The concept of the family office has been with us for over a century. The assets under management required to sustain a family office can be around $300 million of investable assets. Family offices are founded to support ultra-high-net-worth individuals, or UHNW.
In 2016 there were 187,500 ultra-high-net-worth or UHNW families across the world. This number was forecast to grow to 263,500 by 2025. However, this doesn’t necessarily correlate with the number of family offices around the world which is anywhere between 10,000 and 100,000 according to experts. Each one of these offices can hire multiple people like portfolio managers, lawyers, or accountants to help manage their assets. Meaning that they often operate like a hedge fund or an asset manager. Although, it’s important to note that family offices serve their clients in a very unique and personalized way. Very differently to other financial investment companies.
Family offices can differ in the way they operate. There are single-family offices which are dedicated to just one family. Then there are multi-family offices which provide similar services to families but allow for cost-sharing between them. And, finally, there is the outsourced family office with lower management costs that doesn’t rely on one provider. This can make it harder to coordinate or control compared to the other models.
Over half of the largest family offices in the world call the U.S. home. Some of the largest family offices include Walton Enterprises LLC with $224,5 billion in assets, think Walmart. Or Bezos Expeditions at $107.8 billion in assets. Jeff Bezos used his family office (Bezos Expeditions) to acquire the Washington Post, as an example of investment appetite.
The popularity of Family Offices in Texas
One of the hotspots for family offices in the U.S. is Texas. Some of our readers may be familiar with one of the oldest Texas families, the Caruths. The family still plays an important role in Dallas today.
But Texas is more than Dallas. Today Austin is fast becoming a tech hub and financial powerhouse in its own right. We decided to find out more about how this happened.
In 1990 there were just over 500,000 people living in the Austin Metro Area. By 2020 the population jumped to over 2,000,000. One of those people that arrived in Austin, Texas, recently is Elon Musk. Michael Dell, founder of Dell Technologies, also lives there. MSD Capital manages Michael Dell and his family’s assets, and Excession LLC, based out of Austin, looks after Elon Musk’s family assets. Robert Smith of Vista Equity is another billionaire who calls Austin home.
A strategic shift in the way that family offices are channeling their wealth
At the end of 2022 UBS published the ‘Global Family Office Report 2022’. 221 single-family offices were surveyed with a cumulative wealth totaling $493 billion. Some of the results of the survey show a strategic shift away from traditional asset classes.
Whereas in 2021 private equity formed 21% of all assets under management, 74% of respondents shared how they would be likely to allocate more investments into private equity in the future.
Other takeaways from the survey included investment in digital assets. Respondents were more likely to be curious about this asset class, inclined to invest into digital assets to learn about them, rather than profit from them.
#DisruptionBanking reached out to Adam Packer CFA CAIA, Chief Investment Officer at SineCera Capital based out of Austin, Texas, to find out more.
Supporting family offices in Austin with SineCera Capital
SineCera Capital works with a select group of ultra-high-net-worth individuals, entrepreneurs, and family offices. The firm started in 2019 with a mission to be a trusted partner to its clients.
“Most of our clients are still active entrepreneurs and business owners,” Adam explained. The goal at SineCera Capital is, when liquidity comes in from the clients, to “reinvest it in a diversified way from whatever income streams are already in place.”
People sometimes ask Adam if he has a target allocation or if SineCera Capital follows the endowment model. To which his answer is “No”.
“We’re dealing with real people that have taxable situations and have their liquidity locked up in their businesses or in real estate. We offer them a long term view. SineCera Capital makes sure as the capital comes in, we’re reinvesting it into uncorrelated assets, relative to where their business exposure is.” Adam elaborated.
Adam shared how Austin in particular has benefited from the increase in tech entrepreneurs over his seven years in the city. To embellish, when it came to Texas based deals, he explained how these were more likely to be in real estate rather than in growth equity.
Not to be confused with the endowment model
They look at the long term at SineCera Capital. The firm focuses on diversification. Debt investments or real estate can give monthly returns. However, Adam explained, the yield might not be as compelling after the tax is deducted. He shared how some clients prefer to invest in funds while others allocate to growth equity or even venture capital. Importantly, he sees the role of SineCera Capital as one of a fiduciary.
