How family offices are grappling with succession

Family offices are placing increasing emphasis on effective succession planning, as the expansion of their portfolios in size and widening geographical reach poses challenges around how to achieve effective diversification and asset allocation.

This was the message from a group of leading family offices and their advisors at Next Generation Family Offices a session in London at the Sovereign Wealth Fund Institute’s (SWFI) Global Wealth Conference.

Udaya Indrarathna, currently ambassador of Sri Lanka to UAE, served as a senior advisor to the government of Abu Dhabi for five years and has advised many family office members over many years, specialising in the Middle East.

He observed that each generation’s perception is shaped by the circumstances under which their wealth had been accrued.

TRANSITION MANAGEMENT

“Typically, the fortune has been formed by fathers and uncles whose struggles were hard. I see so many complex situations. But often you have the children from three or four brothers and sisters who have not faced the same suffering, so they do not have the same sense of ownership [for the business] as the parents.”

According to Indrarathan, the major challenge facing the first generation of a family office is the anxiety that their sons and daughters may not feel the same sense of responsibility to preserve and grow the family wealth.

The solution to effective integration of subsequent generation, therefore, is planning, informed by open communication. “It is crucial to create a strategic plan for the family, to divide responsibility,” he said.

To feel empowered and engaged the new generation must be given responsibility and that means a clearly defined career path, he observed. “And it’s the founder generation that has to create that path for them.”

Dipika Patel, chairwoman of the Patel Family Office, which manages $3 billion worth of assets across housing, hospitality, healthcare, the energy transition and environmental science, said that the start of her involvement in the family business was challenging.

“When I came out of my MBA, the challenges were that my points were never really listened to. It was hard for [the generation above] to absorb what I was saying,” she said.

Patel is the third generation of a family whose fortune was amassed initially by her grandfather, who migrated from India to the UK in the 1950s. Later, her father moved the family to the US, expanding its businesses there. Patel has now settled in London.

“As an individual, it was hard to evolve without the support of the generation above to provide the finance to back my decisions,” she said.

NEW IDEAS

Patel emphasised the value that the generation below her will bring to a fast-changing global business environment in which the family’s businesses and investments exist.

“I look at implementations of new technology required to allow us to be a global company today,” she said, adding that existing generations rely on those coming through to provide the insight on current trends, most significantly around technology

But she expressed her concern at the attitudes that the generation below her sometimes show.

“I’m already worried: my grandfather had a huge challenge, as did my father, and I’ve faced a struggle. But I have a concern that the next generation feels a sense of entitlement, there is a degree of irresponsibility,” she said.

Mohamed Al Fahim - who sits on the board of the Al Fahim Family Office, one of the UAE’s most successful family offices with AUM in the several billions - said that, today, a member of the third generation entering a family business such as a family office, faced a distinctly different set of challenges to the generation before.

“The third generation is the new team that studied abroad and came back, with new ideas – technology ideas and business ideas. In this respect, the experience is different from the traditional business plan test that was faced by their fathers or uncles,” he said.

GENERATION GAP

In the case of his family, the current generation had faced resistance from older members of the family around new ideas, such as the application of technology. But where a proof of concept was demonstrated, ideas had been incorporated.

“Yes, finally [ideas] were embraced, but it was new for them – it was a challenge for that second generation to understand the application of technology, for example. [My generation] had to prove a point but when the previous generation realised there was some kind of synergy, they were receptive.”

Edward Longhurst-Pierce, director of engagment and partnerships at  SWFI, who moderated the session, noted that the expertise brought by the next generation in a family office could make a significant contribution to securing its long-term future, by assimilating the new trends - notably technology and ESG.

But integrating the competing interests of multiple generations, or even members of the same generation, could be challenging. He noted that different generations had different appetites for risk, with interests that may be trained towards different industries, sectors, or scales of business.

“These may not be straightforward to combine. Ensuring that all family members are listened to can mean that diversification isn’t always easy,” he said, adding that addressing these challenges was necessary to create a successful transition plan for the future.