GPs, Raising Capital? Ask These Questions When Approaching Multi-Family Offices

Time is the most precious commodity of every fundraising campaign. Fundraising through the RIA/Multi-family office industry can prove opportunistic, but only with a full understanding of the industry nuances.

For General Partners who are fundraising within the Multi-family office space, here are three things to clarify prior to beginning your fundraising efforts:

  1. Is the multi-family office truly a multi-family office?

Marketing a firm as a multi-family office gives the perception that the firm works with the ultra-wealthy. It can provide cache and serve as an instant differentiator. Unfortunately, what defines a multi-family office is not simply whether a client has $1 million or $100 million.

A true multi-family office operates single-family offices for multiple families simultaneously. The only difference between a single-family office and a multi-family office is that multi-family offices benefit from shared expenses. Both operate an outsourced model to ensure no bias and/or conflicts of interest.

Registered Investment Advisors (RIAs) and multi-family offices in name only, generally have a $1 million investable asset minimum, focus on one investment philosophy (either active or passive), and have in-house products, services, and strategies. Multi-family offices have no investable asset minimum (given their focus on the entire wealth of the family), subscribe to numerous investment philosophies, have no in-house products and services, and no in-house investment strategies.

Multi-family offices are completely unencumbered and are driven only to meet the goals and desires of their clients.

 

  1. How does the multi-family office get paid?

The predominant revenue model in the RIA industry creates a stumbling block for most GPs when trying to raise money. Understanding the fee structure of the RIA/multi-family office is a key step in assessing how capital allocation decisions are made and whether capital will be allocated to your fund. 

If the RIA/Multi-family office gets paid by a percentage of assets under management, their incentives are tied to increasing their client’s assets – typically invested in public securities. The greater the amount of assets invested in the stock market, the more the firm gets paid. This model aligns the firm with their clients – but only when it comes to investing in the public markets.

If a client’s assets are invested outside of the public stock/bond markets, the firm doesn’t get compensated. Allocating $3 million into a venture fund means $3 million that won’t be invested into public markets and won’t be “fee eligible.” This can result in a loss of $15,000 -$30,000 in fees depending on the model.

Hopefully, the RIA/Multi-family office does the right thing by the client (and most do) and will assess the appropriateness of each investment opportunity regardless of if it generates fees. However, incentives make it easier to focus on the public markets versus the private markets.

 

  1. How does the firm determine asset allocation?

Most RIAs have a set asset allocation recommendation for their clients, developed by a CIO or an Investment Committee. Individual client portfolios may experience a slight deviation from the mean, but not by much. The firm sets the allocation, and the Advisor/Portfolio Manager manages their clients to that recommended allocation.

A true multi-family office will have wide variations of asset allocation recommendations. It is not uncommon for one family to have a 70% allocation to illiquid assets and for another family to have less than a 30% allocation.

In a single-family office, the asset allocation model is for one family. In a true multi-family office, there are as many asset allocation models as there are families. There is no firm standard. As a result, there is likely to be more opportunities for GPs to raise money from true multi-family offices given the range of different portfolios being managed. 

Time is the most precious commodity of every fundraising campaign. Fundraising through the RIA/Multi-family office industry can prove opportunistic, but only with a full understanding of the industry nuances.

 

About Boston Family Advisors

Boston Family Advisors builds and operates Single-Family Offices for Venture Capital and Private Equity professionals, Entrepreneurs, and those who are building a legacy of wealth.

Each family office is run independently and with complete autonomy. Our ability to leverage the expenses incurred by a typical family office allows our clients to enjoy a single-family office experience at significantly reduced costs. To uphold our fiduciary obligations, we do not accept any form of payment from external advisors.