In a conversation ranging from direct investing, to the value of Monday morning meetings, and the lessons from her late father, a senior figure at Bernstein Private Wealth Management in the US talks about what influences family offices today, and why.

Direct investing may have been knocked back somewhat by rising interest rates and the cooling effect they’re designed for, but rate hikes have affected other investment models too, Bernstein Private Wealth Management says.

In the past decade, there has been plenty of talk about how single-family offices have been getting into direct investing, avoiding the fees involved in a fund-based approach, and rolling up their sleeves to make decisions directly. This news service has heard that enthusiasm remains at elevated levels. An argument one hears is that families who made their fortunes in a specific sector such as tech or real estate are ideally placed to invest in it. On the other side, they need to avoid concentration of risk or the hubris of over-confidence in their own ability.

According to some family offices, however, it looks as though the direct approach has waned, Chelsea Smith, senior national director, family office services, Bernstein Private Wealth Management, told this news service.

“The split now between holding of funds and direct investing [within the private market space] is now 80/20 per cent [for a handful of families], whereas it was more like 50/50 before the rises to interest rates and disruptions caused by the pandemic,” Smith told Family Wealth Report in a meeting at her offices in Manhattan.

Rate rises are one part of the mix; another element may be an appreciation that the due diligence and expertise needed to invest directly is more of an obstacle than some family offices first thought. 

Smith said that these considerations aren’t primarily about how many assets a family office has. Bigger does not necessarily equate to more expertise.

“It has less to do with size and more with the principal’s/staff’s expertise in private equity, deep knowledge in a certain sector, or certainly investment banking,” Smith said. “For instance, I recently spoke to a non-family member CIO of a $300 million family office who said he could price deals in his sleep, and thus was very comfortable investing directly but, more importantly, he had built up a network of trusted relationships that fed him deal flow, and he had one analyst. But he admitted that it is still hard, and he has not always gotten it right.”

Elaborating on certain metrics, she continued: “Offices that we have observed that have significant resources to buy, build, or acquire expertise, relationships, and a due diligence team tend to have $1 billion-plus in assets.”

Smith brings plenty of expertise of her own to the job. She’s been at Bernstein for two years and nine months, and in her current role since September 2021. She was previously a senior vice president at Northern Trust Asset Management, and worked at firms such as Allstate Investments and Goldman Sachs.

Let’s talk about interest rates
Smith said that all deal-making, not just direct investing, was affected by rises in US interest rates.

“The rate hikes helped illuminate and remind family offices of the risks of direct private investing and that valuation resets can occur in private markets too. It forced family offices to access how they are staffed to source deals and, more importantly, perform the necessary due diligence. It also highlighted the benefits of funds, in which they do not have to deploy cash immediately all upfront, especially in periods of uncertainty,” Smith said. 

“I know of a family, for example, who faced a sizable loss with a company that was sourced by another family member’s friend, which led to the creation of an investment committee that included a non-family member with private equity experience and they voted to drastically lower their allocation to directs to allow for only 10 per cent,” Smith said.

Some areas of private market investing have been hit hard, especially venture capital. According to advisory and accountancy firm EisnerAmper (January 17, 2024): "In 2023, there was $170.6 billion of VC invested in 15,766 deals, which was well below the $242.2 billion in VC invested across 17,592 deals in 2022. In fact, 2023 deal values were about $177 billion below the record levels achieved in 2021."

FWR's conversation with Smith did not just touch investment. There was also time to reflect on how family offices take decisions, and what approaches work.

Rate hikes, along with inflation and the impact of the pandemic have focused family offices on how to make decisions in times of crisis, Smith said. 

“For example, is it [decision-making] committee-based?” she said. “They [families] are finally applying business tactics to their family.” 

Elaborating, she said these approaches involved steps such as Monday morning meetings. “Effective communication is the cornerstone of any successful organization, and scheduling regular meetings for employees is crucial in reinforcing the purpose and values of the business, introducing new initiatives and ideas, and providing a platform for concerns and feedback,” Smith said. “This holds true not only for corporate leaders but also for family offices, where regular meetings can help align family members' goals and values, ensure transparency and accountability, and foster a culture of open communication and collaboration.”

Another approach is the office holiday party, she said: “Office parties are an important opportunity for businesses to foster a sense of community and boost employee morale. Similarly, family offices can benefit from organizing regular gatherings and events that bring family members together for fun. These events can help strengthen family bonds, build trust and communication, and create a shared sense of purpose and identity.”

Boards and committees are important  
“Family offices can benefit from establishing a board or committee to oversee family governance, investment decisions, and other important matters. This can help ensure that family members have a voice in decision-making, promote transparency and accountability, and provide a forum for discussing and resolving conflicts,” Smith said.  

Smith talked about how her firm gives families the tools so they can choose how they want to deal with Bernstein. 

“We are resonating with family offices who choose to outsource everything, we can provide a combination of expertise of things that we do well ourselves, wealth management, tax planning, as well as provide trusted partnerships that we have carefully vetted like behavior health, cybersecurity, art, for instance,” she said. 

“It’s the acknowledgment that living with wealth is just as important as managing wealth. It is why we host summits to bring families and their staff to discuss topics like isolation and rising gen education so they can learn from each other. If a rising gen member is suffering with depression, how can he/she learn to be stewards of capital, getting help first is what one family shared that they did.”

Definitions 
As readers of FWR know, the definition of “family office” can be fuzzy, creating difficulties in terms of benchmarking performance, costs and value offerings. (There have been attempts to look for common qualities, examined in this book, for example, by Edward Marshall and Bill Woodson.)

“At Bernstein Private Wealth Management, we define a family office as a family entity driven by a common purpose across generations,” said Smith. “Families should not forget the word `family’ in the concept of a family office. What is going to be the psychological glue that binds the family together in good and challenging times, across multiple generations? What is this all for? How do you ensure healthy family dynamics? How are you going to make decisions together? We help families think about this and articulate it in addition to other services mentioned above,” she said.

Talk of family has emotional as well as intellectual power for Smith. 

“My father, Frank Latimer, was a curious Harvard MBA educated leader who thrived in general management and finance and championed women colleagues the same as he did for his triplet daughters,” she said.

“At his funeral, I gave my reflections, and the president of his company also gave some – they were remarkably similar: who he was with us, he showed up fully himself at work, even the tired corny jokes he would tell! While in the air force and stationed in Taiwan (where we were born), he learned how to read, write, and speak Mandarin in his 20s and was determined to keep up his skills. Chinese newspapers would be delivered once a month and we frequented Asian restaurants. His ability to speak the language helped him leapfrog his competition,” she continued.

“However, as brilliant as he was, he thought he had time and struggled to think about life after his death – he died unexpectedly at 62 in 2011, and without a plan. 

“My dad inspires me to lead with curiosity and determination and make sure families have plans. My purpose is to make sure none of our clients die or live without plans. And we are working the hardest to speak the `language’ of our clients and prospects by listening."