Family Office: How to Lay Out in the Primary Market?

Introduction: The positioning of a family office is wealth management. From the perspective of wealth management, it is necessary to clarify value and product logic, and focus on core business. In terms of customer expansion and accumulation, the first step is to establish customer trust and clarify customer positioning, providing precise solutions. In terms of operational investment, it is important to maintain integrity and innovation, and optimize modules. Maintain the logic of value investment and long-termism.

In recent years, the proportion of family offices participating in private equity investment has been increasing year by year, from 60% in 2020 to 77% in 2021. However, the amount of capital is still a minority in the overall LP share.

Over the past three years, after the superposition of various factors, the world is no longer unilaterally optimistic or extremely pessimistic. The complexity has become blurred, evolving from a bipolar to a multipolar situation. Therefore, it is difficult to be a person who understands complex systems, and even masters like Buffett cannot be immune, just like blind people touching an elephant.

As one of the few industries in the market that is not involved in internal strife, family offices need to clarify their own positioning, value, and product logic during the operation and development process. They should focus on core business to better obtain value returns.

First, clarify the internal functional positioning: Facing uncertainties such as black swans and gray rhinos, family owners and family office CIOs have a higher level and sensitivity than ordinary people. The owner is the chairman who sets the demand indicators, and the CIO is the general manager, who breaks down the demand to complete the indicators. They themselves do not create any value, but only choose the best value.

Secondly, clarify the management positioning: Wealth management, asset management, and investment management are three different industries. Many people think they can do all of them, but in fact, a family office can only do one.

Wealth management is to solve the financial needs of investors from the perspective of investors, including private banks, family offices, and third-party wealth, etc.; Investment management is to manage the operation of enterprises from the perspective of the industry, including enterprises, consulting companies, etc.; Asset management is in the middle, designing financial products, optimizing the allocation of investors and industries, and each type of financial product can only meet the needs of some investors, and can only invest in some types of industries. Including incubators, angels, VC, PE, PIPE, private securities, public, dedicated, FOF, etc.

The positioning of the family office is wealth management, and it must do three things from the perspective of financial management: wealth management, charity, and education.

In fact, 95% of family offices are mainly focused on wealth management. Education is the inheritance issue that connects two generations, and charity is not only one of the methods of tax planning but also a symbol of family status.

Carnegie once said: “To die in great wealth is a disgrace. People will not remember a rich man, but they will remember a philanthropist.” The proportion of charitable assets in China’s GDP is only about 0.1%, and common prosperity may promote an increase in this proportion.

Family trusts, tax planning, law, medical care, immigration, etc., are all means to get closer to customers, and they are themselves transactional and not very difficult.

From a product thinking and customer development perspective, joint family offices need to be clear about the six things not to do and the three unifications and four things not to do.

Six things that joint family offices should not do

1. Do not directly develop products. There are only two possibilities for developing products, either good or bad, and mediocre products are very common. It is generally difficult to surpass investment masters, and if you can surpass investment masters, there is no need to operate a family office. The worst result is that if you do it badly, you will hurt your customers, and it will be more difficult to maintain in the future.
2. Do not develop single products. Each product is a case, and it is necessary to find commonalities. The core point is configuration, not pursuing chance, but pursuing certainty. People who want to be single project LPs are like those who “can make money lying down but insist on standing up to make money”;
3. Do not touch underlying assets. Some people are not satisfied with being LPs and insist on making direct investments. They could make money standing up, but they want to run to make money. In fact, wealth management is too far away from asset management and underlying assets. Do not do unprofessional things unless the customer’s fund size is quite large, otherwise the trial and error cost is too high, and the earnings are not enough to support a professional team.
4. Do not engage in personalized business. It still requires strong professionalism, and you may not have the ability to solve the problem yourself, and the cost of a professional team is too high, resulting in a very low return on investment.
5. Do not engage in detailed business. The position of a family office is a coordinator, a butler, a general manager, and a hub. Professional people do professional things, and the expertise of a family office is to fully understand the needs and intentions of customers and chairmen, and then delegate them;

6. Do not sell products. Selling products is a seller’s mindset of third-party wealth management and private banking, which is a product logic of taking institutional commissions from an asset management perspective. What a family office should do is only understand the owner’s needs and only provide solutions.

Clear positioning

“Unified Family Office Customer Development: Three Unifications”

The three unifications in the customer development of a unified family office are: unified philosophy, unified methods, and unified expectations. The most challenging aspect of a unified family office is customer development. To establish customer trust, it is essential to have a clear customer positioning, understanding that not everyone can become a client of a unified family office. It is necessary to create a customer profile in advance and establish a method for selecting customers – content determines the customer group.

The philosophy must be unified. Regardless of whether it is a bull or bear market, there are times when there are high returns and also times when there are significant losses. Wealth management is about the outcome, not the process. Do not pursue the accidental, but pursue the inevitable. In China’s asset management market, whether it is primary or secondary, whether it is equity or fixed income, there is no shortage of stars, but there is a lack of longevity. Therefore, it is important to unify the inevitable philosophy and maintain a long-term perspective.

The methods must be unified. It is necessary to engage in Fund of Funds (FOF). FOF is not easy to do because of human greed and fear, always looking for the best managers and products. Where are the past stock market gods now, the banners on the city walls change frequently. FOF is not synonymous with low returns, FOF also has aggressive, stable, and conservative types. It is necessary to find a balance point in the human nature of greed and fear.

