Two industrialist families have launched a multi-family office in Switzerland based on an equity stake and following very long-term investment horizons. This service spoke to one of the founding financiers about how, beyond this, they intend to attract other families into the fold.

Earlier this month, long-time investment partners Hugues d'Annoux and Morten Kielland launched Key Family Partners. It is a Geneva-based multi-family office designed as a private investment club, inviting families to take an equity stake and largely follow the model pioneered by Yale University 20 years ago as a patient non-traditional path to attractive yields.

The two families, whose fortunes have been preserved over generations in industrials, have spent the last six months engineering services. It seemed a good time to ask why two families - one French and one Norwegian operating in the Alpine state - are choosing now to open their doors. As to what distinguishes them from hundreds of other Swiss-registered family offices or private banks, there are several answers. One standout factor is asset allocation which Kielland believes is about 80 per cent of returns, and where the "difference" can be made. Another factor is launching the venture with zero debt and the families' long history together, he told WealthBriefing in a recent call.

"We have known each other for 30 years and [have been] investing together for a very long time. We were part of another multi-family office before but we decided to start our own because we wanted different corporate governance, a different structure so that really is why we are here."

The Swiss family offices space is worth attention at a time when this news service has been intensifying its coverage of non-bank wealth management players in the country. New regulations are taking hold in Switzerland, giving external asset managers more visibility. Among the ranks of the ultra-wealthy, a desire for more hands-on control of wealth and activity helps drive development of family offices. And banks' value propositions are under a spotlight in Switzerland when the country wrestles with negative official interest rates. 

Switzerland has a large number of single family offices, to give some context. There are 135 of them, according to Highworth Research and, after checks are made, Highworth expects to add about 50 more to that number to its database by the close of 2021. 

What specifically do you want to do differently?
Kielland: I think number one was to have 100 per cent transparency. That includes not to have many offshore companies but just to have one entity. Number two was to start a company in the black from day one. Number three: we didn’t want any family members to work full-time in the office because that can create problems further down the line. So we believe in professional management. We can sit on the board but not in the day-to-day operations. We also wanted to have a very professional investment committee. Our CIO is Nigel John Webber [former chief investment officer and chairman of the global investment committee of HSBC Private Bank]. We wanted to do everything right from day one.

That’s interesting, you use the word transparency and typically for those covering family offices, they are anything but. They are difficult entities to understand because they are all quite different and generally fly under the radar.
That’s true. I think you can probably ask 10 different family offices and they can be very different. Our approach at least is different from the multi-family offices that I know about. And that is why we offer equity to each family that comes in. So it would be like a true partnership. And also having families as equity shareholders you have the transparency. You will see all the financials there. There are no hidden commissions, there is no hidden anything. That is very important. Also by creating this, we should be able to attract families who view this as a very long-term commitment for many generations. That is our goal.

Explain the equity structure and how it works for individual families wanting to come in.
We have set aside 25 per cent for additional families that come in. The remaining 75 per cent is owned by the two founders and staff.

So what is the threshold for families?
We believe that the sweet spot is between SFr50 million and SFr250 million. So we are saying the minimum investment is SFr50 million. I think in excess of SFr250 million and you are large enough to have your own structure. We want to have another eight families then we will close the shop.

What’s your time frame for achieving that?
That is one beauty of being in the black. If it takes two years or ten years, it doesn’t really matter. The most important thing for us is that we are able to manage our money in the way that we think is the most efficient. If other families join us that is very good because then we can possibly squeeze our infrastructure differently. But as we are truly operating today, we use external advisors on the private equity side. We do in-house bonds and in-house equities.

We have a firm based in Geneva that used to run Pictet’s private equity on retainer. We have an English advisor doing due diligence on our real estate investments. I don’t think we will change those in the future.

How do you go about reaching consensus around some of these long-term investment decisions? There are probably going to be strong personalities from other wealthy families bringing their own ideas. Are you taking them on the basis that they believe in the Yale Endowment model predominantly and that is the common ground?
Today, the two families are quite different. I manage part of my equity portfolio myself. The other partner does not do any investments on the equity side nor bonds side. I do both. So we are quite tailor-made to the families’ needs and wants. Some families can be very hands on and other families have 100 per cent discretion, so it depends from family to family.

I think we welcome strong personalities. It only contributes to the evolution of ideas. Nothing is better than having a challenging discussion in the investment committee. We had one this morning where I happened to disagree with our CEO but we came to a solution.

How might the regulatory landscape change for you now? Where do you see those hurdles?
We are in a two-year grace period because we only have two families. But now already we have quite a lot of compliance. I am sure it will increase. And we don’t have an external compliance company to do this. For now we are doing it in house because it is routine. How it will be in two years I have no clue but our lawyer and director of the company deals with this all day long so we will know in advance if we need to change anything.

What industries and sectors are you most paying attention to? One from an investment point of view but also the types of wealthy families you are attracting or want to attract in to the office? And where do you see wealth heading as opposed to how it was created from your own background?
That’s a good question. What I am saying is, "OK you are a wealthy person, you have SFr100 million with Coutts in London, you get good service, but it is quite pedestrian. You put SFr100 million with us, you will get a yearly dividend. I guarantee you, we will commit the same service but we will also have a much more interesting deal flow – in private equity, in real estate in non-traditional asset classes. And we will have a much more active asset allocation. And if history teaches you something, and what it taught me, is that asset allocation is about 80 per cent of returns. That really is where you can make a difference.

