Since 2016, Citi Private Bank’s annual Family Office Leadership Program has provided a dynamic forum for family office and family heads to hear cutting-edge insights, share experiences and build connections with each other. The 2023 edition saw 140 participants from 24 countries – who represent $434 billion in wealth – gather in Ossining, New York.

Over three days, delegates heard from prominent thought leaders and practitioners on topics including economics and investment strategy, innovation, family leadership succession, philanthropy, estate planning, technology, cyber security and much more.

1. Amid current uncertainty, family offices should consider maintaining robust, globally diversified portfolios, with tactical tilts to quality fixed income and other select undervalued assets

Elevated inflation and recession fears have made for challenging conditions for global investors. Sharp monetary tightening has created painful losses in bond portfolios but also potential opportunities. With weakness likely to affect further areas of the economy, there may be tactical potential in high-quality fixed income, such as in US investment-grade fixed income.

Short-duration index-linked bonds could be useful against further inflationary surges. Ahead of an eventual recovery, we see relative value in areas such as US small- and mid-cap and emerging market (EM) equities. A weakening US dollar over the coming years could also increase the returns on EM and other assets.

2. Cyber criminals are increasingly targeting family offices, so thorough cyber security planning and risk prevention are vital – act decisively if a breach occurs

Given the substantial assets typically under their control, family offices are increasingly a target for cyber criminals. This calls for a proactive and preventative approach, formulated in a comprehensive cyber security plan. The first step is an audit of a family office’s people, processes and technology.

People are often the weakest link in cyber security, so thorough ongoing education about threats and best practices is essential. Among the key risks personnel need to be aware of are:

• Business email compromise – targeted communications to trick recipients into transferring funds or divulging data
• Insider and third-party risk – in-house fraud by new hires who have not been adequately vetted or leavers who depart with proprietary data
• Ransomware/phishing attacks – dodgy links and attachments provide a way in for miscreants

Family offices should ensure the latest software and updates are installed, work with external advisors to ensure defenses are adequate, react quickly and follow a plan if a breach occurs.

3. Seven best practices can help navigate family and family office leadership succession

Our 2022 Family Office Survey revealed that 52% of respondents expect a family or family office leadership transition in the next five years.² However, many admit they do not feel ready to manage these critical transitions and worry about potentially negative consequences.

Experience highlights seven vital lessons for navigating these complicated challenges:

1. Have the courage to start a conversation about succession
2. Develop a succession plan early and make it a continual process
3. Seize the opportunity to redefine the family’s vision for their future
4. Communicate, communicate, communicate!
5. Set the new leader up for success
6. Support the transitioning leader
7. It is never too early to start planning

Ultimately, continuity planning is better than succession planning, such that the process becomes perpetual and seamless.

4. To seize the opportunity to partner with outside capital, family enterprises need closely aligned management and focused operational readiness

Family enterprises seeking capital in current market conditions are looking to maximize value and find the right partners and strategies, aligned with the goals of their owners. Successful partnerships require consideration of the sectors and markets you are targeting, whether you are seeking a minority or majority stake, and whether you’re pursuing active or passive strategies.

Business readiness is essential to maximize value in the current market, including strong, audited financials; a compelling competitive positioning strategy; strong management team, business plan and good governance; and absence of (or transparency to) any major liabilities, whether legal, environmental or financial.

Families should prepare by understanding the sale process, establishing clear goals for selling the business, determining how much control they are willing to give up and how much involvement they want post-transaction.

5. Prevention and wellness – enabled by innovative technology – may represent the future of healthcare and a potentially investible trend

In a rapidly aging world, keeping people well rather than simply treating illnesses is vital. Combining technologies such as artificial intelligence (AI), machine learning, and genetic and wearable data could enable preventative and preemptive action. Consumer-oriented tech companies with disruptive potential are starting to enter healthcare.

Challenges may include privacy concerns, regulations, monetization and consumer uptake. Potential portfolio opportunities include back-end medical data storage and pioneering techniques like liquid biopsies.

6. Rate hikes and new working patterns are hitting commercial real estate – investors should seek quality

During 2022’s economic uncertainty, commercial real estate investment volumes fell sharply. Rate hikes have forced up borrowing costs, creating pressure on maturing loans looking to refinance near term, especially for those whose collateral is retail or office. Potential recession risks further dampening demand.

Commercial occupancy remains lower in the US and UK following COVID, whereas in continental Europe and Asia, the return-to-office trend is greater. Despite US housing shortages, repurposing commercial buildings to residential is often expensive and impractical. But appetite for better facilities and greener offices is set to grow.

US industrial real estate demand could benefit from re-industrialization policies and infrastructure spending. The transition to green energy could also spur demand for industrial properties.

