Interview with Simon Foster
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This wide-ranging interview touches on many of the themes in this book, especially the value of transparency, the involvement of family members in the family office itself, convenience services and philanthropy.
This interview was conducted by Dr. Alexander Koeberle-Schmid.
Your family office is based in the UK, but the family itself has a different background, correct?
Simon Foster: The T.Y. Danjuma Family Office was created in 2010 to represent a high net-worth Nigerian family. The family are well-known entrepreneurs in Africa, and the patriarch of the family is a noted African industrialist working in the fields of shipping, oil and gas—lots of heavy-lifting industries.
So who actually owns the family office?
SF: Well, the interesting point for us: we always advocate having a family office which is owned by the family. And I think that’s the right way to do it because it eliminates the conflict of interest. Everybody who works in it, including myself, are employees of the family. We know which side of the table we sit on and there’s no conflict of interest between the family office and the family.
I think when looking at family office architectures, there’s very often a difference between family offices depending on whether the family is still in business or if they’re a financial family solely with a pool of wealth to manage. In the case of my family office, the family is still highly industrious in Africa, there’s still the family operating businesses, and that’s the core of what they do.
What the family office does is offer a number of services, part of which is investing the liquid wealth of the family.
So what is the structure of the family who owns the businesses and the family office, and are they heavily involved in the family office?
SF: We work for a number of generations of the family, each of whom tend to have ownership stakes. The family office itself is owned by the first and second generation of the family. At this point we are providing services to the first, second and third generation of the family.
What I like about our structure—and from a governance perspective, something I highly advocate—is that the family members are extremely closely involved with the family office. We have a number of the family members who are employees of the family office. They act in a senior capacity in the family office. The family office is their day job.
From my perspective, this means the family is heavily embedded in the day-to-day decision-making taken by the family office, be it investment, be it advisory, be it anything. We’re highly wedded together.
In formal ways as well?
SF: Yes, it starts with our board structure. Our board is composed of five directors. The patriarch of the family is our chairman. Two next-generation members of the family are directors. And then we’ve got one executive director, which is me, and one non-executive director. One of the family members is a non-executive director as well.
So I think from a balance of family involvement it works really well from a compliance and governance perspective that we’re wedded so closely together. And the degrees of separation and involvement between the family office and the family is quite low and I think that works really well for adding value to the family.
Is your family office, and the investment in relation to the businesses the family owns, an instrument of the overall wealth diversification?
SF: Yes. There are degrees of interaction and degrees of repost against each other between the operating businesses and everything else the family does. One of the things we did structurally which I’m really proud of and I think was very smart was using a private fund to manage family wealth.
We created a Singapore-based “UCITS-compliant” fund and we use that as the master liquid wealth portfolio. We use a regulated fund manager in Singapore to manage that and we act as sub-advisor to the fund manager.
But what that has meant though is that we’ve created a very, very flexible investment management structure. So that means that we can act as a fund manager to related-party entities as well. We manage a bit of money for family-operating businesses, a bit of money for the family charitable organization, various family trust funds, various family members, various family businesses.
This has allowed us to provide our liquid wealth management services across the gamut of the other things that the family are involved in.
Does this affect your approach to transparency?
SF: We are huge fans of transparency. We think more enhanced transparency is coming to the family office sector. I think there’s a global thrust around it.
So we see big industrial fund managers in America giving back the external AUM and saying: “We’re a family office now,” and I think what that creates is a situation where family offices in some environments are becoming dark pools of capital that the regulator knows very little about. Because of that, at some point the regulators are going to start stepping into the fray and look for more understanding of what’s going on in the family office world.
How do you work to counter this?
SF: We are extremely transparent. If we were regulated, if we were publicly traded, it would have absolutely no impact on our reporting standards because we already meet or exceed the best-of-breed practices in those environments.
One of the things that we thought was important was using jurisdictions which work well from an ‘OECD White List’ perspective—highly transparent countries with very, very strong reporting structures. And for various reasons we thought the UK was a really good fit for that.
So, for us, one of the key governance planks was being involved in a country where there’s transparency. From a governance perspective that means we file accounts every year at Companies House and we follow western-world governance principles in our operation.
