diamond - Chairman Of Diamond Wealth

Ron, first off tell us what is a family office and why do people choose to create them?

The origins of Family Offices were European, with the concept being developed and formalized in the U.S. by the House of Morgan and the Rockefellers soon after. Wealth management was the most significant driver, and therefore it is not surprising to see the proliferation in Family Offices over the last few years as the number of billionaires grows, and the time taken to make significant amounts of money decreases. Other drivers include global volatility, new types of investment options and the focus on multi-generational wealth preservation, all requiring specialist advice. The reason people choose to create Family Offices are varied, but most involve control and alignment of interest.  

Why do you believe that Family Offices will continue to grow for the next decade?  

Demographics. We are currently seeing the largest transfer of wealth in history. It is expected that roughly $30 trillion will change hands in the next 20 years. 10,000 people are turning 65 every day. People with net worths in excess of $500 million are increasingly deciding to start their own Family Office.

What role has technology played in the proliferation of Family Offices?

Technology has played a huge role. I sit on the Board at Stanford University and during one of our Board meetings one of the professors showed a picture of a fire, a wheel, and the word internet. This is how transformative technology has become. Companies like Google, Amazon, Facebook, Linkedin, Uber, Air BnB and many others didn’t exist 20 years ago. Technology has allowed people to attain wealth exponentially faster than we have ever seen. And many of the founders of these companies are setting up Family Offices. Family Offices control roughly $5 trillion in capital — and that number will continue to grow.

Why do you believe Private companies are more efficient than Public companies? 

First, public companies are required to report earnings every 90 days. This is a flawed model. As a result, many CEO’s are more focused on managing the short term earnings to keep their stock price high and appeal to Wall Street than on taking a longer-term view of how to best position the company for the next five years. This is not good for innovation. The second reason is the misalignment of incentives. Bonuses are often paid at year-end based on sales, which creates a conflict of interest for how many mid to upper-level managers are compensated.. And third, publicly traded companies are all covered by Wall Street. In addition to making recommendations to their clients on which stocks to buy or sell, investment firms make a lot of money in investment banking. How many times have you seen an analyst recommend a SELL on a company where they are also an investment banking client? 

You believe the PE and VC world has become an AUM game, please unpack this for us?

Private Equity and Venture Capital has definitely become an AUM game. Initially, the traditional 2/20 model was perfectly aligned. The 2% was used to pay for overhead and the 20% would only be made by the firms after the investor was paid back in full plus a hurdle. The problem, however, is that many private equity and venture capital firms saw the 2% as a way to generate annual revenue far greater than simply paying for overhead. It became a profit center and funds were thereby incented to become bigger and bigger. This is not the case for all private equity and venture capital funds, but it is for many. This has led to a misalignment of interest.

So you believe that firms like SoftBank are too big?  

Absolutely. It is very difficult to deploy $100billion in one venture capital fund. Especially at today’s multiples.

Why are Family Offices a better model in your opinion than investing in Private Equity funds or Venture Capital funds?  

Patient and strategic capital. One of the biggest advantages that Family Offices have over private equity and venture capital funds is the fact that Family Offices have patient capital. They do not have to invest if they feel the market is overvalued and trading at extremely high multiples (like now). Private equity is sitting on over $1 trillion in dry powder. That money will be deployed, no matter what. With most markets trading at all-time highs, doing nothing is often the best strategy, The funds do not have that luxury because of the way they are incented. Right now there is too much capital chasing too few deals. Firms are overpaying for companies. Remember, money is simply a commodity. Family Offices offer more than money, they offer strategic money. Many of the Family Offices made their money in a particular sector and thus have a lot of connections in their industry. Most of the large private equity and venture capital firms have more finance people than actual operators. It is more efficient to create alpha by operating a company more efficiently than simply financially engineering a company to profitability.

  Where are we in the evolution of the Family Office?

We are still in the first inning. There are Family Offices like the Pritzker Family Office or Michael Dell’s Family Office that have become institutionalized and are able to compete directly with the top tier private equity or venture capital funds. They are paying top dollar to recruit top talent and have very sophisticated teams vetting and executing deals. But the vast majority of Family Offices are, at this time, fragmented, inefficient, and work in silos. This is starting to change and I predict that over the next 5 years the top students coming out of schools like Stanford or Wharton will prefer to work at a Family Office over a private equity or venture capital firm.

Why do you only invest in the private markets and not in the public markets.

It is extremely difficult to create alpha in the public markets. If 4 out of 5 index funds outperform money managers in the public markets, investors are better off focusing on asset allocation and investing in index ETF’s. More and more people are starting to realize this and that is why we have seen extraordinary growth in ETF’s. The only way to create alpha, in my opinion, is in the private markets. 

How do you keep your finger on the pulse of the Family Office world?

I’ve spoken at over 75 Family Office conferences throughout the world and this enables me to see first hand what’s really going on, what are the latest trends, and who are the leaders in the Family Office community. One of the main reasons Family Offices attend Family Office conferences is to meet with other Family Offices. They want to see what other Family Offices are doing and compare best practices. That is why I am launching a podcast called Family Office World which will help Family Offices share best practices.