SPEAKER_03 0:11

Welcome to the Curiosity Crisis. This podcast isn't just about topics, it's about an approach. We take eclectic, timeless ideas and distill them into clear commute length episodes. Designed to help you practice the art of curiosity, this show is for curious minds navigating a busy world.

SPEAKER_00 0:27

Family offices manage $5.5 trillion globally, and that's projected to reach nearly 9 trillion by 2030, surpassing the entire hedge fund industry. Yet 8,000 plus single family offices operate with zero SEC, so that's in the states, a registration, no public disclosures, and no mandatory reporting. Today we're gonna explore how these private wealth behemoths are quietly reshaping global capital markets through direct deals, sport franchises, and art markets while having some interesting and uncommon takes on things like AI, crypto, and gold. So it's a very interesting episode. But before I get going, Luke, what's keeping you curious?

SPEAKER_03 1:11

Yeah, very good question. At the moment, I've been reading a few fiction novels. One of them is The Red Rising series, and another one is The Name of the Wind. And I am I'm in the last book of the Red Rising series, and it's a fascinating book if you haven't read it. It's about the this kind of like a classed society. It's a bit of a sci-fi, bit of a cyberpunk-ish kind of book. It's hard to explain, to be honest, because it takes a lot of parallels from ancient Rome and ancient Greece, but it's just a really good book, and I'm at the last part of it. And it's interesting how the author depicts a lot of kind of like parallel struggles that people have today, like differences in wealth and power and politics. And it's just been really interesting to read, and it does a very good job of kind of outlining the human condition. I've just I've really enjoyed it. Yeah. Anyway, it's a book recommendation, which we do seem to do a lot of in in our uh keeping you curious.

SPEAKER_00 2:13

That's super interesting. And I thought funny I had a book one as well, but I'm gonna change it up because you've already given I already given one. But I'm curious at the moment about salsa, not the food, the dance. Um, my partner and I have done an eight-week course on salsa, uh beginner course, which has been super fun. But now we're trying to find some open salsa knots, just go and flow and try different things. It's very fun, very interesting. So I would recommend giving it a go if you uh haven't already. And it's actually relatively okay to pick up. So yeah. Is it difficult? No, I don't think so. I don't think so. Like the it is based on like a super simple basic step, and you just always go back to that if you can't do or if you mess up and you just sort of just go to flow with it. But it's super fun, so would recommend.

SPEAKER_03 3:01

Do you want to kick us off with some of the world's wealth hides?

SPEAKER_00 3:05

Yeah, absolutely. Well, family offices are essentially private wealth management firms for ultra-high net worth families or individuals. There's more than 8,000 entities up from 3,000 a decade ago, and it's tripled since 2019. So you can see the massive growth there. And the average size is about $1.6 billion per office, and the operating cost for that office, as you can imagine, that's a really big fund if you think of each one as a fund, is about $6.6 million to operate a year. So they have staff, they have research teams and investment managers, and that that size is projected to reach north of 10,000 family offices by 2030. So it's seen a lot of growth, and considering 30% of all family offices have been launched in the last five years, who knew there's a generational wealth creation wave happening at the moment.

SPEAKER_03 4:05

Yeah, and just to clarify, if I'm a listener and I'm thinking, oh, so they're just like billion-dollar businesses, right? Are you able to like help differentiate a like kind of what makes a family office versus just like a billion-dollar business?

SPEAKER_00 4:20

Yeah, that's interesting. I mean, like, to be honest, they're probably built off the back of billion-dollar businesses, but it's like the formal definition, if you want that, is uh a private organization that manages wealth, investments, governance, and legacy of a wealthy family with the goal of preserving and growing wealth across generations. So it's basically like a private fund manager for a family.

SPEAKER_03 4:42

Yeah, like instead of a a sovereign wealth fund, it's a family wealth fund. Yeah, yeah, yeah. Literally. Wouldn't that be nice? Yeah. I wish. Yeah, so I guess we've kind of covered like what a family office is, and I think you've done a really good job of just kind of explaining like what that looks like. And I think everyone could kind of imagine, yeah, these these rich families where they're focused on preservation, not necessarily wealth creation, because they've already got it, right? But there's some interesting parallels and some kind of historic roots here. So actually, like all the way back to ancient Rome. So we have like examples of like a principal steward, and then in the 15th century, the Medicus, is that how you say that? Medicius, yeah, I think so. Medici's, yeah. And then I think the one that probably everyone would know and would come to mind would be Rockefeller. Obviously, that family got exceedingly rich and has there's buildings in New York, they still have a lot of influence and power. But yeah, that those those families still exist, right? And I think now, if we look kind of more recent and into the future, family officers kind of pivoted with the internet, right? Like there's been this big tech wealth explosion, and especially like you have the early 2000s, but now, especially like you were saying, with a wealth thing built off the back of some of these companies, a lot of this could be like a startup gets sold for billions and billions of dollars. And so suddenly now you have a family that has billions of dollars, and so the the new game becomes maintaining that, and so now we have all these, and I think that probably explains that growth, right, from 2015, like in the last 10 years from 2015 to today. Is how do you triple the s the amount? It's probably explained by tech, really.

