www pwc com au Family Office Insights Dale

www. pwc. com. au Family Office Insights Dale Sanftl – Partner Pw. C Family Office 4 December 2018

What is a family office? “A traditional single family office is a business run by and for a single family. Its sole function is to centralize the management of a significant family fortune. The purpose of the family office is to effectively transfer established wealth across generations. ” (Source: Wikipedia) Pw. C August 2017 2

70% of wealth transitions fail And the origins lie within families themselves… 60% 25% 15% fail due to breakdown in communication and trust within the family fail due to inadequately trained heirs fail for a range of reasons - tax, legal or poor advice Williams & Preisser “Preparing Heirs”

Three circles of family office Wealth What we own Three circles Family Who we are Pw. C Business What we do May 2018 4

Family Office Purpose Key functions 1. Managing the family wealth 2. Managing the family i. e. the process of inter generational wealth transfer 3. Managing the impacts of taxation, and protection against threats to financial security, privacy etc How do they achieve their purpose: • Making family a priority • Ensuring alignment of interest between the family and employees & advisers • Market leading expertise – both insourced & outsourced • Leveraging economies of scale for access and preferential pricing. The solutions available to wealthy families can be different to those for high net worth individuals. Pw. C August 2017 5

Family Office Investment Insights • Effective governance • We can articulate the purpose/objectives of our family wealth • A network of trusted advisers and investment committee in place • Measurement and benchmarking of investment returns • The endowment model; targeting low correlation to equity and credit markets • Compound returns by reinvesting into the portfolio each year i. e. be mindful of family spending, costs and taxation which erode returns • Avoid major drawdowns of the portfolio • Harvest the ‘illiquidity premium’ through investing in long term illiquid assets such as real estate and private equity with a portion of the family balance sheet • Reasonable return expectations, say inflation +3 to 4% Pw. C August 2017 6

Key Macro Themes Global themes Domestic themes • 10 years post the Global Financial Crisis • Real estate prices • Global debt higher now than in 2007 • Legislative risk for taxation • Interest rates are low, and will inevitably rise • Politics • Banking Royal Commission • Protectionism and populism • Regulation – tax and transparency eg. CRS Pw. C August 2017 7

Family Office investment strategies Every family office investment strategy is unique 60% 58% 50% 40% 29% 30% 27% 23% 20% 19% 18% 21% 6% 3% 16% 14% 11% 10% 6% 0% Fixed Income 9% 8% 8% 6% 6% 5% 4% 1% 1% Cash 21% 18% 14% 10% 25% 24% 22% 0% 0% 0% 1% 4% 3% 0% 0% Australian International Private Capital Alternatives Direct Property Equities Family A Family B Family C Family D Family E Real Assets Pw. C 8

Family office asset allocation Investment insights from a sample of large Australian family offices 100% • Diversified across a range of asset classes, but strategies within these asset classes vary • Recognise your core competency – asset classes are sometimes managed in-house or outsourced to specialist advisers and fund managers • Increasing use of co-investment structures to access illiquid asset classes such as private equity and real estate 7% 90% 12% 80% 9% 70% 8% 60% 15% 50% 17% 40% 30% 20% 13% 0% Family Office Peers Average* Cash Australian Equities Private Capital Fixed Income International Equities Alternatives Pw. C 9

Current investment themes • Stretched valuations in many asset classes • Property finance – high quality first mortgages • Cash –maximising returns and liquidity, increasingly difficult • Private equity – mid-market PE and venture capital • Long-short and quality focussed equity managers • Uncorrelated returns – alternative assets, credit, absolute return mandates • Real estate – opportunistic properties with “value add” potential. Wary of passive commercial and residential, particularly if interest rates rise Family Office advisory June 2018 10

Asset protection and risk management • Legislative risk • Superannuation • Family trust • Companies • Franking credits • Global tax and transparency • Proactive management of tax risk – wealthy families have an elevated risk profile in terms of regulator scrutiny. Manage your tax affairs with an expectation of review, your advisers should be proactively managing this for you Family Office advisory June 2018 11

Structuring your assets • Avoid owning assets in personal name wherever possible, except your family home. • Use trust and company structures for asset protection and limited liability benefits • Comprehensive estate plan • Advice taken up front has the most value, the ability to improve tax and asset protection outcomes may be limited if advice is after the fact • Consider your global tax outcomes and cross border taxation issues Family Office advisory June 2018 12

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