Building your wealth
Family offices: align investments to a greater purpose
It’s abundantly clear that the global business landscape we once knew is set to become a relic of yesteryear. Economic, political, and social mindsets have shifted dramatically in a few short months and it is evident that maintaining the status quo is no longer an option. Business and the individuals who run them are having to reevaluate their priorities and devise new strategies in almost every area.
For family offices, aligning investments to a greater purpose is more relevant now than ever before. In the current tough economic times, investments requiring follow-on funding rounds need investors who are well-aligned to their investments. Aligning investments to values affords investors a longer-term view, making them a better longer-term fit, qualities that are often sorely lacking in the investment landscape.
As such, family offices should be taking an introspective look at who they are, what they value and why, and deriving their investment strategies accordingly. Here’s a look at how to get started and the factors to consider when doing this.
Start with “why”
In 2019, LifeGuides CEO and founder Mark Donohue pointed out that a rebirth, of sorts, was emerging as ever-larger enterprises moved toward reframing their reason for existence. This was evident in the Business Roundtable’s announcement of a new “Statement of Purpose of a Corporation,” and their leading CEO’s commitment to “leading their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and stakeholders.”
This shift has also become evident in the family office space. With the realization that every family office is unique, has come the necessity to understand the family’s motives, operational contexts and investment objectives.
Purpose-driven investment has become about far more than merely avoiding investing in stocks of companies engaged in morally questionable activities at the cost of profits. In recent years, many sustainable and impact investment opportunities have emerged, enabling investors to earn well by doing good.
Still, when considering various investment options, success comes from examining why investment is being made. Why invest in a particular way or with a specific focus? Why choose one deal over another?
The answers to these types of questions stem from the family’s values and higher purpose, which become the driving force of all actions. When the purpose is clear, investment time frames will be easier to ascertain and distractions are minimized.
Having a well thought out and defined purpose statement helps to not only provide direction for the enterprise from an operational point of view but ensures that there is also a solid frame of reference when exploring investment opportunities and finding the right fit.
Formulating a purpose statement
When crafting a purpose statement, it is essential to look beyond profit and find what really matters to the family. It helps to frame, in black and white, who the family is, what they value and how they translate this into working objectives.
Including the next-generation and future owners of the family business in this process can be highly beneficial to both the company and family. Doing so not only fosters interest and engagement early on but also helps to ensure a continuity of vision, values and purpose as succession takes place further down the road. Research shows that millennials value corporate sustainability more than previous generations, making this the perfect segue to integrate the next-generation into family office matters.
When purpose and values are clearly defined, the family can expand these into investment considerations. These can be used to determine their objectives, where they want to focus their capital and the type of investment approach they wish to take. Is there a specific environmental or social issue that is close to the family’s heart or where their expertise and experience can be leveraged to add value beyond capital if desired?
The answers can be used to not only guide what is being invested in, making identifying sustainable or impact investments that align with these values easier, but also what is being measured and reported on.
Evaluation – What is the cost of focusing on what matters?
Investing responsibly no longer means sacrificing profits or taking on additional risk. It may, however, mean having to sacrifice short-term gains for longer-term value and positive impact. This is something that can cause a degree of conflict initially, primarily when traditional investment evaluations have been based solely on cash-flow and price and portfolio performance is judged on a quarterly or annual basis.
Moving into purpose-driven investments requires both a shift in mindset and operational processes when it comes to how investment evaluations are conducted and performance is calculated may be required. In instances where certain non-financial factors matter more to certain family members, then it’s important that these factors are highlighted as part of the family office’s regular reporting. This increased focus on non-financial factors also has the benefit of better navigating non-financial risks.
When investment decisions are reframed according to the family’s purpose and are selected according to its values and the objectives that stem from these, while still yielding returns, a committed, longer-term outlook becomes the new normal.
Often when a family and their family office have a clear purpose, this not only drives strategic, operational decisions but can also serve to inform investment decisions. Internally, everyone is on the same page about why things are done. Whether investments are executed in-house or by external consultants and asset managers, those involved are equipped to source and secure opportunities in-line with these values and objectives. This saves time and valuable resources and helps to ensure the success of investments over the long term.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.