SPEAKER_00 6:36

Well, that's the thing. So that's really interesting. Like, maybe that's sort of saying that in the last five, ten years, there's never been more billionaires or billionaire families in the world. So there has been a huge wealth creation spike. And so it's a very like in history, it right now is a very prosperous time. However, maybe right now also there's like a a broader gap between like the richest families and the poorest. So that sort of in you know, research sort of dumbfounded me. That's it's pretty crazy.

SPEAKER_03 7:09

It's a really good point, actually. Just quickly, is that was my first thought was actually, oh, is this the amalgamation of wealth at the top? Is that what the explosion of growth is? And I think that partly explains it, like you're saying. Yeah, and then the tech drive explains the rest of it. But yeah, that is funny because that was my first thought, rather than it being, yeah, consequential of yeah, tech.

SPEAKER_00 7:31

Yeah. And so the the other thing that's really interesting and different, so their massive fund sizes are bigger than the private equity industry in terms of funds under management, I guess. Except they just don't have the same regulatory oversight. So, for example, in the States, uh the SEC exempts family officers from registering as investment advisors, and so they must only advise family clients and be controlled by family members, so like a trust account system, but I'm sure much more complex. But what that means is there's no public disclosures, no mandatory reporting, no SEC filings, so as funds or securities on like on the market would have to do. And this contrasts with hedge funds, which have to do form performers, I think, private equity, which have to do their own filings and mutual funds, which put outs into the world, and even like to that that's sorry, concentrated in the US, but around the world, the like family offices has have limited visibility, and so it's quite interesting. So, as people would probably know, the Cayman Islands or Switzerland or certain spots in the world are sort of seen as or even Tobias seen as tax havens, where it sort of attracts the ultra-wealthy, but now jurisdictions are even attract competing to attract family officers with with lighter rules, which basically means that the money will be invested in their more likely to be invested in their countries and their markets and their infrastructure. And so it's almost a draw for governments to have these very wealthy people there.

SPEAKER_02 9:08

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SPEAKER_03 9:16

Yeah, and that's the thing, is that it is kind of an incentive of any tax haven country or state or whatever it is, right? Is that they want just a smaller piece of the pie, but they're just happy to get the piece of the pie. And like we've seen that recently with like Ireland and like a lot of tech movement into Ireland because of the way that they handle their taxes. And yeah, so there has been this wealth migration into certain states in the US, like Austin, for example, with like income tax that you're saying, and then like UAE, same thing. But it is interesting because you have what is effectively like like you were saying before, like small funds, really, because the assets under management, if the average is multiple billions, right? We're talking like that's a crazy amount of money, but there's no trillions, yeah. The crazy thing is that there's no oversight into that, and then and partly like it becomes distributed because they're gonna move into these different countries and be based somewhere else because of tax reasons. But then the question becomes like, should they be registered, should they be taxed from their country of origin? Like, there's all these interesting questions that that come along with that.

SPEAKER_00 10:24

Do you have an initial take? Because I actually want to come back to this question a little bit later when we talk about the types of deals these family offices are doing. But do you have any initial takes on that question?

SPEAKER_03 10:33

It's a hard question, right? I think because because it ends up bringing up more generalist questions about wealth and like how much wealth should ever be distributed. And I mean, I don't know whether any family needs to own a trillion dollars. Like I don't know whether that's really required. But I think one of the things that would be nice, and and I understand that the taxation wouldn't be particularly appealing, but there's a lot of people who are less fortunate in the world, and it would be nice to see some of that wealth go to someone, right? Not to just be kind of held at the top. And so I think what the problem is it raises a bunch of other questions, and each country is going to be different, right? Whether it's the country of origin or the country that they reside in. Yeah. And so the tax, then it's a hard question, and it's a hard problem to solve, is like where should the tax come from? Like which country, like where does it go, and then how does it get distributed? So the ultimately I don't know. I really don't know. Yeah.

