When it comes to creating a dynasty, there are more factors to consider than simply what kinds of family assets you should acquire. After all, most people who win the lottery, quickly become losers. This is why quotes like “The Father builds, his son buys, his son sells and his son begs.” are found in every civilized culture in the world. It’s not about the money, it’s about the culture that carries on through the descendants. Part of this culture is preparing descendants to handle the transmission of the 4 types of capital between generations.
There is first Human, Intellectual and Social capital to consider. Then there are things like putting family structures in place, creating a counsel, a mission statement, creating an emblem and family colors. Working towards creating your family sanctuary and so forth.
Among all these is building the financial capital – and there are a variety of ways to achieve this. There are three core methods to generate family money, all of which have their strong suits and weaknesses.
Ultimately, regardless of how you generate the financial capital you want to acquire family assets. These are investments, active or passive, held in family portfolios that are used to build, grow and/or manage the family financial capital
If this is your first exposure to generational wealth, then I highly suggest you take a read through the mega-post here before proceeding onto family assets. Money is the least of it when building generational wealth and a dynasty. It’s up to you as a founding father or mother of your dynasty to lay the foundation before expecting to create anything that lasts.
Ready for Family Assets?
If it isn’t your first time, then read on to discover the family assets your dynasty should consider if you’re building, growing or maintaining generational wealth.
Last quick note; I’ve put markers below each type marking whether they are for Building(creating significant wealth stand-alone), growing(building upon wealth created from external measures) and/or maintaining(mitigating losses and protecting from inflation safely). Hope you find this helpful.
Operating Businesses
| ✔️ Building | ✔️ Growing | ❌ Maintaining |
A lot of high-net-worth families use operating businesses as a core family asset to grow their wealth. Operating businesses are businesses the family actually owns directly and manages either through their family office or by putting managers in place for the business, then overseeing them. Often times these managers will be family members or friends, in a form of beneficial nepotism but this isn’t strictly necessary.
A lot of the time generational wealth families used operating businesses when forming the bulk of their initial wealth in a method known as The Great Accumulator.
Synergies
Families will try to find synergies between multiple operating businesses in order to increase the overall revenue for their portfolio. An example of this is buying a woodworking shop, a timber mill and a furniture store, and a building company. This would create a supply/demand chain where each business benefits from the next in the chain, increasing revenue across the board as each business improves.
Stick to What You Know?
Most families will choose to own businesses in fields they actually know and understand. This means in one field as a whole(for example, only buying engineering workshops). It also means the family will buy businesses they know they have a family member suited to run(eg buying a retail store for a son with retail experience). Others again will buy a diversified portfolio with or without synergies and put the businesses under external management.
Families tend to stick within their circle of competence and unless they have a firm understanding of setting up synergistic businesses in a variety of industries, they tend not to stray from their strengths. This allows them to make investments that may seem risky to outside investors. But as they have such deep intellectual capital in the area, can wind up making massive returns as a result of their decisions.
Long Term Dedication
As with most assets families are interested in, these businesses are typically made as long term acquisitions and not for quick flips, though sometimes a family will purchase a business to ‘fix it up’ and then on-sell it to another family or fund.
A lot of earth moving businesses are owned by families. Must be a lot of money in moving dirt around.
Direct Investments
| ❌ Building | ✔️ Growing | ❌ Maintaining |
Direct investments are a growing area for family offices to invest in. Making a direct investment is allocating capital to a company in order to obtain a non-publicly traded equity of a company.
Usually, this equity is obtained with the goal of an appreciation in value as the company develops and performs. Other times families will open these equity positions to set themselves up for a takeover of the company to put it under in-house management of the family, similar to what a private equity investor would do. Doing so creates long term family assets.
If this is a families wealth-building strategy, they will have an in-house team to source deals. This team will also handle evaluating opportunities and executing on large, often complex buyouts.
Whether this means a family member(s) heading up this team or having an employer roster is going to depend on the size and wealth of a family, and the families capabilities.
Private Equity
| ❌ Building | ✔️ Growing | ❌ Maintaining |
Private equity funds pool investor capital into a fund structure that is managed by a private equity sponsor. The investors commit capital for a fixed period of time(usually 5-8 years) and pay a management fee annually of the funds under management(usually 1.5-2%) as well as a performance fee(usually around 20%) based on the profits generated by the fund.
The sponsor will deploy the capital over the given time period into distressed companies or companies believed to be undervalued or poorly managed that are then improved under the management of the fund. The fund will take advantage of leverage where possible, usually from banks of private lenders) in order to increase investor returns.
