Family Offices: Fad or Standard- Episode 5

Transcript

 NextGen Talks- Family Offices: Fad or Standard

NextGen talks is an initiative of PwC Nigeria's NextGen club featuring family business owners, nextgen, successful entrepreneurs and professionals.

NextGen talks, about shaping the African family business narrative.

Host: Welcome to episode five of NextGen Talks, an initiative of PwC Nigeria's NextGen club. My name is Chinasa Collins Ogbo, and I'm the host of this podcast.

In this episode, we're going to be discussing family offices, fad or standard. To give some context, we know that for family businesses and even high net worth individuals, family offices can help provide the much-needed structure, which is required for effectively managing private wealth. Depending on the context of the family business, it is safe to say family offices may operate as single-family offices or multi-family offices.

Many family businesses in this part of the world struggle with placing adequate structures, succession planning, and other components of a family business that ensure efficient functioning of the business. It is therefore imperative that family businesses in this part of the world are well equipped with the knowledge and resources that aid in ensuring access to family offices. Beyond this, it is also useful to review how the COVID 19 pandemic has changed the way family businesses in Nigeria utilize family offices and why.

Joining me shortly is the Private Clients and Family Business Leader PwC Nigeria is Esiri Agbeyi.

She would share her perspective on family office, whether it's a fad or a standard, Esiri is a partner with PwC, Nigeria where she leads the People and Organisation units in tax responsibility for the management and delivery of tax-efficient reward packages and mobility services to employees and employers of labour. 

The team also advises high net-worth individuals and family businesses and structuring right for succeeding generations. She serves as a non-executive director on the board of several companies and has won several awards for her leadership roles and contribution to the Nigerian economy. Before Esiri comes on, please listen to our NextGen talks nugget for this episode.

NextGen Talks Nugget: Compared to the global counterbalance, most family businesses in Nigeria do not have a family office for investment and other services. This is closely related to the suboptimal structure in many family businesses in Nigeria, embracing the use of a family office may help manage their wealth, succession planning and achieve all the non-financial objectives of the family business.

Host: Welcome Esiri and thank you for coming to the NextGen Talks.

Esiri: Thank you, Nasa. Nice to be here.

Host: Awesome. And so what I failed to mention was that Esiri is also the head of the NextGen Club at PwC, Nigeria. So before I ask you to tell us about your role, and what the NextGen club stand for, I just wanted you to share your thoughts on the NextGen Talks nugget today: Compared to their global counterparts, most family businesses in Nigeria do not have a family office for their investments and other services. What do you think?

Esiri: So I think that's a reality. We do have a lot of family businesses and families that have offices with assets under management of say 160,000 or million dollars. Talk about the Walton family, or even Jeff Bezos, who has his own family office as well. But in Nigeria, though we have high net-worth individuals and families who probably have passed on businesses to subsequent generations, you don't necessarily see that concept of family office buildings, and not because the structure is in, there is no intention to have a structure like that, or more because it's glossed over. 

And sometimes you don't see it embedded within their businesses, and there is no separation between them. So it's then hard to track, what are the assets of the management in terms of their wealth distinct from their corporate wealth? Because it's all intermingled.

Host: That's interesting, and I think it just takes me perfectly to the next question, and to just maybe unpack what a family office is because I've heard the concept and I guess, you know, working with you, I have an idea, but I think that for the benefit of the people who are hearing this for the first time and even for my understanding, what exactly is the role of a family office and how is it different from a family business?

Esiri: Okay, so that's a very good question. I think the main thing is it's unique to the family which is why it has the prefix "family". But the other thing as well that just comes to light is the fact that it's there to serve a purpose which is, ensuring that you pass on wealth to the next generation. And then the next point, I think that's good to highlight is, you're using that structure to professionalize the transfer of that wealth as opposed to using just wills. 

For instance, where you see, after my death, this person earns or gets so much wealth, I set up a trust structure, and that person gets so much and I leave it into the hands of a third party. Here, there is an intentionality around ensuring that the values of the family are enshrined, and those values, in turn, continue to give an impact for generations beyond you. So the family office is a fantastic concept. But in simple terms, that's what it represents. 

Host: Okay, awesome. So what I hear you saying is, it allows you to have a structured approach to transitioning, right, so that for the next generation of business owners, like your children, there's a structured approach for them to take over, as opposed to just you know, giving them money. And then it may be the end of that business as it were because there was no structure to facilitate that transition. 