SPEAKER_00 11:33

Well, it's interesting. I like well, we'll come back to it, and I want to take a like a market sort of view on the question because you know, if it's bigger than the whole hedge fund industry, it's very material, right? Like it can move markets, it can move prices and trajectory of things, and like yeah, really, really flood the market or take the the carpet away from underneath it. So yeah, I want to come back to that. So a lot of risk there. Yeah, 100%. I do think obviously, yeah, they do need to be taxed and it needs to be fair. We'll we'll come back to the market side. But you talked about moving to where they reside, sort of thing. There's been a few trends, specifically in the the states and internationally. But for example, in the states, there's been a wealth migration of some of these family offices to to Miami, Austin, Nashville, and some of them like have been through big sports franchise acquisitions, which is really interesting. And Singapore and the UE, so the you know Arab Abrants have been emerging as hubs. So maybe that's to do with the regulatory framework in those jurisdictions or taxes. And the other thing is there has been a lot of movement, it's been quite notable because, as we said, 30% of these single-family offices have been launched in the last five years, which is yeah, really just changing global capital. But uh, yeah, it's quite interesting because the traditional ones have been around for years and years. You think about Rockefeller, they're still influential now. But the other piece that's quite interesting is succession. So, like if they're newly created ultra-wealthy families, what happens next year?

SPEAKER_03 13:13

Yeah, and like we've talked about that the great wealth transition of like especially all that money that resides in boomers in that generation and then coming down. But this is another example of that, right? Where it's very concentrated and it needs like it'll go somewhere eventually. And so now, like you've said, if 30% have been launched in the last five years, then that succession is probably also going to correlate and you'll have like a big wave of it, right? I think another really interesting thing that we have here in the research is the amount of investment that has come from these private family offices. So 70% of family officers now participate in direct private deals. And so, yeah, like you were saying before, with the market perspective, that's a really big impact on something that is completely unregulated and kind of like that you're kind of flying blind. It's a bit of a black box of investment, right? So we have here that like 40% ramped up direct investing activity in the past year. Value of direct investment surged 123% to nearly 13 billion in the SP global. So that bypasses private equities two and 20 fee structure.

SPEAKER_00 14:22

So like 2% management fee and 20% performance fee, like if they just direct investing directly if they can cut out that middleman.

SPEAKER_03 14:29

Yeah, it doesn't need to exist, right? And so you've kind of raised an interesting question, which is this the end of the PE private equity model? And I think maybe that one's a broader discussion, but yeah, so we can see that they've targeted certain industries, so healthcare, logistics, fintech, certain industrials. And I I have a feeling that those are picked as either areas of growth or areas that won't disappear in the future. And so they're taking a long-term perspective.

SPEAKER_01 14:57

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SPEAKER_00 15:23

And I'll put in a third thing, areas of expertise. So some of these like family offices are actually but they got super like crazy wealthy by succeeding really greatly in uh in a certain industry or by building a a massive business or suite of businesses. So they have really like close insight into certain industries. And so uh they kind of have what a lot of investors are chasing, which is that the edge, that unfair advantage, because they really deeply understand an industry. And so yeah, this is why I was thinking the the regulation piece, like sure, they understand them really closely, but say they've built their expertise in their business their business in, for example, fintech, like starting the last five years, the tech explosion, and then something happened, like something new comes up, and they go extremely hard at a new business or a new investment because they know it really closely, and that can move the market, and they not they it's insider trading, but they have an edge, which yeah, there's there's an asymmetry of information, hey.

SPEAKER_03 16:32

Yes, yeah, yeah, yeah, yeah. I was actually wanting to get your thoughts on this kind of private equity model and like how that stacks up. Like, do you think that it's a serious threat to private equity? I guess like what's your zoomed out kind of take on that?

SPEAKER_00 16:49

Yeah, so I think it is a threat because like we said at the start, it costs on average. I mean, obviously the averages are a little bit not misleading, but one representation of what's happening because when there's so much money involved, the order there there's almost orders of magnitude.

SPEAKER_03 17:05

Yeah, yeah.

SPEAKER_00 17:06

It's a power law for sure. Yeah. But still, that we said $6.6 million operating fee, annual operating fee. So basically to pay the people that do the investing it on behalf of these families. So these families, they're super rich, they've made money, I assume, through business, so they understand operating costs, and they have deemed that it is better for them to invest their money through their own family office to manage their own affairs. They've deemed that $6.6 million on average is acceptable, and it's better value than paying the 2% fee to a private equity company and a 20% performance fee. So basically, that's to me is a direct threat to the private equity model where you make your money from being the custodian of these funds, but now the funds are being held in-house. What do you think?

SPEAKER_03 18:00

I guess it is. It has to be a threat because it's they're clearly dodging that business model, right? Like they're going around that. And so I guess by definition it is. I don't think that would ever truly stop PE from existing. I think that there's always going to be a place where businesses, banks, whoever wants to go through private equity to do investment for them, and private equity firms will continue to exist. But it might be that it kind of it's part of their lunch and they don't get the same bite of the private investment that they would have otherwise.

SPEAKER_00 18:34

And maybe their growth is a bit slower because if if family offices, which would typically be ones putting money into private equity funds, start to still put some money in but less so and manage some of their more like some of their own, yeah, maybe the growth P is is a bit slower.

SPEAKER_03 18:51

Yeah, definitely. I think that there's there's definitely that potential for sure. I I was hoping that you could explain the AI paradox.

SPEAKER_00 18:58

Let me introduce it, but I definitely want to get your perspective on it because you're the AI guy. So so basically, in terms of the these direct investments, which we were just talking about, research from the McKinsey report that we went through showed that 65% of well in a survey, 65% of family officers plan to prioritize AI investments. However, in a JP Morgan report said that 79% have zero allocations, and these this is all centered in America, have zero allocation to physical AI infrastructure. So the data centers and hardware. And so there's a massive push for data center investment more broadly in the world, except family officers aren't doing that. But more specifically on that, is that family offices also like 72% of these offices have no gold exposure, which is a commodity that it's in a lot of portfolios, and 89% have no crypto exposure. So I don't know, like what do you make of that? Like, like if you're thinking about maybe gold's not necessarily a fad, but it's a newer goals are a newer investment class, but AI is a newer investment class compared to healthcare and something that we talked about before, and crypto is obviously new compared to the legacy industry. So yeah, what do you think?

SPEAKER_03 20:20

Yeah, I mean, it's tough to make kind of broad assumptions about the statistics kind of just off the top of my head. But I mean, I do think that the initial discussion around the significant growth in family officers, how it went from 3,000 to 8,000 or 9,000 in such a short amount of time does lend to that theory of tech being heavily involved. I think that would be a big contributing factor. And I do think there's something you mentioned before about how targeting the niche that they got wealthy off. So if you got really you basically get rich on a logistics company, you're probably going to continue to invest in logistics, right? And I do think that those would probably contribute a lot to some of these stats. So the gold one would maybe make a bit more sense where you're like, ah, I see. They're not investing in gold because they likely didn't get rich off gold. And it seems more like a hedge and risk mitigation than it does actually allocating capital to do something with. That would be my my first thought. In terms of the AI one, that one's interesting. I do think there's a little bit of a gap in that specific kind of space that the that other examples wouldn't have. And that is that they're competing with big tech, and big tech has so much money that the the difference is they might allocate billions, but if Google or Microsoft is looking at an order of magnitude more, like a hundred billion, or the the numbers are so large that I don't know whether the the risk profile is then like something that they would want to accept for what they would have. Be able to contribute to. And that probably helps with the JP Morgan number of almost 80% have no allocation in that area. Yeah, I don't know. That would be my first thoughts.

SPEAKER_00 22:10

And so they're willing to maybe dip their toe in the water and like invest in more the more the software side or the basically the non-hardware AI investments because you don't need just as much capital as you do for the behemoth data centers that are going up. And that that's quite interesting. Like, yeah.

SPEAKER_03 22:29

I think that would definitely be a contributing factor. I think the other thing is that the economics of some of this hasn't been proven yet. Like the economics of sustainable net revenue of AI, we haven't gotten there. And so there's a lot of presumptions about the trajectory and the growth. And so that also then plays into the hardware side, though, right? Like how long do GPUs last? Like three to five years or something, right? So then suddenly you're investing a lot of money for three to five years of risk, essentially. And so I think it might end up just kind of coming down to like uh yeah, just the risk versus reward and just focusing on the areas that even though they have the intention of doing something in the future, because there's still a lot of unknowns, they'd rather just stick to what they know for now. That would be my guess on how I'm looking at those statistics. Yeah.