Expectations must be unified. The chairman’s style and strategy must be unified, and there should be no wavering between conservative, stable, and aggressive types. Set clear Key Performance Indicators (KPIs). Conservative types should not envy others’ high returns, and aggressive types should not look at others’ small retracements, otherwise, the general manager will also be unable to complete the KPIs.

Overall, the investment performance of North American family offices is better than their global peers, with an average investment portfolio return rate of 15%, Europe at 13%, and the Asia-Pacific region at only 10%. To maintain unified expectations, it is first necessary to clarify a unified style and strategy.

Unified philosophy, unified methods, and unified expectations are the foundation for establishing customer trust. In addition, when accurately developing customers, it is also necessary to be clear about the four “do nots”.

Four Essential Elements for Client Development in Family Offices

1. Don’t fear losing clients. Focus on a balanced approach of investment and care. Before developing clients, it is crucial to deeply understand them, accurately diagnose their needs, and provide real-time tracking and feedback on asset management products. Customer loyalty is the most important aspect; clients who leave usually do so because the work was not thorough enough.
2. Don’t rely solely on channels. In the client development process, channels are just an added bonus. It is essential to engage in precise marketing, avoid detours, and directly reach out to clients. Reaching out is easy, but converting them into loyal customers is more challenging.
3. Avoid having too many directions. When expanding your client base, do not emphasize all your capabilities, such as asset appreciation, family trust, and tax planning. This approach can confuse clients and create decision-making difficulties. Focus on a single solution and aim for a direct hit.
4. Don’t target clients who are too high in status. It is valuable to have self-awareness and to focus on building relationships with those around you, gradually improving your social circle and reputation. Instead of aiming too high and targeting large families, which can be costly in terms of trust and often have capable individuals who prefer to establish their own Single Family Offices (SFOs).

Joint home to do three, four, six do not

Solution: Stick to the norm and be unconventional, optimize modules.

Wealth management stands above asset management and requires a bird’s eye view, just as asset management stands above investment management. Family offices should stand on the shoulders of asset management giants and avoid getting involved in asset management themselves, as doing so would lead to core competitiveness issues.

Stick to the norm and be unconventional. Sticking to the norm means that large amounts of capital should be invested in products with high liquidity and a high probability of success, based on the logic of value investment and long-termism. For example, secondary equity. Being unconventional means using a small amount of capital to invest in high-odds products, such as angel investment, high-leverage quantitative hedging, etc.

The primary market is evolving too quickly, and few people have the unwavering ability to ensure the success of their investments amidst rapid changes. In essence, it’s all a gamble. The risks are the same, so it’s important to choose early-stage investments with a high margin of safety.

Currently, the largest investors in the primary market are government-guided funds. Most investments are based on the government’s investment demands, and few funds are without the participation of government-guided funds. Although the proportion of family offices participating in private equity investment has been increasing year by year, from 60% in 2020 to 77% in 2021, the amount of money involved is still relatively small.

The triangle model of the secondary market is: professionalism, diversification, and time. By adhering to these three points, one can enjoy compound interest. Value investment is against human nature; when others are greedy, I am fearful, and when others are fearful, I am greedy. It’s easy to say but difficult to do. Those who can truly achieve this may become the next Buffett.

The world’s smartest brains and fastest computers are all in the secondary stock market. A single private equity server in China has the computing power equivalent to 250,000 personal computers, making it incomparable to retail investors.

As for real estate and insurance products, they are basic businesses that many family offices can handle, and the market is extremely saturated. A modular optimization approach can be adopted, using an internet-free model to provide more optimized solutions for clients. Breakthroughs can be made in the charging model, and the free form can attract a large number of customers. As for how to be free, artificial intelligence can be used to replace manual methods. AI such as ChatGPT will gradually replace most standardized information and standardized services. Only charge for non-standard advantage solutions, thereby achieving dimensional reduction and impact.

The First Principles of Family Offices – Five Essentials: Slow, Nothing, Subtraction, Humanity, Philosophy

The slow thinking problem-solving approach is step by step, although slow, but it can always rise. Fast thinking is fast, but once a mistake is made, it will regress, eventually returning to the starting point and being reduced to the original form.

The state of no self, there is no product upstream, only customer needs, there is no competitor downstream, only solutions, all asset management institutions are product providers. At present, there are about 1.58 million high-net-worth families, about 105,000 ultra-high-net-worth families, and the total number of family offices in China is only about 2,000-3,000, and there is no competitive edge among peers. It is one of the few industries in China that is not involution, and it is necessary to achieve the state of no self.

Do subtraction, subtract until it cannot be subtracted anymore. Focus on one or two core things and keep doing them, not because of not being greedy, but because there is a greater greed and ambition. Resource endowment determines business logic, and many non-core businesses need to be abandoned in the process, and it is necessary to focus resources. Low expectations are happiness, scarcity is value.

The ultimate solution is a human issue, hitting the soul.

The ultimate form is philosophy and thought. What each family office does is more or less the same, someone else’s honey may be your poison. So it is necessary to form your own investment configuration philosophy and establish a personal brand.

Overall, the family office is one of the few industries in the market that is not involution, and it is necessary to clarify its own positioning, value, and product logic, aiming at the core business. In terms of customer expansion and accumulation, it is first necessary to establish customer trust and clarify customer positioning, providing precise solutions. In operation and investment, it is necessary to maintain the value investment logic and long-termism, and to be unconventional while adhering to the principles, and to optimize the modules. The family office is not a product logic that can be achieved in one step, and it needs to be polished step by step, focus on resources, build core businesses, and at the same time improve the brand and increase value.