Wharton Global Family Alliance

Wharton GlobalFamily Alliance2020 Family OfficeBenchmarking ReportExecutive SummaryRaphael AmitThe Wharton SchoolUniversity of PennsylvaniaCopyright 2021 by the Wharton School, University of Pennsylvaniahttps://wgfa.wharton.upenn.edu/

AcknowledgmentsWe thank the team at the Wharton GlobalFamily Alliance, particularly Amy Weiss andChaim Fishman for their outstanding support.We are indebted to Laird Pendleton, our partnerat the CCC Alliance, for his insights and supportthroughout this project.

Executive SummaryIntroductionThe Wharton GlobalFamily AllianceThe Wharton Global Family Alliance 2020 FamilyOffice Benchmarking Report is one in a series ofreports from the Wharton Global Family Alliance.The detailed 2020 report regarding the findings ofthe survey is distributed exclusively to Family Officesthat completed the survey. This summary of the2020 Benchmarking Report is presented to sharemore widely some of the insights gained on currentpractices of Family Offices around the world. This isthe fifth detailed benchmarking survey undertakenby the Wharton Global Family Alliance in order todevelop a better understanding of the performancedrivers of Family Offices, and to share that emergingknowledge with participating families in a mannerthat preserves anonymity and confidentiality.Established in 2004, the Wharton Global FamilyAlliance (WGFA) is a unique academic-familybusiness partnership established to create anddisseminate actionable knowledge that is helpful,timely, and important to substantial families and totheir businesses through: Knowledge creation and thought leadershipthrough research (creating cutting edge research andpublishing it in academic and practitioner journals). Knowledge dissemination and transfer throughteaching (to convey knowledge across generationsthrough a range of degree and non-degreecustomized executive programs). Outreach to bring influential global familiestogether to discuss mutual interests and problems aswell as share best practices.The WGFA provides a forum for global familiesthat control substantial enterprises and resourcesto engage with leading faculty researchers at theWharton School at the University of Pennsylvania.WGFA researchers focus on key issues affectingsubstantial families, their family businesses, andtheir related entities such as the family office and thefamily foundation, combining two highly credibleand complementary sources of insight – the practicalexpertise of highly successful global families andrigorous scholarly analysis from Wharton researchers.1EXECUTIVE SUMMARYCOPYRIGHT 2021 BY THE WHARTON SCHOOL,UNIVERSITY OF PENNSYLVANIA

Executive SummaryThe 2020 Benchmarking SurveyDescriptive Analysis of the2020 Family Office SampleThe online survey instrument was developed andtested in Q2 2020. It was distributed in Q3 2020both directly to Family Offices and through a selectnumber of firms who have Family Office clients.While the 2020 sample of Family Offices that areexamined in this report covers 18 countries, themajority (70%) are headquartered in the Americasregion which includes North, Central, and SouthAmerica; 19% are in EMEA; and 11% are spreadacross the Rest of the World (RoW). A more evengeographic distribution of Family Office respondentswould have enabled a meaningful regionalcomparison, which cannot be done in light of thisyear’s sample.The survey includes the following 10 sections:A. Family Office Detailed Background DataB. Family Office Investment Objectivesand Asset ManagementC. Family Office Risk and Return MeasurementsD. Family Office GovernanceE. Family Office DocumentationF.Family Office ProcessesG. Family Office CommunicationsH. Family Office Human Resources Practices I.Family Office Educationand Succession PlanningJ.Family Office Information TechnologyWith respect to the Assets Under Management(AUM) that are managed by the Family Offices in oursample, 42% have greater than 1 billion, while 20%have between 500 million to 1 billion; and 34%have AUM between 100 million and 500 million.Regretfully, 3% of respondents are smaller or did notaddress this question, a fact that is reflected in theanalysis that follows.62% of the 2020 sample families own, manage, and/or control one or more businesses in addition to thewealth that is managed by their Family Office. Thisrepresents an increase as compared to 2018 surveyrespondents.Each section contains a set of detailed questions onissues that are of concern to principals and managersof Family Offices. The survey was designed with aview to maintaining a balance between obtaining ahigh level of detailed information and ensuring thatthe survey’s overall length was manageable.2EXECUTIVE SUMMARYCOPYRIGHT 2021 BY THE WHARTON SCHOOL,UNIVERSITY OF PENNSYLVANIA

