New generation of entrepreneurs fuels boom in Australian family offices

The Australian family office market has traditionally been relatively small, low profile and limited in its ambition. To manage intergenerational wealth, rich families, often Europeans who emigrated after the second world war, set up offices that mostly invested in blue-chip stocks for dividend growth, alongside real estate assets.

However, there has been a revolution in Australia’s investment market over the past decade as the number of family offices has boomed and their investment strategies have shifted towards active investment.

Professional services firm KPMG estimates that, of the more than 2,000 family offices operating in Australia, almost 60 per cent of them were established in the past decade. Their growth has been driven by factors including the “baby boomer” generation selling family businesses in order to retire, and a new generation of entrepreneurs emerging and creating wealth on the global stage.

The family office sector now employs up to 20,000 people in Australia and has started to draw talent away from traditional wealth managers and banks, as investments have become larger.

“People shouldn’t underestimate the power of private capital,” says Robyn Langsford, the partner in charge of KPMG’s private family business operations. Over the past decade, the nature of many family offices has started to change and some are now playing the role of “pseudo private equity houses”, according to Langsford.

This growth is all the more remarkable as it is not driven by the migration of wealthy families to attractive tax jurisdictions, as is the case with Singapore or Hong Kong. “It is a home grown industry,” Langsford says.

And these trends have also changed the role of the family office within the Australian investment community.

A report issued earlier this year by the Australian Investment Council and data provider Prequin showed that private capital assets under management grew 33 per cent in the 18 months to June 2023, to A$139bn ($91bn), meaning that they have doubled in four years.

The role of family offices has also become significant. The AIC report said that family offices now account for more than a third of active investors in Australia, up from only 7 per cent five years ago, as more wealthy families have looked to establish a family office to grow their fortunes rather than just managing them.

In fact, the number of family offices investing actively has surged to eight times the level of four years earlier. In contrast, the number of superannuation funds — the nation’s powerful pension industry investors — pursuing a similar strategy has halved.

Family offices are often the hidden hands that have quietly transformed Australia, with investments ranging from the initial development of the 1,100km CopperString electricity transmission project in north Queensland to the construction of the airport in the nation’s capital Canberra, and the salvation of Sydney’s artist venture Carriageworks, which was forced to close because of the pandemic.

A new generation of billionaires, which emerged from sectors such as software and mining, have disregarded the historically secretive and opaque nature of the investment segment. They are targeting climate technology and energy transition investments that would normally be the preserve of private equity or asset managers.

Grok Ventures, the family office of billionaire Mike Cannon-Brookes, co-founder of software developer Atlassian, has backed a host of climate-related start-up companies. These include eco-toilet paper brand Who Gives A Crap and biowaste business Goterra that uses insects to reduce carbon emissions. Grok also controls Sun Cable, one of the world’s largest solar power projects, and is the largest shareholder in AGL Energy, the country’s second-largest electricity group, having played activist by blocking a planned demerger of the company two years ago.

Billionaire Andrew Forrest’s own family investment fund Tattarang, run with his estranged wife Nicola, has used his mining wealth to invest in large scale renewable energy companies. He was also an initial investor in Sun Cable. Those deals sit alongside investments in Vegemite-owner Bega Cheese and well-known Australian brands including Akubra Hats and outback apparel maker RM Williams as the mining magnate looks well beyond iron ore.

Even long established family offices — such as that of the Albert family, which owned the record label behind rock band AC/DC’s global success — are now looking to devote more resources to impact investing with funding for start-ups such as ticket exchange platform Tixel.

As a result, the sector has become idiosyncratic and no two offices are alike. Some fund managers question whether all family offices should even be included under that umbrella. One adviser, speaking on condition of anonymity, says that the term is now the most “misnomered” in Australian investment circles with some “family offices” more akin to large private offices, while hundreds of those at the smaller end of market — with assets of less than A$200mn — have little clout.

Chris Graves, an academic with the University of Adelaide who compiles reports on family offices and businesses in Australia, argues that there is confusion over the term given the boom in the number of wealthy families in recent years. He suggests the definition is more related to the approach of the office.

“It’s financially driven but it’s also about human capital,” he says. “We all come from families and our parents’ ultimate goal is that their kids will have a positive impact on society. A big part of that is preparing them for the future.”

For Paul Heath, chief executive of Koda Capital — a wealth management advisory firm that works with family offices — the boom has been driven by the nature of capital markets in Australia, which were not as sophisticated as in Europe and the US. This has opened up opportunities for private investors.

He cites corporate lending that occurred when the country’s largest banks withdrew from some activity after the global financial crisis. That opened the door for family offices to strike deals with upcoming companies. Likewise, the subsuming of smaller superannuation funds into the larger operators in recent years meant there was more opportunity for family offices to step in to financially support smaller businesses.

“Between banks and super funds, there are meaningful gaps in the system. Family offices were the first to fill that lending gap,” says Heath.

Australia’s venture capital and private equity industries are also still relatively new, he points out. That has meant that the family office has played a more prominent role over the past decade, in segments such as private debt and specialised lending to agricultural operators, compared with the US and Europe. “Growth in private capital in Australia is really only starting to get going,” he says of the continued opportunity.

The role of founders has also been a growing factor in driving investments and has become a more significant factor in family office investment in recent years. This is because the source of the wealth is closer to the decision making than in a traditional office running to four or five generations with dozens of members. “That entrepreneurial drive doesn’t go away,” says Graves. “That realised wealth will be used for other ventures. Founders that love creating value want to do it again.”

However, the very rapid growth of the size and influence of the family office has raised concerns over potential risks because of its unregulated nature.

Heath says that the “explosion in unregulated capital markets” represented a risk for both the lenders and the recipients of the funds. He cites difficulties that less experienced and smaller offices may have when presented with funding opportunities. “When a family office is presented with a transaction — are they the first to see it or the last to see it?”

Langsford agrees that the family office environment is “not a bed of roses”. She cites governance and cyber security as areas where smaller family offices need to be wary.

Still, it looks like remaining a vibrant sector. While the development of wealth management in Australia has come on the heels of the surge in family office activity, few expect investors to revert to the more traditional administration role that remains the driving force of family offices in countries such as the UK.

“Growth is now the primary function,” says Langsford. She argues that the younger generations have taken a more active role and will probably continue to do so. “Sitting there and looking at things going up and down on the stock market is not that fulfilling for 40 to 50 year olds anymore,” she says. 

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment