Looking forward to a post-pandemic world, there are several factors that family offices should consider during these uncertain times.
Managing human capital
Narayana Murthy is quoted with the saying “our assets walk out of the door every night”. When considering family offices, this refers to ensuring that priority is placed on taking care of employees and key executives. Employees who handle administrative, investment, or risk functions within the office are critical to ensuring that everything runs smoothly and that they can handle the family’s needs in a time of emergency. It can be necessary to outsource back office functions through third party providers to assist with the temporary transition to remote operations. Reviewing succession plans will also be necessary to prepare for the time when they are activated.
Managing liquidity and credit
Alternative investments may have several restrictions that, depending on the portfolio allocations, will prevent the family from withdrawing capital. Hedge fund or private equity managers may mandate a lock-up period from the point an original investment was made. Certain investments, such as fine art, real estate, yachts, private jets, or any other illiquid assets may take more time to liquidate. Managing both sides of the balance sheet, and reviewing cash flow and budgets, are all functions that should be monitored. It is important to work with a relationship banker to ensure that there is access to lines of credit or other sources of financing. This will help the family through these difficult times.
Sharing information and data management:
The pandemic has led to the financial markets becoming volatile, which in turn has led to some investors making irrational decisions. Family offices that have more complex structures could potentially have issues getting verified data on their investments or businesses. Hiring outside consultants or investing in business intelligence tools can help gain a fresh perspective that the office would not usually have access to.
“Family offices should proactively prepare for the rare opportunity to make investments at values not seen in years, while managing the ongoing impact of the pandemic.”
Keeping up with cybersecurity and technology management
It is important to ensure that offices have confirmation of the strength of their information technology infrastructure. As with any robust business continuity plan, the objective is to reduce any office disruptions during the process as office personnel work from home and to ensure that systems are robust enough to thwart any opportunistic cybercriminals who seek to penetrate key reporting systems. Family offices should also undergo cybersecurity and data protection training, as social media platforms could present a potential area for criminals to attempt phishing for key data.
Maintaining business continuity plans and regulatory management
Throughout the period of instability, families should review their business continuity plans at intervals, as well as their recovery plans. This includes how the office intends to function when the physical office is closed, and it may also include managing the plans for family residency, personal security and travel restrictions. Other considerations are insurance coverage with general liability, life insurance, disaster, kidnapping, real estate, investments, data breaches and personal assets. It is also advisable to review communication plans and reporting during periods of disruption.
Family offices should also consider all aspects of safety with regards to members of the family. Documenting these plans can help in alleviating anxiety from the investor’s behalf.
Positioning for the future
Two years ago, Bloomberg LP reported that over a third of family offices increased their cash reserves in 2019, anticipating a global recession in 2020. In 2021, as markets continue to fluctuate, family offices are sitting on the side-lines waiting for the opportune moment to invest. With credit spreads tightening, family offices may be considered an attractive option for other businesses looking for liquidity in a down market.
Public market valuations creating opportunities
With financial conditions tightening and equity prices falling, families may find the lower market values as an opportunity for sustainability or impact investing.
Private direct investing:
With technology and healthcare businesses at a lower rate compared to the rates prior to the spread of the virus, these are sectors which may present families with the opportunity for investment.
Generational planning:
With interest rates hitting record lows, there may be a good opportunity to use estate planning tax techniques to reduce future tax liabilities. This may also be an opportune time to review the governing documents and mission statement relating to the family office. This will allow younger members of the family to have their fingerprints on office policy. A stable family office provides a strong foundation for the next generation, especially during long periods of instability.
The takeaway
This current period is a good opportunity for family offices to review key policies and procedures. Implementing proper planning will allow family offices to put themselves in the best position to preserve capital, transition into the digital economy, invest in undervalued assets and equip the next generation of family members with the right tools to drive future success.
“Family offices will be well positioned to transition into the digital economy, preserve capital, invest in undervalued assets and ensure the next generation of family members are equipped with the right tools to drive future success as long as there is proper planning.”