PERE Europe: Family offices shun funds

For most family offices investing in real estate, the fund model is broken, according to a panel at today's conference.

Family offices may be small relative to the large institutional investors of the world, but that does not mean that they do not think like one. For many family offices, funds also have fallen out of favor.

At the 'Behind the curtain: Demystifying the family office' session at the PERE Europe Summit 2015 in London, moderator Basil Demeroutis of FORE Partnership, asked one panelist, Ilan Azouri, director at Astone Investments, if he thought the fund model was broken. Azouri said yes.

In the past, family offices such as Astone had invested through funds and relied on managers to make real estate investment decisions on their behalf. “Today, you're seeing a much more entrepreneurial approach,” he said. What's more, family offices are increasingly trading assets directly with each other. “It's a new paradigm, a substantial change.”

Indeed, 67.4 percent of respondents to an audience polling question during the session believed that the disintermediation trend and direct investment movement among family offices was a paradigm shift, rather than a short-term fad.  

James Burchell, partner at Tellon Capital, a UK-based real estate investment firm that partners with family offices on deals, called the move toward direct investing and away from funds “a seismic shift among family offices in the last 10 years.” The reason for this change was a desire by family offices for greater control over their property investments, he said.

Such rationale is similar to the thinking of many large institutional investors. In fact, the results of another audience polling question revealed that more than 57 percent of respondents strongly believed that family offices wanted the same things as large institutions.

Demeroutis asked Azouri if he would consider investing in funds again.  “It depends,” he answered. “It depends on the type of fund, it depends on the type of manager, it depends on the size of the fund.” Astone would be open to a fund where the family office could have some say over investment decisions, but was not interested in being in a fund where it had a completely passive role. Generally speaking, however, Astone was more focused on direct opportunities rather than returning to funds.

Burchell said what is important to note about family offices is that they are far from all investing alike, varying widely in terms of the types of structures and the degree of control they sought in their property transactions.

“Family offices have got their own philosophy on what appeals,” he said. “Different families have different appetites.” Moreover, there's disagreement even within the same family organization on how to invest.

Such “schizophrenia”among family offices has led to its explosive growth within the real estate investor base over the past decade, with the “sea change” really beginning in 2009, in the aftermath of the global financial crisis, said Burchell.

On the flipside, this diversity among family offices represents one of their advantages as an investor, said Jeremy Gates, director at Real Estate Capital Investors, a commercial real estate investment advisor. “Family offices can be more flexible than institutional investors because they can call their own shots,” he said.