This article belongs to our exclusive single-family office guidebook, where we give guidance on the most relevant topics for newly established and already existing family investment vehicles. It was contributed by Tsitsi Mutendi, co-founder of family office consultancy Nhaka Legacy.
Africa is emerging globally as the next frontier and as the world turns its eyes to the continent they are learning that the continent is developing a dynamic family office ecosystem. In the near future and beyond, this ecosystem has the potential to rival and possibly surpass the other big emerging regional economies. However one of the biggest challenge Africa faces is the size of its ever growing population coupled with the bleak wealth distribution statistics. No doubt that there is significant wealth in Africa. According to a recent report, Africa has a total individual wealth amounting to $2.2 trillion, with approximately 145,000 high-net-worth individuals holding $800 billion of assets. The number of multi-millionaires on the continent is growing at a faster pace than anywhere else in the world. Africa as a whole will see its UHNWI segment grow by 31% to reach close to 2,600 individuals by 2023. This figure is expected to rise to 198,000 by 2026, helping to fuel economic growth rates that are expected to be higher than other emerging and developing markets in a few years time. Countries like Egypt, Nigeria, South Africa and Kenya are set to be the largest wealth hubs on the continent. And as a haven for Family Offices, Mauritius has a keen eye on the African market.
Let’s focus on what steps one needs to take to set up a Family Office in Africa. Some of these steps can be applied in many other countries and continents as they pertain to the actions that the Family must take with reference to their wealth and the need to professionalise the handling of their wealth and lifestyle. As you may already know, a family office is the best vehicle to handle the various capital available to wealthy families. Including but not limited to Financial Capital, Human Capital and Social Capital. What needs to be done first you may wonder:
1) Establish Your Family Governance.
This means creating a family constitution and family charter. This step is a crucial step that most families may overlook and have to go back to. With most families of wealth, the end game when creating a Family Office is to create and build a family legacy for generations to come. Family Governance is a process that leads to a family constitution which is essential to guide the strategic direction of your family office.
Family governance involves sitting down with your family and a family governance specialist, and going through a process that helps establish the goals, culture, and ideals you would like your family legacy to achieve.
2) Clarify and Choose Which Assets Will Be Controlled by Your Family Office and optimise tax by choosing the right locations for the office:
When a family decides to set up a family office the senior members of the family are at a stage where their investments are likely to be extremely varied, including and ranging from stocks and shares, to property, to fine art. Notably each class of assets will have specific needs in terms of tax responsibilities, so it’s necessary to decide how to treat each asset segment. A good example is that the family may decided to put property into a private family trust which falls under the family office umbrella, so as to optimise tax obligations. Understanding all tax requirements per jurisdiction of asset holdings is necessary for the Family Office to be able to manage it optimally. It also becomes the function of the Family Office to keep abreast of changes in taxes and legislation that can positively or negatively impact the wealth holdings of the family. A common mistake families make is to choose or create a family office located in the same jurisdiction as where they live. Although this can be very practical from a communication point of view, this is often not the best choice when examined from a wealth-preservation perspective. This means that the family office needs to be able to protect the family’s assets against geographical, political, religious, personal and economic risks, while remaining fully operational under any circumstance. Therefore, it is only logical that the family office be located in a secure jurisdiction.
3) Select the Services You Want Your Family Office to Provide and hire accordingly:
It must be kept top of mind that, a family office is a completely bespoke solution to your family’s special needs. Because the number of unstable and unsafe jurisdictions outnumbers the stable and safe ones, the majority of families’ family offices will need to be located outside their home jurisdiction. This does not necessarily mean that the entire staff or services must be located in foreign territory; roles as local secretarial support, lifestyle management services and local real estate management can be based in the family’s original jurisdiction.
Here’s an incomplete list of services that could be offered under your family office:
- Tax services
- Legal services
- Wealth management
- Concierge services
- Property management
- Charitable giving
- Family governance
- Wealth succession
- Investment education for the family’s next generations
- Establishment and operations of private foundations
- Payroll and human resources
Each of these services will be assigned to dedicated staff members, creating a team of experts at your disposal virtually 365 days a year. Within a few short weeks, you could have a dedicated team of bankers, lawyers, travel agents, or even bodyguards. However its key to point out that you need to be clear on deciding how your Family Office Leadership will be structured. While it might feel natural to hire a former employee, banker, or investment advisor, given your long and trusted relationship, they may not actually have the skills or experience to handle the complexities of a family office. Keeping that top of mind, when it come to choosing your family office CEO, CIO, etc., it is essential you get hold of a Family Office recruitment specialist. A specialist will be able to use their network to help you recruit the best person to lead your family office.
Why go professional you may ask, the final choice is up to you and your family however, an essentially pertinent fact is that the team you choose this will be leading your family’s legacy for decades to come.
4) Draft Your Family Office Business Plan and include a budget:
Most of you will bewildering why this is on the list. You already have a family constitution. Thats correct, but family governance is complimented by giving the office a mandate. Drafting a family office’s business plan helps the office to be clear of its operations and its functional areas and expectations thereof. And key to this is creating budgets for the day to day running of your family office. Setting up your family office costs and budgeting will set the framework for more definitive budgeting further down the decision chain. This business plan will outline and guide to the setting up of the actual infrastructure of your family office, which is absolutely essential.
Everything from computers, to cybersecurity, to operational practices will need to be considered.
5) Multiple Family Office or Single Family Office?
Making the transition from wealth management to family office services is a big jump. One of the most frequently asked questions by families is, what amount of wealth is necessary for it to make sense to set up an SFO or to start using MFO services? The truth is, there is no one right answer to this. Before considering an SFO or using an MFO, a family must go through the above list and be clear of the following:
- Its goals
- What type of family office it aims for
- What type of services it needs
- Why a family office would actually be needed
- What budget is available
- Whether it expects family members to be actively involved in the family office or not.
There are many aspects involved in the decision to establish an SFO. The thought process itself is the only way for a family to choose the right structure for its needs and circumstances.
For a majority of families, a SFO allows them to have full control over their family wealth and it enables them to establish the family office according to their exact specifications and to deliver the precise services they need. That said, having full control also means having to recruit, and manage staff. The longer the list of services needed the larger the staff and numerous costs. SFO means the office needs to develop its services by itself, whereas families selecting an MFO have the luxury of using existing set of services and structures. Where a SFO is never commercially driven, MFOs mostly are. The MFO model helps to share costs of having a Family Office with other families.
Conclusion: Starting a family office in Africa
Looking at the above 5 key items. Opening a family office for in and for African Families should be more clearer and put into perspective. The process itself is heavily leaning on what the family wants and needs, the budgets available and the necessity of building legacy. For help and insight into how to get started on Family Governance and setting the foundation of building your Family legacy Nhaka Legacy planning is available to assist.