Awesome. Okay, so can you provide a foundation, or what roles if any family offices play in sustaining and growing private wealth?

Esiri: Yeah. So and maybe also, that would allow me, you know, expand on the definition I was also trying to give before, which is, the point about the wealth growing and going beyond generations doesn't necessarily mean that it has to be with a legacy business that was founded. So it might mean that that wealth then takes a different face entirely. Because now you've brought on different unique personalities in the next generation who feel, you probably need to branch out into something else. 

But then we have the advantage of a strong backbone in the family office. And so what you're trying to do within the confines of the family office is put the right structure that can guide that objective, okay, and foster that objective. So you're looking at things around investment management, which is, traditionally what a lot of families or individuals would focus on. So it's just about the money, at the end of the day money without values, they say, or wealth without values is just money. 

And so you then have to back it up with the values. And the values are the inherent advantage that the family has to stand out from other family businesses, like the unique selling point? Yes.

So you then want to start thinking about governance structures, which need to go in a family office, you want to think about, you know, what's the risk of doing things the wrong way? You know, do I want to be out in the public for the wrong reasons? How do I ensure that our reputation is protected?

And so in terms of compliance, it's very important, that you then have a section that deals with compliance. Now, in the age where we're seeing the Common Reporting Standard, and the need to just be transparent with information across borders, it's also important that our compliance unit begins to think about such things. But the other roles within the family office apart from just investment management and compliance, run from admin structures. So a family wants to travel, you know, you need people to organize, you need them to be sure that where they go to, they're comfortable. 

Those admin stuff will generally be handled by the family office, in terms of next-generation education, which is a very poor part of making sure that you have responsible stewards for the business. It's also within the family office. So that kind of training, setting the ground rules for this is how we should behave. Or this is how we typically run businesses in the family is enshrined within the family office. The other things as well that we start to see are things around security and safety. So, especially now in the age where technology is becoming really vibrant, a lot of family businesses and corporates are exposed to hacks, exposed to data leakage. And it's important that the family office also takes that approach in setting up and I guess the one more thing as well that's important to consider with family offices is data management. As family businesses grow, there's a lot of data that needs to be managed and handled. 

Not only one jurisdiction, sometimes in several jurisdictions, and managing that data properly, analyzing it to make informed decisions, and people's family businesses become more agile.

Host: Okay, what kind of data?

Esiri: So I guess, just take an example, with COVID, right, unexpected events like that, typically will cause businesses to be jolted. And what you then want to start asking yourself is what could have gone different? What we saw during COVID was a lot of growth in employees, realizing that I could do things by myself. And taking that ring of responsibility to see, I would branch out and do my stuff. 

But what it also revealed was, that you couldn't do business without having technology. And because of that, you then saw that there were a lot of exposures to either not being able to sustain the business for growth, or you weren't even analyzing the data in front of you to make the right decisions, either in hiring people or in even making sales to the public. So those kinds of data are what we're seeing is important that businesses now use them to make meaningful decisions at the time when such events happen. 

Because then you will be too late. If you have to wait until the time when the event passes, why not have a data management store? Where can you then make those decisions proactively, and anticipate them? Sometimes you can't anticipate? But then you want to do that? As fast as you can. Right. 

Host: Awesome. So as far as the question about what you know, I've heard you talk about the different parts and roles that a family office will play. And my question is, sort of, that it sounds to me like a family office is almost like an outsourced service. So I'll give you an example. I own a business, I have a business. And I don't know that I have all of these skills and knowledge, etc. So how do I set up a family office? Must I set one up myself? Or can I outsource it to a third party?

Esiri: Yeah. So I guess it depends on the size of wealth that you have. And what tends to happen is you probably start with doing it yourself. If you're disciplined enough.

Host: But, I don't know what I need to do. Exactly.

Esiri: So I guess the point is, if you understand the first question, distinguishing your wealth from your corporate or business wealth is a good start to see, since there are two buckets of wealth, how do I then structure around that personal wealth? Well, the next question to ask would be, if I was, Do I have an intention to pass this wealth on to the next generation? Do I want to leave a legacy? What's the legacy? What are my values and build around them? So the family office takes its life around your values, around what your future objectives are? And why said it's easier to start, personally it's costly to have these family offices, you know, an example is the Walton family, their family office or assets under management, is well over millions of dollars. 

