Family Office

What is a family office?

Family office (a family's wealth management organisation) is an organisation that manages and invests the assets of one or more very wealthy families. It also bundles the tasks that go with this, such as reporting, liquidity planning and the coordination of tax and legal advice. Besides listed investments, real estate and funds, many family offices also invest directly in unlisted companies. Common abbreviations are SFO for single family office and MFO for multi family office.

In funding rounds, family offices act as direct investors that take shares in the company themselves. They also take part as co-investors alongside funds and as investors in venture capital and private equity funds. In company sales and succession, they come into consideration as buyers of majority or minority stakes. Like that of any other investor, their investment is governed by the participation agreement, the shareholders' agreement or the share purchase agreement. Particularities arise from the decision-making routes, the investment horizon and the structure of the family office.

Forms and structures of a family office

• Single family office: works exclusively for one family, usually with its own team and tailored to that family's goals.
• Multi family office: serves several families, often as a service provider with standardised processes. It invests the assets in line with the guidelines of each family and often works in a similar way to an asset manager.
• Embedded family office: The wealth management is part of the family business or its holding company and is handled alongside other duties by its employees.

In Germany, the assets are often held in an asset-managing GmbH & Co. KG (a limited partnership with a GmbH as general partner), in a holding GmbH (holding structure) or in a family foundation. The family office itself is often a separate company that takes over the administration. Whether it needs a licence from the financial supervisory authority depends on whether it provides financial services to third parties; this is more often the case for multi family offices than for single family offices.

Investment horizon and decision-making routes

A family office invests its own assets and does not have to return them to investors after a fixed term. It can therefore hold investments for longer than a fund and is not bound to any particular time of sale. This independence from the fund cycle is often described as patient capital.

The long horizon has limits. In a company in which funds also hold shares, the same drag-along obligations (drag-along rights) generally apply to the family office as to all investors. If the agreed majority resolves on a sale, it must sell its shares along with the others on the same terms. It can therefore generally not prevent such a sale on its own. Some family offices expect regular distributions, which can conflict with reinvesting all funds into growth.

Decision-making routes differ greatly. Professionally organised family offices have an investment team and an investment committee with fixed criteria, while in others the family decides itself. The review can accordingly be quick or protracted, and its thoroughness is often not inferior to that of a fund.

Family offices in funding rounds and company sales

In rounds from Series A onwards, family offices usually take part as a co-investor alongside a lead investor, whose review and valuation they rely on. More rarely, they lead rounds themselves or take a large part of the volume as an anchor investor. Their contribution beyond capital often lies in the family's network, for example in contacts with industrial companies, customers and partners in the German Mittelstand (small and medium-sized businesses).

Because of their long horizon, family offices are also sought after as buyers of existing shares. If early investors or business angels want to exit, a family office can take over their shares through a secondary sale without the company raising new capital. In company sales and in business succession, they appear as buyers who want to hold a company without a fixed resale date.

Tax treatment of a family office's investments

If the family office holds investments through a corporation, gains from the disposal of shares in another corporation are 95% tax-exempt under Section 8b of the German Corporation Tax Act (KStG). The remaining 5% are treated as non-deductible business expenses. Profit distributions from investments of less than 10% at the beginning of the calendar year, by contrast, are subject to corporation tax (portfolio dividends). For minority investments in growth companies that rarely distribute profits, the disposal gain is usually the main focus.

If, on the other hand, a partnership such as the GmbH & Co. KG holds the investment, the profit is attributed to its partners for income tax and corporation tax purposes and taxed according to their circumstances. This does not apply if the company has opted to be taxed like a corporation (Section 1a KStG). Which structure is favourable depends on the family, the assets and the investment planning.

Practical example: a family office as co-investor in a Series B

A software company for the logistics industry raises EUR 15 million in a Series B at a pre-money valuation of EUR 45 million. A growth fund leads the round with EUR 9 million. The family office of an entrepreneurial family from the freight forwarding sector takes EUR 4 million, and existing investors take EUR 2 million. In addition, the family office buys shares from two business angels for EUR 1 million, for simplicity at the round price.

