Insights and Resources

From fund to family office: Key questions to consider

ARTICLE | September 28, 2021

Authored by RSM US LLP

Some private equity and hedge fund managers are making the move to restructure as a family office. Why? Many are seeing the benefits of transitioning to private investing, which include allowing for less regulatory scrutiny, less complicated decision-making on investment strategies and choices, potentially favorable tax considerations and more.

Most funds considering a new entity structure have been in the outside investment business for a while, and upon attaining a high level of wealth, have decided it may be time to focus on more individualized investment goals, rather than coordinating a community of shared capital investors. Perhaps the fund manager’s desire is to pursue an investment strategy in a specific industry or diversify investments to seed entrepreneurial or philanthropic efforts. For some, the family office allows former fund managers a chance to invest in what they want, where they want, when they want without answering to regulators or investor partners.

Questions to consider

However, while the family office seems greener on that side of the fence, hedge fund and private equity principals should consider a variety of areas before proceeding with restructuring efforts. Key questions to ponder include the following:

  • What is the purpose of building the family office, and how do you define success, both in the short term and long term?
  • What is your current net worth, asset base and level of financial complexity? To transition to a family office structure, by some estimates, the optimal net worth threshold is at least $250 million to justify the implementation of a comprehensive family office and realize its advantages. A family office structure is also optimal when the family’s tax and financial situation are complex and require organization and coordination.
  • How do you plan to liquidate the legacy fund? You’ll need a comprehensive plan to dissolve the fund efficiently and economically and transition to the new structure.
  • Have you considered creating a multifamily office rather than a single family? This approach allows for pooling resources and other shared advantages. But this might not be optimal for your situation and goals, particularly if you are looking to focus on your family’s personal investment objectives exclusively.
  • Have you weighed tax considerations and structure options? With the disallowance of investment expenses as itemized deductions under the 2017 Tax Cuts and Jobs Act, some families have implemented a comprehensive family office structure to enhance operations and potentially improve tax efficiencies. Careful planning and compliance are needed before and after the transition to take into account today’s tax considerations and build flexibility into the future for potential tax law changes.
  • Will the family have access to the technology reporting platform of the fund business, and if so, will it meet the needs of the family office? There have been several exciting developments in the area of family office technology that should be considered.
  • Have you assessed the needs of your multigenerational family to determine the nature and level of services the family office will provide to family members, as well as how the family office will address those needs and future goals?
  • What services will the family office outsource versus insource? Will you require an outsourced solution to oversee cash management, family concierge services, investment management, tax planning, legal services, succession and estate planning, foundation management and more? It’s important to consider the many resources needed and the associated costs to maintain these services.
  • Have you considered risk management issues such as internal controls, cybersecurity, physical security and appropriate insurance?
  • What approach will the family take regarding oversight and governance strategies for the new family office? Careful planning upfront will allow for a successful family office for generations.

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This article was written by Benjamin Berger, Christa Clark and originally appeared on Sep 28, 2021.
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