And when we talk about what sits or what funds sit within that family offices, probably ranging from the dividends from their businesses to capital gains when they exit certain businesses, or the IPO, all of that wealth is not the business wealth, is not your money. The salary you earn, if you work within the business is an owner-managed business, is your own money. 

Now, what you find is, that a lot of business owners mix that wealth with corporate wealth, just to stay afloat sometimes because they want to be liquid. And at those very early stages, it's quite unrealistic to then ask to set up the family office because you don't even have the funds to run your business and talk more of running a private structure. So as you then grow, you know, as long as you have those two key questions in mind, what's going to be my legacy? And if I separate my wealth from corporate wealth, you then start to reach that point where you decide that you want to set up the family office. 

A lot of businesses in Nigeria currently are run with embedded family office concepts, okay, where they're probably using a staff of the organization to run their personnel stuff. So, for instance, remember when we talked about what sits within the Family Office compliance. Yeah, if I wanted to be compliant from a tax standpoint, as an individual, sometimes you would find that these people are relying on staff within the organization to do that small stuff, the personal, right. But that individual who doesn't have the full view of everything that you do, will probably have investment, which is where the disadvantage comes. And so what you then want to ask yourself is, what's my footprint? How pervasive am I? How pervasive is my wealth? Do I need to start pulling out that individual into my personal structure, because I trust that person?

 And that's a very important point for how you staff the family office, do I pull that person out into that personality into my structure so that they then take over running my wealth. So it's very simple logic. It's a simple concept. I think it just takes taking yourself out of that corporate world and asking yourself these questions to see if it's now time for me to set up the office. And what are my objectives? How do I set them up, which is where professionals come in because, at the end of the day, there is no point reinventing the wheel. 

This is a concept that has existed for years, it works very well for HMI. And a lot of people can borrow money to speak.

Host: So going back to the topic of discussion is and it's, you know, Family Office fad of standard? Would it be fair to say that it's standard for not every individual, it's just a standard for a certain group of individuals? So like the high net worth individuals, given how much it costs, you know, to run one. 

So would you answer that it's, it's a standard for them, not for everybody, because when I hear the topic, it sounds like everybody that has a business should have a family office, I don't think that's the case?

Esiri: So it's not for everybody, not everyone has the business. But there are ground rules that you need to take into consideration to build for that future, for when you might have a family office, as long as those ground rules are around, just make sure your assets are mixed with your corporate assets. 

There is a tax cost, for instance, to do having that kind of structure, there is a governance cost to having that kind of structure where everything is commingled, or you're the only one making decisions. And you don't have, for instance, a board of directors. Yeah, that's the beginning of setting the structure and replicating that for a family office costs money. So if you think about the business level, having to hire a CEO, the CFO, a CEO, or an assistant to support all of these roles, that's pretty much what you're replicating on a personal level. Yeah, that's exactly the cost. If you have to protect data within your organization. And you're going to do the same with your personal information and personality, which also costs. So it takes a certain level of wealth to go into that space.

Host: Awesome. Thank you for that clarity. So just going back to what I mentioned about COVID-19, and how it's impacted the idea of family businesses. In your opinion, would you say that the pandemic has changed family businesses in Nigeria, utilize family offices and why?

Esiri: I think, at least just based on data, there are a lot more questions now than I had before. On family offices. I think it's also around the fact that people just want to understand what it entails, you know, and they're still trying to grapple their minds around it. Is it right for me? which is a very necessary question. Yeah. And valid questions will be asked at this stage. 

And yes, did COVID affect people's decisions in that space? Yes, it did. In the last count, I think for COVID, they said we've lost about 14 million, or 14.9 million people globally. Unfortunately, the numbers in Africa weren't really obvious, because we are not quite good at data. So I don't know if we're supposed to celebrate, or if we didn't lose a lot of lives. But as you know, or we just don't know. I mean, if I just look at some of the close examples within my space, you know, people lost pay tracks or made tracks in their family businesses. 

And are those points where those kinds of incidents happen? Yeah, it highlights the gap in succession. 

There's also the possibility that there are conflicts that existed all through the family that you weren't aware of that then come to the fore. And the role of the family office then becomes very evident in situations like that, where, imagine where we had been very deliberate about training the next generation and causing them to understand what their stakes were within the businesses, making sure that there was no entitlements or sense of entitlement in the business. And everyone was rewarded, right. And we knew who the leader was, you know, if such a thing happened, we would have avoided a situation where there was that huge gap. So I think COVID has highlighted the need for families to start to ask this question. 

