08/31/2022

Pasy Wang, first CIO at Cedars-Sinai, Los Angeles

13yrs CalTech, 5yrs PAAMCO, MBA, Columbia, BSEE, UCLA 

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I made my money the old-fashioned way. I was very nice to a wealthy relative right before he died

— Malcolm Forbes

Everyone is chasing family money these days. Andreesen Horowitz, west coast venture capital powerhouse, is the latest institutional investor to create a wealth management arm. Their hook of course is quite tempting, you let us manage your money and there just might be room for you in our next venture fund.

They recently hired Michel Del Buono, formerly of Jordon Park, Makena, and Scion Capital as the new chief investment officer. (Remember Scion Capital and its prescient founder Michael Burry, played by Christian Bale in The Big Short?). Clever devils.

For those family offices able to access the top VC firms, the returns can be impressive. Family portfolios produced an internal rate of return of 24 percent in 2021 according to a survey by Silicon Valley Bank.

Family wealth, that pot of gold

The asset management business is diverse, powerful, and exceptionally profitable. No wonder so many banks, brokers, OCIOs, and RIAs, are clamoring for a piece.

Boston Consulting Group’s Global Asset Management Report 2021 estimated $45 trillion in US institutional and retail assets under management at the end of 2020 with revenues as a share of average AUM at 23.7 bps. That’s well over one-hundred billion dollars.

Taken as a whole, S&P Global IQ calls financials the most profitable of eleven sectors they follow, with a 25.3 percent profit margin in 2021. Energy firms ranked near the bottom by the way at 8.3 percent, though you wouldn’t know it from the howls coming out of Washington.

Ultra-High-Net-Worth (UHNW) families are well aware of the fees and hidden costs attached to wealth management offerings which explains why so many family offices are adding internal investment capabilities.

That’s our job, recruiting chief investment officers for institutions and families.

Leave it to the kids

While family dynamics probably haven’t changed much since Count Leo Nikolaevich Tolstoy wrote his famous line about unhappy families, the modern family investment office has come a long way from 1878 when Anna Karenina was published, adding structure, discipline, and academic rigor to the management of UHNW wealth.

According to Capgemini’s latest wealth report, Top Trends 2022, millennials and gen-X are set to inherit somewhere between $10T to $30T over the next two decades via multigenerational transfers. (Estimates vary widely but they all tally in the trillions)

Some will choose wealth advisors but, in our experience, once a family accumulates over half a billion dollars in investable assets, they start thinking seriously about hiring an investment manager.

That’s when it gets interesting. Each first-gen founder and every multi-generational family has a distinct culture, temperament, and objective. The fit has to be just right between the family and their head of investments.

Hands on, hands off

Most founders and families are inclined to invest in one of two ways, institutionally or opportunistically.

In the most general sense, the institutional, or “endowment style” of investing – with investment policy statements (IPSs), diversification, and risk mitigation – appeals more to gen-two and beyond, while first-gen entrepreneurs, not surprisingly, prefer a hands-on, opportunistic approach, investing directly in any business, security, or private vehicle that catches their eye.

As one highly successful family office client wrote in our last newsletter, “We consider ourselves opportunists rather than allocators; we are not driven by an allocation-based investment policy statement (IPS). So we always want to have sufficient cash (or borrowing capacity) to meet opportunities as they arise.”

Diversification? How boring

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