For family offices, COVID-19 presents a new challenge, and opportunity
INSIGHT ARTICLE |
As the human and economic toll of the coronavirus mounts, no sector of the economy has been immune from the downturn, and this includes family offices.
Like any industry sector, family offices are facing challenges in managing the crisis. For instance, employees working from home was uncommon in the past because of the cost of technology improvements. But that is no longer an option; the coronavirus outbreak is forcing firms to upgrade systems that allow for working remotely.
At the same time, family offices have a chance to capitalize on opportunities rarely seen in the markets. That’s because this public health emergency, as severe and costly as it is, will eventually pass. Even if other sectors of the economy take longer to recover, the rebound for family offices, which have grown in size and scope over the past decade, could very well come more quickly. It’s all the more reason that family offices need to manage the crisis and prepare for the rare opportunity to make investments at values not seen in years.
Managing a crisis
Depending on the size and scope of the family office, there are a number of factors that need to be considered in navigating these uncertain times.
- Human capital management: As the old saying goes in the investment business, a firm’s most valuable asset goes out the door every night. In family offices, this means placing a priority on taking care of employees and key executives who work in the office handling the administrative, investment, or risk functions. These individuals are critical to making sure the office runs smoothly and is able to handle the family’s needs during times of crisis. If necessary, outsourcing key back-office functions with third-party providers may provide that temporary transition while the office prepares for remote operations. Reviewing and memorializing succession plans will be necessary to prepare for the time when they are activated.
- Liquidity and credit management: Depending on portfolio allocations, alternative investments may have a number of restrictions that will prevent the family from withdrawing capital. Investments with a hedge fund or private equity managers may mandate a lock-up period from when the original investment was made. In addition, investments in fine art, real estate, yachts, private jets or other illiquid assets may take some time to liquidate. Managing both sides of the balance sheet, reviewing budgets and cash flow are all functions that should be monitored. Working with a relationship banker to ensure access to lines of credit or other sources of financing will be important to help the family through these difficult times.
- Information sharing and data management: The financial markets in the past few weeks have led many investors to make irrational decisions based on unverified data. Family offices with complex structures may have issues getting verified, timely data on their investments or businesses. Consider investing in business intelligence tools or hire outside consultants to gain a different perspective that the office would not normally have access to such resources.
- Cybersecurity and technology management: As offices close down to help slow the spread of the virus, confirming the strength of the information technology infrastructure, bandwidth and records management will help reduce any office disruptions as office personnel work from home. Cyber criminals may try to find opportunities to penetrate key reporting systems during this period of vulnerability. In addition, social media platforms could be subject to possible phishing or social engineering campaigns by criminals against family members to gain access to private data. The digital transformation is happening all around us and may encourage some families to move away from the traditional office and convert into a virtual office.
- Business continuity plans, insurance, and regulatory management: In times of crisis, like the spread of the coronavirus, families need to review their disaster recovery plans on how the office will function when the office is closed for an extended period of time. Plans might include where members of the family will safely reside, travel restrictions, initiation of backup plans to outsource all functions of the office to a third party provider, use of private security, or oversight of wealth by an institutional trustee. Also, review insurance coverages in connection with general liability, disaster, life, kidnapping, real estate, investments, personal assets, and data breaches. Family offices registered with regulatory agencies like the Securities and Exchange Commission need to review communication plans and reporting to maintain compliance during this period of disruption. Documented plans regarding communications with outside investors will help facilitate discussions and calm anxiety.
Positioning for the future
A family office that has considered some or all of these factors may be best positioned to be invest in the depressed equity and credit markets.
- Cash is king: According to Bloomberg LP, more than a third of family offices boosted their cash reserves last year as they bet on a global recession in 2020. Family offices are sitting on the sidelines as markets continue to fluctuate, and they will be ready to invest. As credit spreads tighten, family offices might be a good avenue for other businesses looking for liquidity in a down market.
- Lower public market valuations: As equity prices have taken a tumble and financial conditions tighten, families questioning sustainable or impact investing in the past might find the lower market values an attractive opportunity to invest in this space. A 2019 survey completed by UBS reported that the average family office portfolio allocates 19% to sustainability. In that same survey, 25% of family offices globally engaged in impact investing.
- Private direct investing: Families looking to invest in technology and health care businesses might have an opportunity to invest at a lower price compared to before the spread of the virus.
- Generational planning: As interest rates hit record lows, this might be a good opportunity to use estate planning tax techniques to reduce future tax liabilities. In addition, this might be a good time to review the family office governing documents and mission statement, and bring in the younger members in the family to have their fingerprints on office policy. A stabilized family office during times of crisis provides a firm foundation for the next generation to continue for future generations.
This is a good time for family offices to review key policies and procedures. With proper planning, family offices will be well positioned 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. One family office said it best to Bloomberg LP, “There’s no doubt that huge amounts of wealth will be created out of this pandemic.”