SPEAKER_00 23:19

Yeah, and that's very interesting. Yeah, I like that in terms of how you stitch those together together, like in terms of the capital and then sticking to what they know, potentially dipping their toe into the water. I will give you this then. There is a bit of a rotation though. The same survey said that 60% of family officers are planning major allocation shifts, which is the highest ever recorded. And some of the key drivers are geopolitical anxiety, weighing competence in the US dollar, and succession anxiety. So 80% outsource some portfolio oversight, which is like potentially 2PE or getting other people involved or other businesses involved to manage their capital, and 33% outsource more than 50%. And so there's a lot of hands touching this wealth, but it's still mega dollars. So do you think in this coming back to the the regulation piece? What happens when you know, say all of them, like not that it will happen necessarily that all of them would shift their allocation simultaneously, but if there's that many unregulated entities moving trillions, currently it's 5.5 trillion, like what does that happen? Like, what happens there? Is there any ethics or regulation questions that come up for you?

SPEAKER_03 24:32

I think there definitely are. I wonder how much of this is kind of influenced by macroeconomics. And so the intent for allocation shift might be more to do with like the current economic situation of the world rather than any in particular, like any specific example. It definitely raises the question of if that moves, where does it tax? Does anything get scrapped off the top? What happens to all the markets that it moves to? I know that we saw it must have been earlier this year, or maybe it was last year, that like a firm was caught going crazy on derivatives in India, for example, because of the the like kind of small size of the market relative to the size of the derivatives bets that there were. And so you don't know what the potential ramifications are of kind of this moving and what the succession looks like either, which could be huge pivots out of certain industries and into others. So I think it just presents a lot of unknowns and a lot of like lack of traceability and understanding of where this capital goes. So I think it raises a lot of questions and probably answers a lot less, to be honest. But I don't know. Would do you have any like takeaways on this great rotation?

SPEAKER_00 25:41

Well, I think it does. There is a lot of flaw and effects. I think one thing that's less of a threat or less likely is that they all shift allocation into one thing. So they're not all like as we've talked about, business brains made their wealth through business most likely over generations. So there is that inherent like internal knowledge of certain markets. So I think there's less risk compared to public markets where sometimes a lot of money goes to the next hot thing and it creates like spikes and booms and busts or bubbles. I think there would be independent minds and financial management and like theses on certain industries, however, it's still a hell of a lot of money, so they can move significant capital, especially building industries, for example, in other countries. So if there is geopolitical anxiety, and for example, a certain region or country sees less allocation, like less capital flowing in because of those risks, then other places, for example, as you said, India might get more investment quicker. And if that's unregulated or unseen, yeah, makes a big difference, which is huge. Look, we're nearly that at time, so I'm gonna ask you the uh the wrap-up question. We've talked about a lot of things here. What is your key takeaway? What do you want listeners to take away from this episode?

SPEAKER_03 26:59

I think the biggest thing for me was that there's so much money that is just kind of like a black box that it's not really traced, it's sitting somewhere and it's doing things, but we don't really see it and it doesn't really get taxed the way that it maybe should. And I I think it's just that, yeah, that the idea that there is a crazy amount of money that's out there in the world, that especially like this is a great example of very concentrated capital, and just it raises a lot of questions, and our monetary systems sometimes just aren't set up for certain things. And I think this is an example where we're not really we haven't really had to deal with this. I mean, there's been kind of examples historically, except those they're probably more outliers than they are a large group of people with a lot of money versus like a handful of families or something. So I think it's it presents a really interesting kind of problem and dilemma for our monetary systems and governments.

SPEAKER_00 27:56

I can definitely see that. I'm gonna give you I think you've wrapped it up really well. I'm gonna give a slightly different take. And I think it presents yeah, a lot of interesting opportunities because if you think about other funds management, and I like sort of I work in investments, that you have a lot and very specific things to answer to. So, like hedge funds have have a mandate, you've got lots of clients, they know what to expect, you've written it down in prospectus, it's regulated, there's rules that you're bound within. I think this is quite interesting that so like it's gonna surpass hedge funds in terms of funds under under management. So uh in terms of investing and with the the brains and the the the business minds behind it, I think it it'd be quite an interesting space to work, especially if you aligned with the very few clients that you uh would work for. Because like maybe you're just investing on behalf of a family, which is a handful of people, and they've got a strong thesis to make positive change, for example, in the world. It could be quite interesting to make things happen and do it like swifter and with more ease because there is less to answer to. So you have really interesting potential there. I'd like to see it used for good in the world, and I guess we'll see what happens.

SPEAKER_03 29:11

It's all it's like a curated venture capital or something.

SPEAKER_00 29:15

Absolutely, yeah.

SPEAKER_03 29:16

Yeah, super interesting. Thanks for listening. Find us at the CuriosityCrisis.com and Curiosity Crisis on Instagram. We're on all major streaming services, so you can listen how you like. We'd like to just ask a quick favor if you could share this with a friend. Your recommendation means a lot. Thanks, and we'll catch you in the next episode.