Does that mean you follow UK company law across the board?
SF: We do. We follow the Walker Report, we have non-executive directors and I think that it’s a knock-on effect for every asset class and the governance of every asset class. So what we’ve tended to do is this: for every different asset class we have a company which fits that asset class and then we deal with governance for that by having a board of directors, and that board of directors is typically composed of family members and professional staff so that we insure we have balance between the family and the investment team around it.
And also we also have investment management committees where appropriate. Just to make sure we cover the right voices from a governance perspective.
From an internal reporting standpoint, that is a lot of moving pieces. How do you convey this information to the family?
SF: In terms of reporting for the family, it’s horses for courses, you know. Some people want to consume that level of detail of information, some people would rather have dashboard wealth reporting, with two pages to show me everything that’s going on. And we try to cater a little bit to both.
Can you tell us about the key aspects to your financial risk management?
SF: We do lots of things. One of the things we’ve done is we’ve tried to use best-of-breed reporting, best-of-breed governance from regulated and publicly traded entities.
So, in terms of risk management, we look at several things. One I think of the most important things that we’ve done is that we’ve created strategic asset allocations for both the fund, the property portfolio, private equity, everything that we do. We’re created a written mandate that describes exactly the process and our limits around that.
Certainly within the fund we look for our approach to be along the lines of the way a pension fund would do it. And I think that’s really fitting with our conservative wealth protection mandate, with limits in portfolio construction between, say, bond investment, equity investments, commodity investments, alternative investments, etc., and limits on the amount we can invest in it. So they’re trying to capture how much risk we can take on within the fund.
We furthermore have limits within the bond portion of the portfolio that describes the investment-grade bonds vs. non-investment grade bonds and we also have sub-categories about ratings of bonds, etc.
So from a governance perspective, we are quite strapped down. But I think that’s important, because I think our investment thesis in a way is part of our contractual involvement with the family. It describes what we’re going to deliver and it also establishes the rules of what we’re able to do with the pools of wealth that we manage.
Compliance is an issue all around the world. What role does it play in your family office?
SF: It’s interesting—I think intriguingly, one of the things that was a really good decision for us came very early in 2010 when the family office was very new and we hired a compliance officer. So we have an in-house compliance officer, which is fairly unusual for a single family office. But I think it’s worked out really well.
We have mandates, we have rules as we were talking about earlier from a compliance perspective and I think our compliance officer makes sure that we are staying within that from an investment/decision making perspective.
The regulatory backdrop keeps changing and one of her main duties is to keep an eye on that regulatory backdrop, to keep us up to speed with it and help us understand where there are things that are changing in places where we really need to do more.
Part of the role panned out a little differently than I would have expected it to. And I think a lot of what our compliance officer does is what I would call “outward-bound compliance.” Because we represent an emerging-economy family—I think if you’re an emerging economy family you are held to a higher standard than European family offices or American family offices would be.
And because the family is African, as with most emerging economy families, there’s a degree of political exposure, and which certainly fits the bill with us, and so that means we’re in constant dialog with our bank, the financial service providers maintaining and making sure that we have good in-house KYC documentation. It’s been absolutely vital. And the compliance functions, one of the major roles has been maintaining dialog with our financial counterparties and making sure everyone continues to understand who we are, what we are and what we do.
Let’s move on to family governance. What measures do you do on the family governance side to increase family cohesion?
SF: I think one of the things that has worked quite well for us strategically has been using a set of UK companies to host the family office. What we’ve basically done is we’ve created the family office company with family members as shareholders. So while there’s no formal family council, when we hold AGMs for the family office—and because various family members are board members as well—when we hold directors meetings, what that means is that the various individual family members are meeting around a table to talk about the operations of the family office.
What I really like about that is we’ve used company law and company governance to embed family interaction and family governance as well.
How have you achieved this?
SF: It’s actually quite a simple and elegant solution to an issue that resonates with many families. I think by having all family members as shareholders in the family office, that formally means that when you have an AGM, everyone has a right to speak. And that creates some nice natural cohesion about debating where the family office fits in the investment matters of the family.