We have a very active asset allocation model and a bias towards the endowment funds in the US. They have a very non-traditional asset allocation model. In the last 20 years and 10 years they have out-performed the typical 60/40 portfolio by a good 100 per cent. Our goal is to out-perform the typical asset allocation model of most private banks in Switzerland, the UK and elsewhere. I also believe in the next 10 years, interest rates are going to be quite low, equity valuations will be quite high, so you have to look elsewhere.

Going back to when you talked about the situation at Coutts and suggesting that you would offer a much more interesting deal flow, explain that more, and put some examples forward.
OK, let’s take private equity, we have around a 20 per cent allocation to it. Coutts or Credit Suisse or whomever, when they introduced a private equity deal to a client they have to be very certain, if that is the right word, or they have to be quite pedestrian in what they offer. We can be very opportunistic, which is the difference. We can act very quickly. We have acted within two weeks. We have five analysts working day and night and we get the due diligence report.

That cannot happen in a big bank. It would take it three months. And by the time they have done the due diligence, it might be over. However they will invite investors to invest in KPR or Blackstone that are huge machines, and some of them are doing extremely well of course. We prefer to go into direct deals. Less fees, more risk, but also more reward. But it is important to do your proper due diligence.

What you are suggesting is that you can get deals done faster than massive private equity firms.
Yes. When we started we looked at over one hundred private equity deals and we invested in eight of them. Is that a good ratio? I don’t know, but it illustrates the deal flow that we have gotten in here and that is thanks to my French partner, thanks to me, and people we know in the industry. And we are both grey haired people so we have been around for a while.

This naturally leads to asking about risk.  In the times we are in, with so many companies under stress, investment under stress, and so much speculating going on, how do you manage risk?
A lot of it comes back to asset allocation. We have 30 per cent in cash, which is very high of course, and that is the way of mitigating risk. It comes from our investment committee discussions, where right or wrong, we are, I would say, extremely conservative when it comes to our exposure to equities and bonds. We have 30 per cent in equities. A typical bank would have 60. If arrangements were very different and we were not in a 12-year bull market, we could perhaps have 60 per cent in equities. But we have been very cautious since we started. I think that is the best way of mitigating risk.

When it comes to specific equities and bonds, we have a lot of parameters on how to try to mitigate the risk to be as little as possible by doing fundamental as well as top-down research on the individual names. Again I strongly believe that the asset allocation is more important.

So far, I must confess we have been rather wrong because the market is soaring up but we are in there for a couple of generations and what happens tomorrow or the week after is not that important for us. We take a very long view.

Geopolitical risks also are impossible to ignore. How much you are weighing the US election outcome, the trade standoffs between China and the US, which most people think are going to continue regardless of the outcome. How do you talk about that around the investment table?
We talked about that actually yesterday. A Biden win will probably drive even more helicopter money into the system. Instead of $1.2 trillion, it might be $2.5 trillion. So we don’t see a Democrat win being a big risk to the market, on the contrary it would be positive.

We are rather optimistic about China. Again if you take the long view, China is in many ways replacing the US. So we are looking right now as we speak at a Chinese hedge fund manager, and taking a long and short approach. He has been around us for four or five years and has a tremendous track record with very low correlations in the market. It also means you have less net exposure to the market so you have less risk in the market.  We will most likely go in with him.

In emerging markets, we have two external managers, one who I have personally invested with since 2005, from England. He invests quite a lot in Chinese companies, in equities and his yield on the portfolio is something like 7 per cent. The other manager is a Canadian who lives in Geneva. I seeded that fund about 10 years ago and he does emerging market debt, excluding Asia. So we have exposure in emerging markets for sure, both in debt and equity. There, we believe we need experts. We can’t do that ourselves. It is too complicated.

I wanted to end on succession planning for family offices. Family offices are dealing with quite different generations at this point with possibly quite different life views and values given how fast societies are changing. How do you bring some cohesion to family wealth decisions?
Unfortunately because there is Covid, we have had to put our family day on hold. We had planned a family day about six months ago, where we had speakers on succession planning, on philanthropy, on next-gen, very interesting speakers on these topics.

What we have seen is that some of the children are more interested than others. But we try as much as possible to have them involved in what is going on between the partners. The succession planning is of course extremely important and a topic we are taking very seriously. I must admit we are half a year behind because we cannot meet. And I can’t sit here and talk to my children or my partner’s children on a Zoom conference. You have to be face-to-face on the weekend to really bond.

What we want is to take the shares we own in the company and put them into a foundation and part of the profits will be invested in charities and foundations decided by the kids, with a board of directors. But they will come to us with proposals; they will be scrutinized like any other investment; and they will have to make a case for why we would invest in this and not in that.

What is the objective?
There are many. First of all you get the children involved. Second of all you will have security in Key Family Partners because we do not sell the shares, and we don’t want to, we want this to be run for the next generation and so forth.  So we are not there yet but we are working on it.

That is also what has set us apart from other multi-family offices. Where quite a few of them are in the business to make money. We are in the business to keep our own money. In Geneva a lot of family offices are set up by ex asset management professionals who want to gather a lot of money to enrich themselves I guess. That is not what this is all about.

There are hundreds of family offices in Switzerland, but you are suggesting that the majority fit into this ex asset-manager structure rather than being more akin to yours, where one or two families have built up wealth over several generations?
Yes, that is my understanding. But you have some very substantial single-family offices, where you have in excess of SFr500 million, even a billion, that are run very similar to us. I would say that our multi-family office is run like a single family office other than that we accept other families.