Do we need a family office for family cohesion, for ensuring that succession is gotten right. Succession is not just something that happens in a day, it's a journey, and our journey starts from when the business is founded.

Host: Fantastic. So I'll have one more question for you. Before we round up, a review of PwC Nigeria's NextGen survey for 2022 shows that 60% of Nigerian family businesses do not operate a family office as a separate business vehicle for family investments and services. So the question is, why do you think this is so? And what blank spots? Do you think the family businesses that fall into this category have to do?

Esiri: Yeah, I think it's so because a lot of business owners are still on that fast pace journey of making money. Yeah, so it's cash, cash, cash and influence as well. So right now, I think a lot of Nigerian family businesses haven't really started to think about what the future is like even post-COVID, Yes, some of them are a bit more. 

But I think it should be a lot more than what we have now. And we're getting there. But I think it takes a lot of awareness, which is why PwC is investing significantly in this area, we're seeing that there is positive result and acceptance of this. So what we're seeing now is a lot of families now reassessing their holding company structures, and asking, Can we re-convert this into a family office, because having a holding company doesn't necessarily mean you have a family office, the holding companies just for holding the assets. But they're not thinking about developing the next generation, they're not thinking about succession in the way a family would, in our thinking about dispute resolutions for the family.

 And it's not hinged on your values. So that reassessment is now happening, at least you're doing a lot of that now, for some families, wealth management companies or firms are also asking how can we claim this space? And some of what they're thinking is that inherent advantage with families, you know, setting them apart from other businesses, if you look at the top businesses in the world, there family businesses, the Walmarts of this world, which are family business, Samsung, the family business, Jeff Bezos is running, he has a family business as well, he has a family office, you know.

Host: So when are we going to get there in Africa?

Esiri: So I think we are and I don't want to just call names, but we do have some family offices in Nigeria. Okay. Very few, just a sprinkle. But I think the more it's better than nothing. And I think the more we have wealthy people, you know, start thinking about this. I mean, if we have more homegrown billionaires, and millionaires, we will see that concept really strive. And I'm rooting for some of our tech geniuses who are making all these billions now, the celebrities who are making a lot of money now, you need to start thinking of the next generation, you need to start thinking of diversifying your wealth. Because we've seen how technology has disrupted businesses, it will disrupt and continue to disrupt. And what family offices do is, you know, help with the diversification of that wealth as well. Because there you start to think about what your investment strategy is, and start to think of how you should put them in different pockets just to stabilize. I mean, if we look at an example, I think it was five years when the currency just dropped significantly. 

Yeah. What happened was our wealthy guys, the billionaires who had most of their wealth in Naira, their wealth halved already in dollar terms, because of the devaluation of the currency. Imagine if they had, yeah, so if you had a family office that was very deliberate and strategic about saying I would invest in this type of foreign assets, I would hedge against this type of risk, depending on where you're, you know, you're generating those incomes from, you know, you have that kind of stability.

 And that's, I think, what the future is, so I'm rooting for a lot of these new billionaires that are coming on board to start thinking about such apparel dominance.

Host: I agree, I think we should all root for them. Okay, I would ask you a lot more questions, but we only have time for you to share one recommendation that you figure would help promote the utilization of family offices in Nigeria?

Esiri: I guess the recommendation would be, that it's not too late to start already. The two key questions are, do I have personal assets seperate from my corporate assets? The next big question is, what's my legacy? What legacy do I want to leave? If the answer to the second question is I don't want to leave anything, you don't have anything to do with the family office. But if you do have something you want to leave for the future. 

And it's not just all about making money. It's also giving back to society, your philanthropy contributions, we're now moving out of the space of just donating cash. It's more impact investments. Right? So what's the impact? What difference are you making? Where are you on the ESG continuum? And if we stick with all of those, then we will start to get that question right about this is the kind of family office I want to have. 

This is how I want to distinguish my family business. And this is how I want to contribute to society.

Host: Wonderful. Thank you so much though Esiri, that has been a fun and enlightening conversation. I know more now about family offices. And I think that's even I need to start thinking about and cultivating habits. Thank you. 

And I hope that our listeners have enjoyed this as well. So thank you for listening to this episode of Nextgen talks, catch you on the next episode.