Today there is a growing demand to follow the endowment model on the market. Adam shared how this strategy often needs a much longer term approach. Having 10% in venture capital or private equity or both, can be a long term commitment. Something that people often don’t realize.
“It’s a challenge to get an endowment allocation into a real person’s strategy. But our goal is to find that happy balance where they can attain this,” Adam explained.
What about digital assets?
Adam explained how SineCera Capital had little exposure to digital assets. He sees them more as an aspirational investment. Albeit an alternative investment all the same.
“Our objective is to ask ‘What goals do you have for your family? Generate current income? Preserve and protect capital? Provide philanthropic opportunities? Manage risk? Succession planning?’ And we take all this into consideration to form the best strategy,” Adam elaborated. “If you can carve a place for that aspirational component, that’s fine. In our view it helps our clients stay engaged and have conviction in the market.”
The other fundamental problem with a digital assets investment strategy is the lack of historic data. SineCera Capital’s core public strategy focuses on risk parity, which allocates to inflation-hedging assets. Crypto’s role as an inflation hedge has been unpredictable. Much less predictable than other assets like gold.
Is the 60/40 portfolio dead?
In a recent story on #DisruptionBanking we discussed with Eric Satz of Alto IRA how the 60/40 portfolio is dead. Investing in public markets is still important though, Adam believes.
We discussed with Adam how over the last two years concerns over the heightened volatility in the markets has increased the need for communication with clients. The firm was in touch with their clients more than ever during the last few quarters as clients needed to talk about more than just investment performance. More importantly, they needed to talk about goal performance.
“It’s about making sure clients are focused and thinking about their investments in the right way. It’s not just about what’s going on in the market.”
As for its public market strategy, SineCera Capital seeks to balance risk exposure across broad-based market ETFs. The firm is also very careful to communicate to clients both the costs related to investments as well as the overall tax exposure.
“We wouldn’t make a wholesale change to the portfolio of any new clients, as that would incur a large tax bill. We prefer to take things stage by stage. Which is how we get our clients to an appropriate allocation over time,” Adam explained. “Costs are a huge component in our discussions with clients.”
Even the biggest funds have had mixed results in the last years
It doesn’t take long to find examples of bad investments made by even the best portfolio managers. Consider the multi-billion dollar investments of the Saudi Public Investment Fund into stocks of WeWork. Or the exposure that the Ontario Teachers Pension Fund had to FTX. Sometimes what looks like a sure bet can turn into a bad investment decision.
Adam explained how it is important to “operate within your means.” However, he also explained how clients like to discuss what investments institutional investors and other family offices are making. How they allocate their investments.
Ultra-high-net-worth families are approached from multiple angles with various investment opportunities all the time. Adam sees the role of SineCera Capital as one where the “wants” of the clients are tempered by an appropriate discussion about asset allocation. The important thing is to help the clients focus on the “needs” and not the “wants.” And to help them be able to say “No.”
“If a client is over allocated in a certain asset class we provide them with the ‘Professional “No,’” Adam elaborated. “Our clients appreciate this approach as it allows them to maintain relationships with those seeking capital from them without having to write a cheque to do so.”
Changing from a low inflation to a high inflation investment strategy
Recent changes in the roles of Ray Dalio at Bridgewater or Cathie Wood at ARK Investments have shown how the markets are changing. But not only markets. The way that portfolio managers approach the markets today needs to accommodate the rise in inflation and interest rates. Something that has not happened since the global financial crisis.
Adam explained how one of the key investment strategies at SineCera Capital is the All-Weather Core. An investment strategy that Ray Dalio helped to popularize over the last ten years.
“Investors are going to face macro headwinds that haven’t existed since 2009. We’ve been in the low interest rate, zero interest rate environment that benefits certain asset classes and sectors more than others,” Adam explained.
Going forward into 2023 family offices and investors need a confident and assertive financial partner. A partner that looks at the long term. One that can put market turbulence into context. And one that can help say ‘No’ when necessary.
Most importantly though, is how today the investment landscape in Texas, and specifically in Austin, is changing. The increase in ‘transplants’ coming in from other parts of the U.S. is increasing the maturity of an already well represented financial ecosystem. And going forward, the new challenges that market uncertainty, inflation and geopolitical tensions have created means that you need a partner you can really trust.
Author: Andy Samu