The Lure of the Family Office

Art by James Yang

The holy grail is changing. Whereas rising investment talent on the allocation side of the business once aspired to the gilded offices of endowments and foundations, now some are heading to family offices, where multigenerational family politics can take the place of institutional bureaucracies, and where talent might find flexible investment platforms, creative expressions, and longer time horizons.

Family offices are becoming a strong lure for talent within the investment industry, especially as they take on more mission investing and direct investments.

Each year, CIO scours the industry to find NextGens, those who one day will likely be coronated into chief investment officers on the allocation side of the industry. They’re nominated by industry professionals for being rock stars in their own right, and rising stars to watch. Yet over the past few years, we noticed a few more NextGens than usual leaving the folds of their funds and jumping the great divide to family offices. “It is indeed trending,” one told us, “because we’re tired of investing around liabilities. We want to focus on generating returns and funding great investments.”

And so, we decided to dig a bit deeper into what seems to be a burgeoning trend.

That Poaching 1%

There’s been a huge rise in the number of family offices. And there’s also a frenetic need for some money managers to get their assets covered. As wealth becomes more concentrated and globalization creates pockets of prosperity around the world, family offices, established to manage that wealth, have been called one of the fastest-growing investment vehicles in the world. By 2017, there were at least 10,000 single family offices, with at least half of them established in the last 15 years, according to a report by EY and Credit Suisse.

“They started to emerge as career destinations following the 2008 financial crisis but their allure has only accelerated over the past several years, as they are seen as very patient long-term investors rivaling private equity firms where you have the opportunity to invest, but without the considerations of a fund time horizon,” said Renee Neri, partner at Heidrick & Struggles executive search firm.

Becoming a legend in the finance industry can claim most of one’s free time. Many who made it to the top tier have not only neglected their personal lives, they’ve neglected their personal money. And so, in the past decade, they’ve been establishing family offices, often hiring some of the industry’s best recruiters to do the hunting for them.

A tilt is happening, and it often has to do with available jobs: On the corporate side of the industry, top talent is fully aware that the number of corporate jobs at top funds is shrinking, especially for those corporate pension funds headed toward derisking. Family offices’ demand for allocator talent is growing but is competing with other growth areas such as endowments, foundations, direct private equity firms, and OCIOs (outsourced CIO firms).

“We have seen a steady rise in CEO, CIO, and direct PE and fund allocator roles in family offices over last five years both in US and Europe,” said David Barrett, managing partner of investment and wealth management search firm David Barrett Partners.

For Marylin Prince and Jim Houston of the Prince Houston Group recruitment firm, family offices have emerged as one of their active areas of business in the past 18 to 24 months. “We’ve certainly seen an increase in recruiting activity for family offices,” said Houston. Those with experience allocating and direct investing at firms north of $1 billion are becoming “highly sought after.”

Each family is different, with a different set of liquidity needs.

“The expression in the industry is: if you’ve seen one family, you’ve seen one family,” said Linda Mack, founder of Mack International, a recruitment firm specializing in family offices and enterprises. Multigenerational family offices are different from those with new wealth. Midwest offices tend to be more conservative, less active in venture investments. West Coast family offices, because they’re often tech entrepreneurs, are much more deal-oriented and open to illiquid-type investing.

There’s usually a discussion about whether they should bring talent in-house versus continue to outsource, Prince said.

But as personalities often take center stage within families, working for one can also demand a different skillset. You typically will see more turnover and shorter stints in family office environments than in the E&F world.

“You need somebody who not only has the investment acumen, the technical skills, but also the EQ to be able to deal with a wide range of family members, from the most sophisticated, established members of the family to the younger generations who are coming into wealth and learning about what that responsibility entails,” Houston said.

Families of significant wealth often look to the investment staff in their offices to help educate millennials in multigenerational offices. “Family office leaders recognize that empowering a succeeding generation is a lifelong journey, and they devote a fair amount of time counseling younger family members on their social and emotional well-being,” according to Jane Bierwirth, a managing director of RSR Partners, who wrote a white paper on the generational shift of wealth happening among family offices. 

Competition

Almost completely referral-based, recruitment often comes from their own network, as trust within a family is paramount, said Heidrick & Struggles’ Neri. “The trend lines around where you source this talent is very much is derived by the diagnostic of what the family wants to achieve.” At some offices, privacy is often valued almost above all. So much so, that even the names of the family office are often guarded from the press. (Sometimes they truly seem to operate from bat caves.) 

And yet, they offer allocators with natural borne curiosity the flexibility to explore new types of direct investments. They appeal to investors who want to experience a purer form of investing free of the red tape of the bureaucracies often found within other types of investment offices.

Competition for jobs within them is still fierce in hot finance cities such as New York; less fierce for jobs in, say, Springfield, Massachusetts, Bierwirth said. Some NextGens never venture out of big cities, fearing if the job doesn’t work out, they’ll have no parachute and nowhere to land.  

Bierwirth’s advice to the wanna-be family officer is to somehow craft a story to communicate your successful track record of investing—but that can be difficult for the “team investor” who finds it rare to have an individual track record.

Instead of languishing at a stagnant company, she’s seeing investors on both the allocation side and the management side who are trying to get their resumes into family offices.

