Fund Structures for Family Offices - April 2019
Family offices of all shapes and sizes may benefit from the formation of a fund structure as the means through which to hold and manage their wealth. At Trident Trust our global team has worked with a wide range of family offices, from very large multi and single family offices through to small families. In this article we consider why a family office might select various “fund-like” structures.
Why have structures at all?
The ability to plan for succession within a business and transfer wealth across generations is a key consideration when designing a structure for a family office. A desire to form a tax neutral structure will be driven by the residence and domicile of the family members, the location of the assets and the nature of the assets themselves and whether they generate income or capital growth. A key consideration is confidentiality so data protection and cyber security are vital.
Many families have historically used a trust (in common law jurisdictions) or maybe a foundation (in civil law jurisdictions) to hold their family wealth. This in turn will often hold a more complex structure of special purpose vehicles which in turn own assets like land, real estate, trading companies, securities and even super yachts and fine art.
A popular variant for the ultra high net worth family office is to set up a private trust company (a company that is set up for the sole purpose of acting as trustee of the family trust) through which they retain the benefits of having a trust, while having greater influence over the process of determining what happens to the trust assets.
Trusts, foundations and private trust companies are perfectly valid structures for family offices to utilise, but there are other cases when a family office begins to behave more like a fund manager and a “fund-like” structure then becomes more attractive or absolutely necessary.
Why use a fund structure?
In some ways it is unavoidable that once a family office, or manager, is managing the assets of multiple, unrelated investors then it needs to be regulated. It follows therefore that rather than manage multiple unrelated managed accounts it is more efficient to pool the assets of multiple investors into a collective investment scheme and this will require the structure to have some regulation. Even where the investors are related, the legal framework of a fund structure provides clarity on the rights and obligations of the investors and the manager.
Two further key elements which might make even a single family office wish to adopt a fund type structure for the assets it manages are control and incentivisation. A fund structure can provide an element of control to the family office in the same way a fund manager controls a private equity fund: the family office can own the shares in the general partner that manages the limited partnership and contracts on behalf of the investors. By extension a fund structure also permits the family office to be remunerated in a way which is consistent with fund managers and aligns their interests with the families whose assets they manage. This would typically entail charging an annual management fee plus a carried interest fee with respect to illiquid investments. This incentivises the family office team to maximise returns.
Limited Partnerships- the alternative for illiquid assets
The structure will depend on the asset class into which the family office intends to invest. Illiquid assets are typically associated with closed ended fund structures and in the private equity and property world this will often mean that a limited partnership is the weapon of choice. As an example, a family office client of Trident Trust in Guernsey launched a Guernsey Private Investment Fund (PIF) incorporating a general partner and limited partnership. The PIF was seeded with a $150 million commitment from the family office at the first close and the vehicle was then available for investment by other family offices and sovereign wealth funds. The rationale for selection of this classic private equity structure was to attract investors who would ordinarily invest in private equity funds.
The Guernsey PIF has been specifically designed to facilitate these arrangements. There is a requirement for there to be a Guernsey manager, which there always is with a General Partner managing a Limited Partnership. And the manager must make a declaration to the local regulator that “the investors can afford to sustain any losses”. With ultra high net worth families and their members this is not normally in question. The PIF can have up to 50 investors, which again is not normally an issue with multi-family office structures. Regulation is deliberately light, but is not absent. A regulated service provider is required. A key benefit of the PIF is the speed to launch as the Guernsey regulator will register the fund and the manager within one day of receiving the application.
Protected cell companies providing flexibility
Another vehicle which lends itself to both single and multi-family office asset management is the protected cell company (PCC). In a single family office context the cells can be used to segregate the assets and also the liabilities into distinct pools, maybe by asset class, strategy or geography. Large single family offices with liquid assets may wish to appoint different investment managers to manage each pool of assets and to segregate them from one another in a structure which they control. The family office could simply provide one cell of the PCC to each family member. The PCC can also be useful to investment managers who wish to add cells, raise cash and invest in different time periods so each cell has a distinct vintage. Alternatively some fund managers use a cell per asset acquired to facilitate club deals whereby each deal is offered to a pool of investors who can opt in or out of each particular transaction.
There are significant cost benefits to be achieved by utilising a protected cell company structure rather than setting up multiple fund structures. Legal set up costs will be saved if a PCC is used because adding a cell to an existing PCC is much more cost effective than forming a brand new legal entity. There are reduced operating costs too because the company secretary, board of directors and audit fees are shared across the PCC rather than having separate boards and company secretaries each time.
An example from our Guernsey office is the recent provision of a proposal with respect to our in-house emerging manager platform Global Offshore PCC Limited. This is a Guernsey incorporated, authorised open ended collective investment scheme. In this instance a family member has been given a pot of cash of around £10 million to manage on behalf of a handful of family members and he invests in liquid, listed securities. The family would like to appoint an independent service provider to ensure that their interests are recorded and recognised appropriately. A cell of the platform therefore makes perfect sense. The open ended fund structure allows the family members to subscribe or redeem their shares as and when they wish.
There is a wide a range of jurisdictions in which funds can be formed and each may provide distinct regulatory options depending on investor sentiment, the value of the investment to be made by each investor, the number and location of investors, their relationship to one another and whether the structure will be marketed or placed in any way. Where the structure is formed and managed will have an impact on the regulatory regime which will apply. Trident Trust is licensed to provide fund administration services from 11 jurisdictions including Cayman, Luxembourg, Guernsey, Malta, Dubai and Singapore and has a network of offices in key financial centres such as London, New York and Hong Kong, so we can help with most structures that professional advisors to family offices design.
For a single family office, in many jurisdictions, there will be no regulated activity taking place. With multi-family offices, the pooling of assets by two investors in a structure with independent investment management taking place may trigger the structure to be regarded as a fund in some jurisdictions. The use of a fund structure and more than one investor does not however mean that the structure in question is a fund in all jurisdictions.
In Guernsey for example, a joint venture, club deal or multi-family office structure may simply be regarded as an investment vehicle, as distinct from a fund, and not therefore be subject to fund regulation. This was often the route of choice before the PIF regime was introduced. Given how quickly the fund and manager can be approved with a PIF application, it is an easy way of providing the opportunity for family offices to build a track record within a regulated investment vehicle. Having an established regulated investment management company may in turn provide an opportunity to open up services to other investors at some point in the future.
As family offices develop and grow, regulated fund structures are increasingly necessary and helpful to them to perform their primary role of managing the family assets. The use of a fund structure provides a recognised and well established legal framework, which allows the family office itself to become a multi-family office, private equity fund manager or boutique wealth manager. This is in addition to permitting a family office to have greater control over the assets being managed and providing the opportunity for the family office team to be incentivised in line with their peers in the corporate fund management environment. The application of regulation and the use of independent administrators, auditors and Non-Executive Directors gives additional comfort to the family whose assets are being managed that there are appropriate checks and balances, and that the assets are being securely held.
The combination of ultra-high net worth families utilising bespoke structures, which may include multiple jurisdictions in different time zones, with different legal structures such as trusts or foundations investing via fund structures like protected cell companies and limited partnerships will challenge both traditional trustees and specialist fund administrators. Care should therefore be taken that an administrator and trustee with the requisite mix of skills is selected. In particular certain fund administrators specialise in private equity or property and others have expertise in liquid securities or hedge funds, but few have the systems and expertise to cope with a wide range of alternative asset classes, particularly when assets like super yachts are included.
At Trident Trust we have the global reach and expertise in both traditional private client structures and a wide variety of alternative investment funds to meet the needs of the modern family office. Please contact any of the personnel listed below for further information.