Senior executives from sovereign wealth funds and the family office industry highlighted challenges in investing alongside family offices, citing concerns over unclear risk appetites and a tendency for unpredictable shifts in approach.
Rusian Alikhanov, chief executive officer of the $27 billion sovereign wealth fund Azerbaijan Investment Holding (AIH), said the significant problems he encountered included that family offices’ risk appetites were generally unclear; their strategies are too narrow with an over-reliance on real estate; they tended to be unpredictable and change strategies without warning.
Rusian Alikhanov
Azerbaijan Investment
Holding
“[Family offices] often talk about where to invest but not how much. [It’s not clear] how much risk are they willing to take, and whether [losses] see them double down or get out,” he said during Sovereign Wealth Fund Institute’s (SWFI) Global Wealth Conference in London on May 29.
The over-reliance on real estate as a store of wealth for family offices was a particular hazard in an era of high inflation, he added.
“Most of their investment activities [such as real estate] are not value-accretive, wealth cannot be preserved, it needs to be invested.”
AIH is an active investor in Asia. It does not publish its investment breakdown for the region, but has significant investments in central Asia.
In December last year, AIH committed $500m in a joint venture deal with ADQ, an Abu Dhabi-based sovereign wealth fund, which committed the same amount, to create a $1-billion investment platform to invest across Central Asia, Azerbaijan, and the United Arab Emirates in sectors including agriculture, technology, pharmaceuticals and energy infrastructure.
AIH also works alongside the $57-billion State Oil Fund of Azerbaijan (SOFAZ), which has 14.4% of its assets allocated to Asia Pacific and a further 0.7% in Australia and New Zealand.
UNPREDICTABLE
Speaking about family offices’ unpredictable strategies, Alikhanov pointed to cases such as when family members were married or divorced, which shifted priorities for family wealth, which would not necessarily be a good time to revisit the investment strategy.
“The problem with families is that they [may] shift their strategies randomly and the timing and criteria have to do with dynamics within the family,” Alikhanov said.
“They need to make sure that the criteria by which decisions are made are clear.”
James Rosebush, former deputy assistant to US President Ronald Reagan, said securing a consensus between family members remained challenging and the particular pinch points concerned succession.
Rosebush has worked as advisor for a range of wealthiest American families, including that of General Motors Founder Charles Stewart Mott (now the Charles Stewart Mott Foundation).
“I’ve had family [members] that sued each other because they didn’t agree with the investment strategy. That emotion is very important. Individual family offices face all kinds of stresses, a big one is multi-generational. A wealth creator wants to preserve a major share in the company and the children [may not],” he said.
However, he said that sovereign wealth funds needed to understand the restrictions family offices faced in their investment strategies.
“These may have to do with constraints – multi-generations may have prohibitions, so SWFs need to get closer to understanding these,” he added.
Nick Ashmore
Ireland Strategic Investment
Fund
Nick Ashmore, director of the Ireland Strategic Investment Fund, Ireland’s €15.4 billion ($16.6 billion) sovereign wealth fund, acknowledged that there was a high degree of variation between family offices.
That variation is derived from the specific family history and dynamics, but he emphasised the benefits of bringing the two groups together.
“No two family offices, or SWFs, are the same. They all reflect the cultural values of families, countries and teams, so there is a pleurisy of points of view,” he said, adding that he thought many family offices shared the long-term investment horizon of funds like his.
AIH’s Alikhanov pointed to the “rags to riches and back again” stories of family offices, as evidence of the need for more stable, diversified, and long-term investment strategies.
He noted research about the waning of a number of family fortunes.
“Before World War One, there were 700 US millionaires; if their fortunes had seen steady investment returns, we would see more than 10,000 US billionaires today, with most [fortunes] having no relation to how the capital was first formed,” he said.
According to Forbes, the US currently has 735 billionaires.
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