We are now well passed the credit crunch of 2008
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By Steffianna Claiden, Family Office Review, 01 March 2013
Wealth Creation: Family Office Has Critical Role in 2013 We are now well past the credit crunch of 2008. Five years on, it would be rational to believe the economy would have turned around at this point. However, it feels like we are stuck in interminable second gear, unable to find third gear to get the markets, employment, and all things related speeding smoothly along the road of prosperity again.
What’s going wrong? After listening to many experts discussing this hot topic, I have some ideas. Allow me attempt to provide an answer, after which I will suggest the way forward.
I had the privilege of meeting with Israeli economist Dr Frank Shostak of Swiss-based research firm AAS in London recently. Dr Shostak has a marvellous knack for simplifying the issue. He explains economics elegantly, and in terms of human impact, not abstract concepts like GNP or guns and butter.
Production, I learned from him, boils down to two categories – wealth-creating stuff (stuff is my word) and non-wealth-creating stuff. The wealth-creating stuff contributes to the pool of real funding that the economy revolves around and depends upon, and the non-wealth-creating stuff does not contribute to it. This sets up the boom and bust cycle. When the pool of real funding grows, times are good and then more of the non-wealth-creating stuff gets produced. This is not sustainable as it unbalances the equation of “something” being produced and “something” being consumed, because it introduces “nothing” being produced yet “something” being consumed. The bust cycles naturally correct this phenomenon.
Which brings us to examining a spanner in the economic works: quantative-easing, or QE as it is commonly known. To prop up the economy and control public panic, the central banks have two primary mechanisms at their disposal: the interest rate and the ability to print money (to wit, QE). QE does not solve the problems it is meant to. It puts money in the hands of the banks, which do not lend it in difficult times, so ultimately QE does not reach the places (small to medium businesses in need of capital) where it could break the logjam. It does not really circulate and truly make an impact.
At the risk of oversimplifying, I believe there is a way out of the gridlock – the “patient capital” resting with the family offices. This concept I learned about from Francois de Visscher, head of de Visscher & Co, based in Greenwich, Connecticut. De Visscher specialises in advising family businesses in the mid-market on M&A activities, and also works with a number of international family offices. These families, he says, are looking for investments off the stock market, so private companies are highly attractive to them. Unlike venture capital or private equity, they can afford to wait for a return on their money, given their long investment horizons. This allows a company that has received investment sufficient time to do the right things to grow and produce a return, rather than fall under pressure to satisfy the expectations of a group that will want to wait only a few years for their money back and then some.
These small and middle-market private companies are where the real growth in the economy occurs. This is where jobs are created. Boston-based research firm Cerulli put out research not too long ago that suggested there is in the neighbourhood of $1 trillion being held within the family offices around the world. Most industry experts I know believe the figure is significantly higher. If we want to see an increase in job creation, lower unemployment, etc. I suggest we look at helping, not restricting, the investment activity of family offices. The American government, with Dodd Frank and such legislation, has made it more onerous to run a family office. I’m going on the record as saying we must look at legislation to encourage the wealthy and the families with businesses and private investment offices to put their money into the places the banks should but won’t out of fear and out of compliance with deposit/loan ratios.
I’ve been watching the Occupy Wall Street movement with heartfelt sadness and dismay. To some extent I understand it and agree they have a valid point. Yes, the fat cat bankers have run amok, few people will dispute that. But hating and condemning “the wealthy” is one of the biggest wastes of human resources of time and energy I’ve seen in my lifetime. I’m not entirely surprised – United States history is punctuated with decades and extended periods where some minority group was despised and that disapproval was condoned by society at large. Blacks, women, gays, Jews, Irish, Catholics – you name it, they’ve taken their turn at the American whipping post. The One Percent have finally arrived at the front of the queue.
Yet it seems people have conveniently forgotten – or are just choosing to ignore – that behind a wealthy family was almost always a business venture that started out small at some stage. I know many family businesses that have turned into an empire and spawned a family office because someone either recently or a long time ago stuck their neck out and worked tirelessly to start a business and build it out.
The existence of a family office means the family has done something very right and has the power to make a great contribution to society, which its members in fact are generally quite keen to do. Yes, we certainly have the Paris Hiltons and the Kardashian girls and that ilk. But again, I’m going on record to say I think they are the exception and not the rule. In my role with Family Office Review, I’ve witnessed how great the demand is for information on philanthropy planning.
The interest in all things family office is only growing, from what I observe, and there is no sign that trend will reverse anytime soon, particularly in Asia and Latin America where the increase in activity is highest. According to Google, there were roughly 300,000 searches in the past year on the term “family office.” Wealth and the number of wealthy people around the world is in the main on the rise, according to the weekly reports I get from Wealth-X, the company that is well known these days for tracking such trends. Along with it, the number of family offices is growing too. This is the pool of real funding that can kick us back into prosperity much faster than anything a central bank can do.