Executive SummaryKey ObservationsFamily Office activitiesAsset allocation trendsWhile Family Offices are anchored in investmentmanagement activities, integrating family-relatedand administrative activities into a holistic familywealth management service is critical. Our correlationanalysis points to the strong association between thefinancial performance of the AUM and the range ofsupplemental services provided by the Family Office,highlighting the importance of non-investmentmanagement activities such as estate planning andeducation.Wealth preservation is the single most importantinvestment objective of Family Offices. Public equityand private equity are the top two assets classes thataccount for the majority of asset allocation in oursample. Interestingly, we note that COVID-19 didnot bring about a material change in asset allocationdespite substantial uncertainty caused by thepandemic.About half of the Family Offices in our sample servebetween 1-3 households, about a quarter serve 4-6households, and the balance of Family Offices in oursample serve more than 7 households. About a thirdof the sample Family Offices have 4-7 professionalswhile about 42% employ more than 8 professionals.Comparing these results to past surveys, we notethat this represents an increase in professional staffmembers over previous years, which reflects the trendto internalize such activities as asset allocation, riskmanagement and estate planning that previously havebeen outsourced.Cost breakdownActivity Prevalence3EXECUTIVE SUMMARYExpense distribution is weighted towards investments,with 67% of Family Office expenses allocated ininvestment related activities. About half of theinvestment related expenses and close to two-thirdsof non-investment related expenses are incurred inhouse. We note that when comparing these results topast surveys, the share of investment related expensesout of total expense has declined indicating greaterattention by Family Offices to non-investment relatedactivities.COPYRIGHT 2021 BY THE WHARTON SCHOOL,UNIVERSITY OF PENNSYLVANIA

Executive SummaryFinancial performanceFintechThe most prevalent measure that Family Officestend to refer to is actual three-year average annualnet returns after fees and taxes. Post COVID-19expectations with respect to future returns based onaverage annual net return over three years indicatesubstantial confidence and optimism: 44% ofrespondents expect to realize 4-6% net returns ontheir investment portfolios, 32% of Family Officesexpect returns to be in the range of 7-9%, and 18%expect to realize returns in excess of 10%.1 Thesereturn expectations are substantially higher thanexpectations we recorded in past surveys.Ease of use and adaptability to the customer’scontext and confidentiality are the primary criteriaused when selecting a technology platform. RecentFinancial Technology (FinTech) developments arefinding their way into Family Offices through arange of applications, some of which are cloudbased, that enhance capabilities and reduce costs inaccounting management, tailored report composition,and handheld display capabilities. While 60% ofFamily Offices in our sample have some in-house ITcapabilities, over 90% outsource to vendors for helpwith managing IT and cybersecurity protocols whichcover every aspect of the operations of the FamilyOffice. While close to 100% of Family Offices reportthat their enterprise data cybersecurity is outsourcedto vendors, only 20% report that they believe thattheir cybersecurity systems are resilient.1 The balance of firms expect less than 6% average three-year nominal net portfolio return.4EXECUTIVE SUMMARYCOPYRIGHT 2021 BY THE WHARTON SCHOOL,UNIVERSITY OF PENNSYLVANIA

Executive SummaryPerformance DriversThis year’s study categorizes Family Offices based ontheir actual five-year average annual net return. FamilyOffices with five-year actual average annual net returngreater than 10% are categorized as high-performers(against which we benchmark other Family Offices),while Family Offices with five-year actual averageannual net return less than or equal to 10% aredefined as low-performers.First, we observe that high-performers are FamilyOffices that are engaged in a broader range ofactivities than low-performers as depicted in the figurebelow. This observation highlights the importantcomplementarity among investment managementand non-investment management activities of FamilyOffices.With respect to regional distribution of assets, wenote that relative to low-performers, high-performingFamily Offices in our sample invest more in BRICand other emerging markets as well as in opportunityzones or other tax deferred strategies. Highperforming Family Offices in collaboration with otherFamily Offices make direct private equity investmentsmore frequently than low-performers, but they alsostaff up with PE professionals more frequently thanlow-performers. These observations are consistentwith past survey results.While there are some differences in the relativeimportance of investment, family, and administrativeactivities between low- and high-performing FamilyOffices, high-performers review asset allocationmore frequently, monitor external managers morefrequently, have more comprehensive governancemechanisms and related policies, keep familymembers informed about investment performanceand other activities more frequently and in greaterdetail, pay more attention to quantitatively measuredperformance, and use hedging strategies designedto mitigate perceived capital market risks morefrequently than low-performing Family Offices.Importantly, high-performing Family Offices engagefamily members in educational activities much morefrequently than low-performing Family Offices in oursample.ACTIVITY PREVALENCEHigh-performers have internalized Family Officeactivities to a greater extent than low-performers.They also allocate a greater fraction of theirinvestment related and non-investment relatedexpenses to in-house expenses, as compared to lowperformers. Low-performers outsourced investmentactivities more frequently and spent a greater fractionof their expenses on investment management relativeto high-performers. Again, these observations areconsistent with past surveys and are indicative of atrend that characterizes high-performers.5EXECUTIVE SUMMARYCOPYRIGHT 2021 BY THE WHARTON SCHOOL,UNIVERSITY OF PENNSYLVANIA

Wharton Global Family AllianceProf. Raphael AmitThe Marie and Joseph Melone ProfessorAcademic Director and Chairman of the ExecutiveCommittee, The Wharton Global Family AllianceThe Wharton SchoolUniversity of Pennsylvania3620 Locust WalkPhiladelphia PA 19104-6370 1 215.898.7731amit@wharton.upenn.edu

A. Family Office Detailed Background Data B. Family Office Investment Objectives and Asset Management C. Family Office Risk and Return Measurements D. Family Office Governance E. Family Office Documentation F. Family Office Processes G. Family Office Communications H. Family Office Human Resources Practices I. Family Office Education and .