• Valuation after the round: EUR 45 million + EUR 15 million = EUR 60 million
• Family office's share from the capital increase: EUR 4 million divided by EUR 60 million = around 6.7%
• Share from the purchase: EUR 1 million divided by EUR 60 million = around 1.7%
• Total share: EUR 5 million divided by EUR 60 million = around 8.3%
• Growth fund's share: EUR 9 million divided by EUR 60 million = 15%

The family office forgoes a seat on the advisory board but receives information rights and a tag-along right. Because it wants to hold for the long term, it is additionally agreed that in a sale process it may submit an offer for the other investors' shares. The drag-along obligation remains unaffected, so a sale to third parties is still possible. The purchase of the angels' shares is notarised separately and brings no capital to the company.

Distinction: family office, venture capital, CVC and business angel

• Venture capital: funds with a fixed term that invest their investors' capital and must sell their investments within that term. A family office invests its own assets without such a deadline.
• Corporate venture capital: investments by a corporate group with strategic goals for its business. For a family office, the investment goals of a family come first, even if that family owns a company.
• Angel investor: a private individual who invests personally and usually with smaller amounts. A family office has its own organisation and larger resources.
• Sovereign wealth fund: invests the assets of a state, likewise with a long horizon, but with different goals and on a different scale.

Common mistakes

• Approaching a family office like a fund. The prospect of a sale in a few years often convinces a family office less than a presentation of long-term value development, substance and risk.
• Decision-makers not known. Anyone who does not know whether the investment team, an investment committee or the family decides will plan the timetable of the round incorrectly.
• Long horizon overestimated. Even a patient investor is bound by drag-along obligations and the resolutions of the other shareholders.
• Distribution expectations not clarified. If the family office expects regular income, this conflicts with a plan that directs all funds into growth.
• Thoroughness underestimated. Professional family offices examine figures, contracts and the origin of funds as carefully as funds do.
• Dual role overlooked. If the family office is also a customer or competitor through the family business, the same conflicts of interest arise as with a strategic investor.

Frequently asked questions

How does a single family office differ from a multi family office?

A single family office works for one family only, a multi family office for several. For a company seeking capital, the decision-making route matters most: the single family office decides on the assets of its own family. A multi family office invests in line with the guidelines of the individual families and often needs their approval for a direct investment.

At what level of wealth is a family office of one's own worthwhile?

There is no universally valid threshold. As a rough rule of thumb, because of the fixed costs for team, systems and reporting, a single family office of one's own only pays off from assets in the hundreds of millions. Below that, families more often use a multi family office or have the tasks handled within the family business. Before setting one up, the goals, the family's decision rules, the legal form and a possible licensing requirement need to be clarified.

How much do family offices invest in a funding round?

This depends on the assets and the investment strategy; there are no uniform orders of magnitude. Family offices often set an upper limit per individual investment, which is based on total assets.

Do family offices take a seat on the advisory board?

In some cases. Many are content with information rights and regular dialogue with the management. For larger investments or as lead investor, they demand rights similar to those of a fund.

Do family offices buy entire companies?

Yes, some acquire majority stakes or entire companies, particularly in the context of a succession. They then compete with financial investors and strategic buyers, but often want to hold the company without a fixed resale date.

How does a company reach a family office?

Mostly through personal recommendations and advisers whom the family office knows. Family offices often hardly appear in public and rarely examine unsolicited enquiries.

The Roemer Capital view

We involve family offices in rounds from Series A to C above all where their horizon and their network fit the company. This applies, for example, to business models with a close link to an industry. Before approaching one, we clarify who decides, what return and distribution expectations exist, and whether the family office comes into consideration as a co-investor or as an anchor investor.

In company sales and succession, we include family offices in the selection of potential buyers alongside strategic buyers and financial investors. Where sellers care about the continued existence of the company, a buyer without a fixed resale date can be a criterion in its own right, which we show next to the price when evaluating offers.