These sorts of family assets can provide tremendous returns to investors but are also prone to fail in turning around some struggling companies. The funds often set structures up to protect their investors from suffering great losses, but there are still many examples of failed private equity deals that resulted in heavy losses for investors.
Angel Investing
| ❌ Building | ✔️ Growing | ❌ Maintaining |
Angel investing is a bit of an art. It involves making an investment in a start-up or a company not yet making a profit, in exchange for equity. The impetus behind making such an investment is in the hope the company or the product it makes is able to either turn a great profit and generate significant cash flow or be sold for a great profit and produce a large chunk of capital.
Angel investing is a highly specialized field and not suitable family assets for the faint of heart. Investors will usually have a deep understanding of one or a select few fields in order to make well-informed investment decisions.
Home-runs
Just the same, the average angel investor will only strike one home run in every ten(and even then this may not be fantastic), 2 out of ten will be average performers that either break even or produce a mild profit, and the other 7 will be flops that lose money.
That said, The Ewing Marion Kauffman Foundation in conjunction with Angel Capital Education Foundation did a study that found investors that did at least 20 hours of due diligence on an investment had a 6x return on their capital on average, while those who did less than 20 only had a 1.1x return. This stark contrast is most likely due to investors doing more research making more informed decisions and less bad investments.
Not exactly what I meant…or is it?
Venture Capital
| ❌ Building | ✔️ Growing | ❌ Maintaining |
A venture capitalist makes investments in early to mid-stage companies with the intent of helping the business to scale to produce a high return on the capital invested. VCs accept the fact that failures are a cost of doing business and aim for the great successes make up for the losses. A VC will typically make one home run for every ten times they strikeout.
A lot of entrepreneurs and small businesses turn to VCs not only for capital to fuel expansion and growth but also for the connection and experience the VC can bring to the table. For example, a small restaurant chain would benefit hugely from bringing a VC experienced in running a large scale franchise. Both for their knowledge in building such a business and from the network they have in the industry.
A lot of ultra-wealthy families don’t just make occasional venture capital investments, they often operate full-fledged venture capital firms through their family office. This can lead to a solid and consistent wealth generation machine for the family. Most family offices are open to the idea on providing venture capital. The biggest challenge s finding high-quality opportunities and performing due diligence.
Merchant Banking
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
This is a bit different to other areas on this list but I thought I’d include it anyway. Merchant banks deal with commercial level clients to finance high-level deals. Families can act as a merchant bank to provide financing or help source financing for individuals or for other families investing activities.
Families doing this sort of merchant banking can take a fee for their capital sourcing, or receive interest on the money they lend. Other deal arrangements include a management fee on capital sourced, markup interest on money lent, equity in exchange for finding capital or simply the access to this opportunity by finding other investors to pool capital with.
Doing this well creates a ‘family bank’ that does well in a portfolio of well-managed family assets.
Co-Investments
| ✔️ Building | ✔️ Growing | ❌ Maintaining |
Co-investing is when an investor(often an institutional investor) allocates capital alongside an investment fund on a particular investment, rather than investing through said fund.
Often times piece of equity will be carved off for institutional investors in a project like this.
There are two main types of co-investments, direct and indirect. Both make great shorter-term family assets.
Direct Co-investments
With a direct co-investment. Investors make an allocation directly into the company in question and help manage the investment from opening their position to exiting. The investors negotiate these terms with the company itself.
Indirect co-investments
Indirect co-investments are structured in such a way that they reflect the characteristics of an investor and their goals in the respective investment. They most often occur under something called a ‘Special Purpose Vehicle'(SPV), and then are managed under that SPV. Alternatively, indirect co-investments are managed via a fund which may make one or several different co-investments.
Club Deals
| ✔️ Building | ✔️ Growing | ❌ Maintaining |
Club deals come about from leveraging social capital and teaming up on investments with other investors/families. Club deals are related to co-investing in that they involve multiple parties. The difference is instead of involving a fund, club deals are groups of independent investors that pool capital and resources to execute on a large project/investment.
The parties involved will either bring capital or expertise to the table, or a combination of the two in exchange for equity. The Club will leverage these to grow and develop the investment for a strategic exit at a later date. There is almost always an exit planned, which make these family assets shorter-term investments and thus better to build and grow wealth, but not maintain it.
Hedge Funds
| ❌ Building | ✔️ Growing | ❌ Maintaining |
A hedge fund is an aggressive(see caveat below) investment fund that actively manages capital in order to achieve an optimal return. These funds as family assets are generally only accessible to higher-level investors as they require less regulation than more traditionally managed funds.
