As real estate returns to favor as an asset class, sourcing investment opportunities is not necessarily the biggest challenge that wealthy families face. The real hurdle is conducting thorough due diligence—but this can be tackled by joining forces with other family offices.
With wealthy families getting richer and families expanding their lives and businesses across borders, the number of family offices across Europe is “exploding,” said Raphaël Eber, partner & continental Europe CEO at the multi-family office Stonehage Fleming, who expects the number of family offices and assets under management to continue to grow over the next 10 years.
In Belgium, there are approximately 50 multi-family offices, according to BNP Paribas Fortis. In Luxembourg, there are roughly 100, according to the country’s financial regulator, the CSSF. As the legal, tax, and regulatory environment gets increasingly complex—illustrated by the end of the UK’s non-dom regime last year—wealthy families are looking to family offices for guidance. The desire to invest in private assets is another factor driving demand for family-office expertise.
Pascal Rapallino, chairman of the Luxembourg Association of Family Offices (LAFO) and partner at Côme Maison Financière, cited two major points of attention when it comes to investing in private assets: risk and liquidity. Strong, thorough, and efficient due diligence is crucial to vet opportunities, he said. Since investing in private markets involves investing in unlisted companies, “you need to have a very well-defined exit strategy or liquidity strategy when you invest. You have to understand very well that the cash will be blocked for the next two to five years.”
The appeal of investing with peers
Rapallino highlighted the importance of diversification. While investing in a managed fund easily offers a diversity of underlying assets, “discussing with our clients and with LAFO members, I would say direct investments, club deals, peer-to-peer investments are a new trend,” he said. “High-net-worth clients are much more confident to invest with other high-net-worth investors. So when you have several wealthy families investing together, that’s a ‘grab’ for them.”
The power of combined resources is an important argument in favor of these approaches. “At the end of the day, if you have ten very wealthy families investing, doing the full due diligence, plus the due diligence performed by the multi-family offices—of course, all of them could be wrong,” said Rapallino. “But in terms of probability, the probability of failure is lower.”
Family offices can deploy money more quickly compared to other players, noted Eber, giving them a competitive advantage. “We don’t need to go through multiple committees and councils. When a family likes an asset and they say, ‘Yes, go for it,’ they can make the decision. It’s their money. So, one family, one asset, one deal.” Still, “From time to time, we have a gathering of two or three or four families for a single asset, because the asset is extremely sizable. But in the end it tends to be club deals.”
Eber added that smaller single-family offices often lack the necessary global reach and expertise, which brings them to multi-family offices that can structure the deals they are looking for.
Collaboration with asset managers
As a result of fundraising challenges in recent years, asset managers are likely to come knocking on the doors of single and multi-family offices. They also work “hand-in-hand” and combine forces. “From time to time, we are co-investors next to a fund for a specific asset allocation,” said Eber. “Say you have a flagship building, and it’s going to be 1 billion euro. You could have a very large asset manager who says: ‘I can put half a billion; you—Stonehage Fleming—can you put up 100 million euro?’ So we are coming next to the asset manager on a direct investment deal.”
For direct and co-investments, family offices can draw upon a network of professionals who work in various asset classes, along with their connections. “The ecosystem is looking for liquidity, so we receive loads of emails on a daily basis with opportunities,” said Eber. “Finding opportunities is not so hard for the time being—we’re no longer in 2021—but it’s more about the time allocation to conduct due diligence, respect the risk-return ratio, and create added value, not added headaches, for our clients. Currently, the challenge is not really on the deal sourcing; it’s more on the due diligence.”
Real estate is back in vogue
Despite recent fluctuations in real estate markets, the asset class remains attractive for family offices to invest in, thanks to their “long-term vision,” said Rapallino. It can be complex to determine the right strategy and type of investment, but “real estate is a key component of a long-term investment strategy,” he argued. “It’s a topic to be checked on a daily basis, because some opportunities will arise in the coming weeks and months, in Luxembourg and Europe in general.” As an example, Côme Maison Financière is focusing on “hôtels particuliers,” historical mansions often seen on chic Parisian streets, transforming them into five-star hotels. Thanks to the development and management of these hotels, he said, “you create value on day one.”
Real estate hasn’t been “the flavor of the day” for the last few years, noted Eber, but it’s coming back. “For the equity part, we would tend to structure real estate direct investments. So we would find some flagship real estate asset in the ‘right’ location—European capitals, or where the wealthy go on holiday—and we structure them on a deal-by-deal basis.” The firm is currently looking at a “massive deal” in Paris. If they manage to buy and transform this building and add shops and offices, “We can sell it at two to three times the price over a time horizon of three to five years.”