Considerations for growing family wealth across generations 

Investment governance is the framework that guides your family's investment decisions and oversight. It involves setting out clear roles, responsibilities, and procedures to help ensure that your investment choices align with your family's objectives and risk tolerance. Without proper investment governance, family wealth can be eroded as it passes from one generation to the next.

An effective investment governance model emphasizes diversification by creating a portfolio that includes a variety of asset classes, strategies, and managers. This approach helps mitigate specific asset class and stock concentration risks and allows for a tailored investment strategy that reflects your family's goals. Involving external advisors can also be beneficial, as they may provide valuable insights into performance and investment options, potentially enhancing your decision-making process, while improved reporting practices ensure that family members stay informed and engaged throughout the investment journey.

A well-structured governance framework will help enhance diversification, potentially reduce overall risk and promote a shared understanding of your family's investment objectives. This unity is vital for effective succession planning, helping to ensure that your family's wealth is preserved and managed thoughtfully across generations. We recommend adopting a robust and flexible governance framework that accommodates a range of intergenerational investment goals. As your family evolves over time, the number of stakeholders typically increases, leading to greater governance needs and varying investment philosophies to manage.

Increasing the returns on your investment portfolio can be essential for growing your capital and helping your family maintain intergenerational wealth. To potentially enhance portfolio returns, family offices should consider creating a diversified portfolio that includes not only traditional asset classes but alternative investments as well. When creating a private markets portfolio, it's important to consider the pace at which you plan to build it, as commitment doesn't directly translate to exposure. Developing a strategic plan will be beneficial in determining allocations to diversified private market assets that encompass private equity, private debt, infrastructure, and real estate.

We then recommend helping this strategy by allocating to secondary and co-investment opportunities within the private market spectrum. Secondary investments involve buying and selling existing positions in private market funds, which provides liquidity and access to established portfolios. This approach can help mitigate the J-curve effect – addressing the initial negative returns that often arise from upfront costs in private market investments – by enabling faster capital deployment compared to primary funds. Co-investments, on the other hand, involve investing in a specific company alongside a general partner (GP), allowing you to leverage the GP's knowledge and due diligence, and can help improve the risk/return profile of your portfolio by offering faster exposure through targeted single-company investments.

When allocating to private markets, it’s important to remember that the performance gap between quality and lower quality managers can be significantly greater than that of traditional publicly listed assets. To help improve the likelihood of selecting high-performing managers, we recommend focusing on building lasting relationships, utilizing local research teams, and adopting a disciplined fund selection approach that emphasizes business management, alignment, strategy, and track record. 

Even families with seasoned in-house investment teams may find it helpful to seek external support when expanding their portfolios beyond asset classes they have experience with, or those in which they have in-house expertise. For example, allocating to a diversified hedge fund strategy may increase the burden of manager selection, while moving beyond traditional fixed income to incorporate more dynamic strategies, such as multi-asset credit or securitized assets, adds complexity. The evolution of private market vehicles and platforms has also created challenges related to suitability and due diligence.

When thinking about collaborations, it’s important to choose a collaborator who will act as a trusted advisor for your family. Working with trusted advisors can potentially open doors to established hedge fund managers and ‘hard to access’ private market funds, all while potentially saving you on fees. Ultimately, any collaborator you select should have strong relationships with your current custodian (or support you in selecting one) and the research capabilities needed to present the best implementable strategies to your investment committee.

By thoughtfully navigating each of these areas, your family can potentially not only preserve their wealth but also ensure its growth and sustainability for future generations.