Hedge funds take advantage of identifiable market opportunities and leverage to achieve (supposedly) superior returns to investors willing to take the risk. They are often managed by high-level professional investors with highly experienced teams and have a particular set of goals, morals, and philosophies.
The Caveat
Hedge funds, in order to attract investors will only charge fees based on performance. If a fund makes a loss, they will absorb all fees until they can get their portfolio back in the black again. While at first, this appears to be advantageous to investors, there is a trap here. If the fund achieves a certain level of capital, they tend to make very comfortable fees for themselves, provided they keep the portfolio in the black. This removes the incentive to keep performance(and they workload/risk) high, and they tend to rest more on their laurels in more standard vehicles in order to keep lining their own pockets by garnishing fees.
It is for this reason that the traditional fee structure is currently under immense pressure from high-net-worth individuals to change. For a lot of families looking for reliable family assets, these are starting to tick fewer boxes for them than before.
Seems legit.
Mutual Funds
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
Mutual funds are a vehicle that is available for most any investor with a chunk of capital. They manage a pool of investors capital and invest in a blend of stocks, bonds, currency, and commodities. They are operated by professional money managers that aim to beat market returns. As they are open to any level of investment, they make good family assets for low 8 figure and under families.
They outline objectives and aspirations in a prospectus and then work to maintain that. This might mean ethical investing, achieving a particular return, focusing on a sector of the market, maintaining a particular balance of instruments and so on.
Unlike buying individual stocks, mutual funds do not give investors voting rights. They also charge a fee which can eat into investor returns rather significantly depending on the fund. In exchange for this, they give investors of ordinary levels of net worth access to a diversified portfolio of investments, some of which may otherwise be inaccessible.
Real Estate
| ✔️ Building | ✔️ Growing | ✔️ Maintaining |
A lot of fortunes have been made in real estate. And for generational wealth families the same can apply.
When it comes to real estate as family assets, families tend to prefer the relatively consistent returns in the form of capital appreciation. The rent income is just a bonus or used to reduce debt.
Residential
High net worth families tend to focus more on residential investments. These families preferring the certainty and more passive approach the residential property model presents. Some families prefer to buy single-family homes(SFH) while others will buy apartment complexes. It really comes down to the capital involved and the strategy of the family.
Hotels
Hotel ownership is another class of real estate investors will purchase as family assets. A family may allow a franchisee to run the hotel for them and reap a modest return, or take the management on themselves and treat it more as an operating business, reaping the returns as well as the appreciation. Interestingly, Ben Mallah, a prominent real estate investor in Florida invests exclusively in Apartments and Hotels. Though in my opinion, he will not succeed in creating a dynasty, unfortunately.
Commercial and Industrial
Most families will shy away from commercial and industrial property when it comes to passive investments. But will still take these on and treat a portfolio of them as family assets under the operating business category. The reasoning behind this is that there is a lot of specialized work involved in managing this type of real estate.
Another way families gain access to this category of property is by investing on REITs. I’ve put this under a heading of its own later on in this post though.
Long Term
Generational wealth families tend to focus on the big picture for real estate. While they won’t shy away from add-value projects, they’re more interest in building long term family assets that stay in their dynasty for generations. As opposed to fix and flips. This is true for basically all assets they invest in though.
Stocks
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
Stocks are a way to own small pieces of companies. For this asset class specifically, we’re talking about stocks that are publicly traded. That is to say, they are listed on an exchange. Being publicly traded means they can be bought and sold with relative ease, offering a degree of liquidity of capital. This liquidity means that stocks can be bought and sold to free or tie up cash. This keeps capital relatively available for other deals that may arise.
Exactly what investing in the stock market is like.
Blue-chip
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
Families focus on building wealth for generations, so speculating on short term penny stock plays isn’t really an option. Instead, a lot of the time they will focus on blue-chip companies. High-quality companies with a proven track record and steady growth or stable revenue make suitable family assets.
The reason behind this is that they want to keep the family’s money creating returns for generations to come rather than a single lifetime. Companies that have been around for generations are probably going to stay around for generations. Though as we all know, this isn’t strictly true.
Dividend
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
Dividend stocks are popular among family investors as they offer a means for the family to generate relatively passive income. Companies purchased for their dividends are companies with good track records of consistently growing dividends. Also known as dividend aristocrats.
The impetus behind purchasing such assets is that they will be able to remain in the family portfolio for generations. This creates a source of steadily growing income for a family portfolio that can be divested into other opportunities and into projects and family missions. With this reliable steady income as a family asset, it can be hard to go wrong over the long term.
