How multifamily offices invest

Multifamily offices manage or coordinate investments for several families, connecting portfolio decisions with each family's spending needs, tax circumstances and long-term goals. Their work can include asset allocation, outside manager selection and portfolio monitoring, while support for direct investments varies by office.

Investment decisions start with the family

A multifamily office, often called an MFO, provides services to multiple families through a shared organization. Investment management may sit alongside tax coordination and estate planning, as well as philanthropy.

An investment process generally begins with understanding what the assets need to support. A family funding regular distributions has different liquidity needs from one investing money it does not expect to spend for years. Existing business interests, property holdings and borrowing also affect the picture.

These considerations can be recorded in an investment policy statement. This document describes objectives, risk limits, liquidity requirements and decision responsibilities. It gives the family and its investment team a reference point when markets change or a new opportunity appears.

Asset allocation sets the portfolio's direction

Asset allocation means dividing a portfolio among categories of investments. These may include public equities, bonds, cash, real estate and private investments. Each category brings different risks, cash flows and access to capital.

Diversification spreads exposure across investments whose results may differ. It cannot prevent every loss. A portfolio can appear varied while depending heavily on the same economic conditions, such as rising property prices or easy access to credit.

Liquidity matters alongside expected returns. Publicly traded assets can generally be sold more readily than private holdings, although market conditions can affect execution. Private funds may require capital contributions over time and restrict withdrawals. An MFO's planning process needs to account for those commitments alongside family spending and other obligations.

Outside managers require ongoing review

An MFO may manage investments internally, appoint outside managers or combine both approaches. The division of work affects who researches investments, executes decisions and monitors results.

Manager due diligence generally examines the people, process, investment terms and operating arrangements behind a strategy. Past returns provide context, but they do not establish what a manager will earn in the future.

• Strategy review considers how a manager expects to generate returns and what could cause losses.
• Operational review examines matters such as custody, valuation and reporting, along with controls.
• Portfolio review considers whether the strategy duplicates existing exposures or creates new concentrations.

Monitoring continues after an allocation. Changes in personnel, investment style, liquidity terms or ownership can alter the original assessment. Performance also needs context, including the risks taken and the role the investment was intended to play.

Direct investment support has limits

A direct investment gives a family an ownership interest in an asset or business without using a pooled fund for that exposure. It can require work on sourcing, financial analysis and legal documents, as well as financing and oversight after the purchase.

Families should therefore distinguish between an office that introduces an opportunity and one that performs diligence, negotiates terms or monitors the investment.

Those responsibilities are separate. Access to a deal does not establish that someone has assessed its suitability for a particular family. Direct holdings can also concentrate risk and tie up capital for an uncertain period. Understanding the office's actual role helps clarify which tasks remain with the family or other advisers.

Fees, incentives and oversight shape implementation

How an office is paid can affect its commercial incentives. An assets under management fee is calculated using the value of assets covered by the agreement. The agreement's treatment of cash, private holdings and assets held elsewhere helps explain how the fee applies across a portfolio.

Investment costs can also include underlying fund expenses and transaction charges. A clear explanation separates the office's fee from costs within the investments.

Duty and oversight also depend on the engagement. Reporting should make responsibilities understandable by showing holdings, performance and costs, along with outstanding commitments. It should also clarify who can approve changes and how the family obtains its data.

FAQs

Do all multifamily offices invest the same way?

No. Their mandates and staffing differ, as does their use of outside managers. The service agreement and investment policy explain the responsibilities assigned to a particular office.

Can an MFO help with direct deals?

Some can, but Richard Wilson says most offer limited support. Introductions and diligence are distinct services, as is ongoing oversight, so the scope needs to be clear.

Does an MFO handle every financial function?

Service scope varies. An office may coordinate with outside tax and legal professionals, as well as investment professionals. Its engagement terms identify what it handles and what remains elsewhere.

Sources

• Family Office Club research database
• Family Office Club research database
• Family Office Club research database
• Family Office Club research database

Related: all guides, the directory, calculators. For events and peer access, see FamilyOffices.com.