7. Private investments in tech have suffered alongside listed ones – investors should focus on the “three Ts” when assessing potential opportunities

Private tech company valuations are set to potentially head lower in the next 12–18 months. Defaults among 1,000 or more may occur as they fail to secure financing. Investors may be overemphasizing profit versus growth amid today’s conditions. In time, there may be potential for value creation as AI reduces headcount and other expenses. Among other things, family offices assessing private tech investments should consider the “three Ts”:

• Team – Some 70% of the investment decision is based on the talent of the operating team
• Traction – 20–30% of the investment decision is based on business and market data that confirms the staying power and growth of the business
• TAM (total addressable market) – Businesses require a sufficiently large market if they are to scale up

8. To maximize impact, family offices and philanthropic organizations should share knowledge, coordinate funding and co-create

Making the world a better place is integral to many prominent families’ missions, offering a way to perpetuate their legacies. By joining forces with others with the same goals, the potential impact can be much greater. Here are some best practices when it comes to collaboration:

• Knowledge sharing is powerful – Asking questions of other funders, community organizations and governments and exchanging ideas can identify opportunities and elevate philanthropy.

• Coordinate funding – Funders can agree on shared strategy and invest without duplicating efforts. This allows funders to retain their individual granting approach. be it trust based or metrics driven.

• Explore co-creation – Co-creation allows family offices to work with other funders to determine how an initiative will take shape, share decision making and benefit from pooled resources and economies of scale.

• Scale impact via programmatic co-funding of existing initiatives – This involves relying on another’s expertise, program design and choice of nonprofit partners. Funders can support critical initiatives without having to develop in-house or outsourced expertise.

• Amplify the cause – Advocacy and policy change are integral to philanthropy. Collaboration with government and awareness campaigns can produce systemic change and reinforce the message.
  
  

9. Progress in technologies including generative artificial intelligence could drive potential opportunities across almost every sector, boosting productivity

Artificial intelligence has increasingly captured the world’s imagination since late 2022. There is growing conviction that generative AI could substitute for or enhance human labor in a wide range of fields. Potential benefits include more precise medical diagnoses, personalized lessons for students and better natural disaster forecasting.

Genetic testing companies are using AI and machine learning (ML) to generate customized suggestions for diet and exercise through analysis of customers stored genetic data.  Globally, AI could drive trillions of dollars of market value creation via salary and expense savings, as well as workforce rationalization.

10. No longer seen as trophy assets, sports franchises are attracting institutional investors, which may keep driving valuations higher

The sports industry is growing, particularly outside of the US, Streamed events and other content are reaching more consumers thanks to digital technology, broadening the opportunities for franchises and leagues. Sports-related media, technology, betting, hospitality and real estate offer further possibilities.

Given this profile, there are increasing opportunities for funds and institutions to invest in sports. No longer are sports franchises seen as “trophy” assets for prestige and status. Private equity inflows have risen over recent years, attracted by the business underpinnings of loyal fan bases, media rights, merchandising and venue operations. This could keep driving sports valuations higher over the coming years.

11. Estate planning has become more complex amid reproductive treatment progress and a broader definition of beneficiaries

When building estate plans, families and their family offices should consider:

1. 1. Longevity: There is a balance to be struck between providing for future generations and meeting current financial needs.

   2. Reproductive advancements: Rapid advancements in fertility treatments – from IVF to embryo freezing to surrogate pregnancies – are broadening the pool of potential beneficiaries.

   3. Four-legged friends: There is a growing phenomenon of pets as beneficiaries. “Pre-pups” and “puppy-nup” agreements seek to clarify pet custody in the event of their keepers splitting up.
      
      

12. The rollout of renewable energy is continuing but will need major support from private capital

The cost of renewable power has dropped by over 80% since 2010, facilitating a worldwide shift toward sustainable energy use.³ However, there is a long way to go. Battery costs remain high and the increased use of copper in renewable energy production presents environmental challenges.

There are also logistical questions around the recycling of solar panels and batteries which have life cycles of around 10–15 years. Many challenges to development and rollout remain, and this requires support and financing from institutions, family offices and individual investors.

13. The characteristics of families whose business and other wealth have stood the test of time provide valuable guidance

The most resilient families define their collective values as well as a guiding vision that flows from that. In their business activities, they recognize the need for constant innovation and adaptation. The next generation only succeeds them in the business if they are both willing and able to do so.

Maintaining an emotional link between the family and the business is an important element, which can get more challenging with the passage of time. From this can come the realization that they are stewards of family wealth, with responsibilities to those who follow them, rather than owners who can do as they please.

To learn more about Citi Private Bank’s Family Office Leadership Program and our range of services for family offices, please contact us.