Sector Focus
| ✔️ Building | ✔️ Growing | ❌ Maintaining |
Sticking to what you know is a common phrase in the investing and entrepreneurial world. And the same goes for some families when picking stocks. If they’re knowledgeable of particular industries, then it can pay to leverage this advantage into identifying undervalued companies on public exchanges, or recognizing market trends. By doing, so a family can achieve above-market returns for their portfolio, or mitigate losses during a crash.
REITs
| ✔️ Building | ✔️ Growing | ✔️ Maintaining |
REIT is an acronym for Real Estate Investment Trust.
These are companies which hold income-producing real estate in a managed portfolio. They then pass the companies funds from operations onto investors in the form of dividends or distributions. Families use these as a means of gaining exposure to real estate without the hassle of management.
The returns aren’t as great as if they were holding the real estate themselves. This is due to management fees and REITs being cash-rich. In exchange for smaller returns, investors receive regular distributions with minimal work. This creates passive income family assets for a portfolio.
Depending on where you’re from, REITs can have tax advantages and/or disadvantages, so it’s always a good idea to consult a tax professional before diving in too deep.
That said REITs can make fantastic long term family assets regardless of your level of investment. Their diversification, distribution payments and type of exposure they offer make them very attractive investments.
Families may also opt for a REIT fund, which is exactly what it sounds like. By doing this there is reduced risk in the form of greater diversification, but then that fund charges fees on top of the fees the REITs already charge. This eats into returns. More on this under the funds heading.
ETFs
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
ETF is an acronym for Exchange Traded Fund. They are funds that are publicly traded on an exchange just like stocks. These funds have set investment objectives, categories, industries, and philosophies, and charge a modest fee for management.
Index Funds
Index funds are funds designed to track a particular index. They hold a basket of securities that mimic the market they are set up to portray. For example, the VFINX ticker symbol on the Nasdaq is designed to track the S&P 500 index, which is an index that tracks the largest 500 companies in America. For buying one share in VFINX, you get exposure to all 500 of these companies without having to make 500 individual purchases(and pay brokerage 500 times, oof).
Most families, especially lower net worth ones without any particular specialization in the field of investing in stocks, choose index funds as core family assets.
REIT Funds
Instead of buying individual listed or unlisted REITs, investors may opt to buy a REIT fund in order to get an especially diversified portfolio of income-generating real estate. One major issue with REIT funds is that they, too, charge fees. So you’re paying fees on top of fees. If this is worth it for the outsourced management and portfolio balancing and diversification for you and your family then this may be a viable option for family assets.
Precious Metals & Cryptocurrencies
Metals
| ❌ Building | ❌ Growing | ✔️ Maintaining |
Precious metals are infamous for being bad investments in the public investing community. Yet large firms and wealthy families choose to hold gold, silver and other precious metals. Gold and silver have been used as currencies for millennia, and still hold intrinsic and extrinsic value today.
Metals tend to perform best when markets are down. Having some in your portfolio will hedge against losses in other areas. Especially if you manage to liquidate your holdings during the bust. Then you can use the profits to purchase other assets at a discount.
If you want to learn more about precious metals, you can check out my beginners guide to getting starting in Precious Metals.
Cryptocurrency
| ❌ Building | ✔️ Growing | ✔️ Maintaining |
Cryptocurrency is a new and exciting asset. A few fortunes have been made from speculating on these volatile assets. Many of the ultra-wealthy have higher tier coins in their portfolio. They by no means make up an overwhelming portion.
A lot of wealth transfer has happened in the hands of cryptocurrency than a lot of others in recent times. Many people have been devastated by this class when it has collapsed as well. They are speculation at the end of the day.
Bonds
| ❌ Building | ❌ Growing | ✔️ Maintaining |
To put it simply, a bond is a fixed income investment. A bond acts as a loan with a fixed expiry period. By holding bonds, you get a guaranteed income from a company and receive all of your capital back. They are generally considered safer than stocks and other securities. This is because debtors get paid back first in the case of a company going bankrupt.
Bonds are essentially securities that represent debt a company owes. In order to raise capital to invest in their business, companies create bonds. Through these, they ask for money from investors in exchange for a fixed rate of return.
Families hold bonds to get some of that guaranteed secure income. These seem to be less common family assets for high-net-worth families.
The List Doesn’t End There
This is by no mean an exhaustive list of family assets. It will continue to grow and adapt as I continue my research in the field of generational wealth. If you can think of something I’ve missed, be sure to add it in the comments section below.
Thanks for reading. Yours,