And also I think the directorship and approach has also worked really well for us, in that our board is heavily involved and has a heavy concentration of family members in it, all of whom are directors. So I think in a way our corporate governance actually turns into family governance as well.
Do you also offer convenience services for the family—anything from booking hotels or vacations to searching for the right schools for the next generation?
SF: I kind of think with most families and most family offices the mandate changes over time. We’ve been going since 2010 and I think what we actually do now has changed quite dramatically.
From a formal standpoint, we don’t actually offer concierge services like booking trips and those kind of things in our mandate. But over the years we have grown into a property manager for the family and we have sort of turned into managing various family members’ investments. So things that are not formally under our mandate, where people have individual holdings, we quite often become involved in that.
But I think some family offices tend to shy away from concierge services and we don’t hold it out as something we do. But quite often we do become involved in things just because we’re trusted advisors to the family. So if an individual was looking to start a business, or looking to build a structure for a member of their family, we will quite often be asked to comment on it or be involved.
And who pays the fees or your salary, then? Is this paid by all family members, or does it reflect who asks for what in terms of advisory service—how much they invest and so on?
SF: You hit on a really good point, because when you talk about making recommendations about family offices, I think one of the things that people miss is: what’s the funding strategy for the family office?
Our funding strategy is actually quite simple: the heart of what we do is acting as a captive, in-house fund manager to the family for liquid wealth and property portfolio.
So we are run as a company. We have a revenue line. And we generate that revenue line by charging management fees to the property portfolio and to the investment portfolio, and that’s what actually pays for the salary, keeps the lights on, keeps the fridge going in the office.
And because we’re funded by charging investment fees, any ancillary services that we provide to the family are essentially covered in the already-in-place funding strategy.
So we don’t itemize time and materials billed for stuff. We’re already remunerated by the investment management fees that we charge.
You also mentioned that the family pursues a foundation and philanthropic activities. Can you talk a little about that?
SF: That is a separate entity from the family office in this environment. Several years ago, the patriarch of the family created a charitable foundation in Nigeria. Makes perfect sense, because he is Nigerian. He’s passionate about Nigeria.
And that basically acts as the charitable arm to the family’s activities. Its core focus is on women’s rights, education, and river blindness. That’s not formally under the remit of the family office. It’s a sister entity, even if there is a degree of overlap in that family officers, as people who have gained trust through time, and various members of the family act as trustees in the foundation or directors of family businesses.
Thank you for this fascinating discussion. To wrap things up: Can you give us three recommendations you would give a family thinking about building or founding their own family office?
SF: Sure. My first view is this: I think in most case where I’ve met people who are talking about building a family office, my very strongly felt advice would be to do so. And my point around that is this: most families I meet with that have the wealth and the knowledge to do that—most of them have had operating businesses, maybe even operating empires, and they’ve had the confidence to go out and build these empires.
Why would they lack the confidence to actually manage the end product of those financial empires? The family office is just a business. There’s no mystery or mystique around it. And I think, for me, if I had capital at that level, I’d find it empowering. You know, having this entity that’s focused on helping me do what I need to do with the financial power of the family.
The other thing I’d say following that vein as well: the beauty of a family office is that it can be anything you want it to be. It can manage liquid wealth, it can manage property wealth, it can assess succession planning, it can manage operating companies. It’s a bespoke company designed to meet the needs of the specific family and I find the arguments against having one to be relatively thin when you think about the benefits.
The other advice I would also give to people starting this up is: it’s a strange world. I’ve seen situations where family offices have become fashionable. People want family offices because everybody’s got family offices. And it’s perceived as what you do.
And if I was a wealthy family building one, I’d take it back a step. And I actually do a real user-needs analysis of what comprises the family wealth, what they’re actually involved in, what they actually have, what they don’t have, and what needs managing.
So I think it’s important that you get the right architecture in to build the family office, because you can end up with something that is not well built to fit your needs. So, to me, the art around that is effectively understanding exactly where you fit, understanding your tax exposures, understanding your assets and entities and then building something rational around that. I think people leap in too quickly without having done the groundwork.