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We Need More Golden Pyramids

Reminding family offices of their superpower

We need more golden pyramids.​

Ok, let’s back up. A lot of my time is spent with family offices, through CREO and Spring Lane amongst others. Family offices are all different, of course, since they reflect the past and future of individual families that are all unique, but they share one core characteristic that sets them aside from every other financial institution in the world. Almost every financial player — banks, pension funds, endowments, wealth managers, PE funds, foundations — are intermediaries. They manage capital on behalf of others — shareholders, pension holders, account owners, limited partners. They can invest, they can be conservative or be bold, but ultimately they need to justify their actions to a board of stakeholders, and they do so, generally, by showing that their decisions were fact-based, analytical, based off asset management models and explicit investment strategies. Not surprisingly, they tend to act very similarly as a result, since it’s always easier to justify an investment decision by showing that others are following it as well. As a result, most of the strategy of a class of actors, say pension funds, looks surprisingly similar: a mixture of ~50% public market exposure, 20% private markets, about 30% of bonds, etc… Sure, at the margin, some are more active in direct deals, some have VC exposure, some focus on different geographies, but largely speaking, the strategies of most of these funds are remarkably similar. The same would go for endowments, asset managers, or even most foundations.

Two women in a glass office

But family offices are unique in that, in theory at least, they are the owners of the capital. A family office reflects the desires of a single family, who is the ultimate decision-maker. There can be analysis and strategy, of course, but there doesn’t need to be. A family office can decide to allocate capital through a mix that looks identical to a pension fund’s, or they can decide to build a gigantic golden pyramid on the front lawn. In fact, they are probably the ONLY actor in the financial markets that could build a giant golden pyramid – no one else could justify it as a strategy, or as a smart, analytical investment. It is the single most unique power, the single defining characteristic that differentiates a family office from every other actor in the financial industry.

So what is a golden pyramid? Well, it can be anything – a new company, a new venture, an art installation, a model city, a motion picture… anything that goes beyond what a careful, conservative, money manager would consider a good idea. That is NOT to say that it is a bad idea: just that it does not fit the mold of a traditional investor that has to explain her decision to stakeholders. It can be an idea that is too risky for traditional investors. It can be something that has a return other than financial — something that the family feels is important for the arts, sciences, or society. It can be something that will pay off in the very very long term. It can be just a golden pyramid.

It was family offices that funded solar and similar investments in the early days, and maintained the industry until it was de-risked enough that institutional investors entered the mix.

In fact, many family offices started because the founder of the family’s wealth took on an insane risk and started a venture. Guy Laliberte started Cirque du Soleil when he took a troupe of stilt walkers on a tour of Quebec with a weird show that married stilt walking and storytelling and acrobatics. Frederic Smith gambled the last $5,000 of FedEx in Vegas in the early days of the company to make payroll. Jim Pattison sold his house and surrendered his life insurance policy, as well as a personal guarantee for him and his wife in 1961 to open his first car dealership, and 25 years later, he was selling more cars than anyone in Western Canada. All of them won and won big. They took risks that no one else did, and created family offices that stand to this day. In my world of climate investing, it was family offices that funded solar and similar investments in the early days, and maintained the industry until it was de-risked enough that institutional investors entered the mix, and ‘impact investing’ was born.

Ironically, though, today family offices are increasingly creating structures to mimic traditional asset management. They hire strong investors who create asset mixes that resemble those of endowments and pension funds, create investment committees to review investments, and generally ‘professionalize’ the family office investment and wealth management.

That does work very well to preserve the wealth. But it also robs the family office of its ability to build golden pyramids. There are very few investment committees that will approve a golden pyramid in the front yard, and even if the family wants to do it, they will view their role, somewhat rightly, as trying to dissuade them from doing something that may be a bad idea, financially speaking.

And of course, advisers, counsellors, consultants, will generally echo all of these sentiments. Family offices are generally surrounded by many of these intermediaries, who provide sound financial advice. And none of them love golden pyramids.

Feet looking down from height

But not only are family offices the only ones that can build golden pyramids, in my experience it is the golden pyramids that bring the family the most joy. Watching sound financial management happen may allow them some peace of mind that the family wealth is well managed, but it rarely brings the family pride or satisfaction. In my experience, those families and family offices that have built golden pyramids are far more excited and enthusiastic about the pyramids than the investments of the family.

Not every family office will want to build a golden pyramid, and many of those pyramids may, in fact, be bad ideas. And sounds financial management of a family fortune is obviously a positive for almost every family. But after having seen many, many family offices over the years, I do believe that family offices turning themselves into under-capitalized and under-resourced pension funds or endowment offices, and effectively removing their own ability to pursue Golden Pyramids, is also a bad idea. It may preserve the family wealth, but it also robs them of creating something that would bring them joy and pride and pursuing potentially incredibly valuable or powerful ideas that family offices are the only ones that can pursue.

Family offices are generally surrounded by many of these intermediaries, who provide sound financial advice. And none of them love golden pyramids.

So, golden pyramids or sound financial alpha / beta models for asset allocations? It’s probably not one or the other — family offices, for example, can allocate some capital for golden pyramids and some for traditional financial management. But they will have 100 peers, 1000 consultants, and 10,000 articles advocating the latter, and I wanted to provide at least one encouragement on the other side: I have met thousands of family offices. For many of them, surprisingly many, they have passions and interest that could lend themselves to a golden pyramid, but they have also put in place structures that make pursuing these pyramids very difficult.

But family offices should remember that they have a superpower that no one else has, and have real discussions around how to use it, and how to structure the asset management function so that it permits, or even encourages golden pyramids. There are models where family office investments are used to fund a foundation, for example, which can be repurposed to fund Golden Pyramids.

And the world does not need more investment dollars going into bonds and stocks. It does need, more than ever, some epic golden pyramids.

Christian Zabbal is a Managing Partner with Spring Lane Capital. He also serves as board member and co-founder on the CREO Syndicate, a group of large family offices that invest in food, water, and energy companies and technologies.
Project DEEP. Sorenson Impact Center. MCB



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