“The bloom is off the rose at hedge funds,” said Bierwirth, who has been receiving five resumes a day from investors at hedge fund teams. Private equity firm employees are also sending their resumes her way.

“It’s a nicer environment. You’re managing patient capital,” she said.

The next generation of wealth is continuing the tradition of buying operating companies which generated significant wealth for the first generation, Bierwirth said. As a result, they are seeking talent from private equity firms to disintermediate the private equity fund structure with very high fees.

Others seek skillsets outside of their own, Neri said. For example, “an office supporting an entrepreneur with more of a long/short equity investment profile might look for an investor who has more of a credit background to diversify their holdings.”

The Most Attractive Candidates

Those who get hired first are those with solid records of returns.

Some of the most attractive candidates to family offices are those who have been investors, involved in markets, taken risk, surfed the highs and lows of stocks, or invested in performing and underperforming companies, as opposed to those who have grown up in an allocator world just picking money managers. Those who are siloed in one narrow investment sleeve will be of less interest.

Direct private equity investing is often a big focus of family offices. With lofty valuations, the challenge is to find the investor who can find the right opportunities, Mack said. A high-quality track record coming from a private equity shop or a long only or hedge fund type equity shop can speak volumes, according to recruiters.  Long term, those illiquid investments have had historically better performance versus public markets.

Those winning the CIO posts have at least a five-year track record that they can point to as their own. They also have the battle scars from ’08 and ’09 to show they have experience handling a crash. A heart for service to the family is also necessary (which can be an advantage to those seeking to serve one entity only), resourcefulness, and the ability to be an expert generalist, said Mack, from the most strategic investments to tax and computer security issues to finance, accounting, taxes, investment, philanthropy, with the knowledge to ask the right questions and know how things interact. “You have to have the peripheral vision to know when something happens 180 degrees to the left, the three things that will be affected 180 degrees to the right,” Mack said.

Families are looking to see that you can diagnose return streams within various risk parameters, that you can source very broadly and not rely solely on a consultant, that you have access to different money managers and have been able to build up that roster of connections, Neri said.

Other candidates who are recruited are those who gain as wide a range of asset class experience as possible, even if it’s through participating on an investment committee, Houston said. “They’ve gained people leadership, and management experience because CIOs are expected to be able to develop and coach a team, and have direct experience presenting to the investment committee.”

“It’s about doing a really good job, and it’s about paying your dues, networking, and letting people know who you are in a very humbled way. Certainly, having headhunters know who you are is a good thing,” Prince said. In the past, talent searches for endowments, foundations, and family offices were once siloed, but now they are realizing that candidates can cross over, and recruiters are pulling from the large, blended pool of talent, she noted. 

Red Flags

Recruiters’ advice to NextGens? Before making a jump, make sure it’s a cultural or personality fit. Research whether an entire investment staff has left. If there’s a lot of turnover. If a CIO can’t keep his staff. Make sure that as you’re interviewing and meeting with other people around the offices, you are hearing a consistent story, Neri said.  “There will always be a little bit of variability, but there shouldn’t be wild dispersion between what the expectations are.” If there are, that should be a conversation that is evaluated and fully explored beforehand.

 “It’s a story. Listen to the story. If it doesn’t really fit together don’t try to convince yourself,” Neri said.

After you’ve gotten comfortable with the personalities, the family members, and understanding the culture, it’s about matching alignment of investment philosophies and risk taking. Make sure they understand what risk profile they’re asking you for, Barrett said.

Keep in mind that it may increase your salary to work for a family, but the sense of mission isn’t always there. It’s less stable and unpredictable: Families can change their investment needs or commitments or priorities on a whim. There could be a foundation involved with the office, but typically, your job is to get rich people richer. And as wealth filters between the generations, your personality juggling skills will need to sharpen because suddenly you’re not dealing with one person, you’re dealing with three siblings.

In fact, family offices are a bit like hedge funds. They’re very performance-driven but they’re less institutional and less stable than the E&F world.  There’s isn’t the same sense of mission as there could be at a place like Memorial Sloan Kettering, a health system searching for a cure for cancer, or  the W.K Kellogg Foundation, seeking to help children of all backgrounds to thrive.

Although pay might be higher, recruiters don’t see the trend threatening as much of a brain drain as the allure of hedge funds did in the early 2000s. Endowments and foundations have the advantage of having strong missions, and 71% of professionals say they would be willing to take a pay cut to work for a company that has a mission they believe in and shared values, according to a LinkedIn Workplace Culture report.

“There will always be high-quality investment talent that wants to stay in the not-for-profit world. Compensation has gotten to the point where there’s a differential, but you can still do really well and feel really good about yourself,” Barrett said.

Additionally, family offices will be in a better position to attract top talent if there is a governance structure in place that facilitates informed decision-making and candid dialog. “The offices should define the roles and responsibilities of each office executive and the charter for each committee,” Bierwirth said. “Who, within the family or among outside advisers, has control of which assets, and who has the authority to change existing arrangements?”

Editor’s note: Three of the recruiters mentioned in this story will also be present at our CIO Summit on April 21 and 22 at the Harvard Club in New York City.