Family offices in Latin America are achieving greater degrees of sophistication and clearing new paths into the regional and global financial markets. As they look to grow assets under management and diversify portfolios, a range of instruments is drawing their attention and capital.
A number of factors have driven the growing presence and visibility of these institutions. Economic development and the commodities boom spurred the creation of wealth in the region, and companies behind families’ wealth thrived. These businesses then drew interest and cash from foreign investors.
“When owners sold and cashed out, this generated important liquidity for individuals and families, triggering the need for more sophisticated services,” says Bruno Ghio, head of family offices at Banco de Crédito del Perú. In some way, losses at investment banks following the 2008 financial crisis also turned into gains for family offices. Staffing cuts at investment banks following the crisis contributed to the increasing sophistication at family offices, bankers say, as these firms picked up some of these advisors to manage portfolios.
Now, volatility that has hit global and Latin American markets, and the perception of increasing risks associated with borrowers in the region, has families reconsidering where to invest.
“High levels of liquidity in all family offices are normal nowadays, but all of us are waiting for a good deal,” says Emerson de Pieri, head of Latin America at Barings Investments’ family office, an arm of the London-based investment banking and asset management firm. “The majority of family offices are not investing aggressively, but working closely with their financial strategists to be sure that they will not waste money and time on the wrong choice.”
High on nuance
Latin American family offices are often much more inclined to focus their investments on market niches, compared with others in the buyside. The size of the family’s wealth, and whether the leadership is first or second generation might incline investments to a specific industry or sector.
“While more sophisticated families, who sold the entire business and now are looking for new investments, could employ a good research team, small and medium offices need to be more cautious, thus choosing to stay in their own markets,” says de Pieri. Many family offices have preferred to keep investments in the area that has created their fortunes, as they’re innately familiar with the given sector’s nuances and dynamics.
“We are opening five family offices for clients in Paraguay, all of them came from farming. In Ecuador, we are working with two family offices and they invest mainly in real estate, because they are a construction firm there. In Uruguay, we work with six family offices and they are milk and meat producers and they are much more aggressive about investing in their own market,” de Pieri says.
Latin Americans accounted for 100, or 5.5% of the 1,826 individuals and families on Forbes’s annual ranking of billionaires last year. These individuals accounted for $413.8 billion, or 5.2% of the $7.95 trillion in wealth represented on the Forbes list, according to data compiled from the list by LatinFinance. Telecommunications, largely anchored by the success of Mexico’s Carlos Slim, created the most wealth for Latin America’s richest, followed by banking and finance, beverages, mining, media, retail and then construction.
Colombian private equity fund Tribeca Asset Management sold its 61% stake in thermal generator Termocandelaria for $233 million in May 2015. The deal, which has garnered LatinFinance’s award for Private Equity Deal of the Year (see page 38), made headlines for a number of reasons. The 1.2 gigawatt asset is Colombia’s largest thermal generator, the sale marks the largest M&A transaction in Colombia’s power sector this year, and the largest exit ever for Colombian private equity, which is an industry that is still maturing in the Andean country.
Of particular note to the transaction, however, was the buyer group, which included Bancard Inversiones, the family office of former Chilean President Sebastián Piñera. For family offices that are open to new things, their tastes for industries, financial instruments, degrees of risk and expectations on returns vary greatly. While a Chilean manager could be happy with a 10% return, a Colombian outfit would likely want to see a 20% return, says a private equity fund manager based in the Andean region.
Diversification generally leads investment strategies, with alternative investments representing a strong portion of portfolios, BCP’s Ghio says. Santiago Ulloa, founder and managing partner at WE Family Offices, notes that energy, infrastructure and real estate are also popular sectors with WE clients. WE, with offices in New York and Miami, is a multi-family outfit that serves wealthy clients from Latin America, providing a range of investment advice.
The Termocandelaria transaction also points to another trend for family offices. Colombian private holding company Mercantil Colpatria, Chilean private equity funds SCL Energía Activa and Moneda Asset Management rounded out the purchasing group. Market observers agree that family offices are increasingly investing in or alongside private equity funds.
“Private equity is a nice instrument to have more returns, even if the risk is a little higher. Most of the family offices are looking to participate in public-private partnership projects related to infrastructure, clean energy, agri-business and tourism,” says de Pieri.
“Traditionally, investments were directed to open markets, and investment funds. The trend for the past three years has been to leave public markets to go to private markets,” WE’s Ulloa says.
A global survey of family offices conducted by Campden Wealth and UBS found that for the Latin American respondents, investments in private equity make up almost a quarter of their portfolios. Equities and fixed income from emerging markets follow at a distance, comprising 14% and 12% of their portfolios, respectively. The regional inclination mirrors a global trend, according to the study, which was conducted in September 2015 and had a sample of 224 family offices from 37 countries. Globally, family offices invest roughly 22% of their portfolio into private equity.
In Colombia, family offices are the second largest set of investors in private equity funds, making up around 19% of the industry, according to a 2015 private equity funds industry report by Colcapital and Ernst & Young. Pension administrators contribute 41% of Colombian private equity funds’ capital.
While family offices are still not major players in bonds, debt capital markets bankers have noticed an uptick in their participation in recent years. In Peru and Colombia, family offices can place up to 2% or 3% of orders on corporate bonds today. “Even if it’s little, participation has been growing for the past three years,” a Colombian banker says of family offices buying bonds.
In Chile, where family offices are more consolidated compared to other countries in the region, their presence in the capital markets is more noticeable. “Family offices are increasingly relevant in building books for a bond sale, increasingly relevant in capital markets in general. They are growing in scale, expertise, and they have the resources to place important orders,” Maximiliano Katalinic, general manager at Banchile Inversiones’ Family Office, tells LatinFinance.
Research on Latin American family wealth is scarce as these entities often prioritize confidentiality and privacy for security reasons. The top tier of families in the region manage between $1 billion to $2 billion in assets, sources say, while a second tier comprises families with $150 million to $1 billion. The range of family wealth is undoubtedly broad: the average fortune for a Latin American on Forbes’ list of billionaires clocks in at a little more than $4 billion, while respondents to the UBS survey reported an average of $366 million.
Chilean family offices are among the bigger, older, more diversified and visible outfits in the continent. Investment vehicles that contain family wealth include Drake Real Estate Partners, which contains funds from Nicolás Ibáñez, whose family is behind Supermercados Almac; Porto Seguro, the vehicle of the Matte family; Megeve Investments, linked to the Solari family and retail chain Falabella; and Transacciones e Inversiones Arizona owned by the Luksic family, which is affiliated with miner Antofagasta and conglomerate Quiñenco.
In Colombia, the Santo Domingo family, which has a stake in beverage company SABMiller, is affiliated with Quadrant Capital Advisors and Valorem vehicles. Amalfi and Azurita are investment vehicles created by the Scarpetta brothers, who are affiliated with Cementos Argos, Promigas and Corporación Financiera Colombiana, among other entities. In Colombia, and Peru, many family offices are in their infancy, with most created only 10 to 15 years ago.
Brazilian offices, which are the largest and most numerous, up to very recently concentrated their investments in the domestic markets. However, given Brazil’s economic and political troubles, these outfits are looking to invest abroad, family wealth advisors say.
As family offices grow in number and size, a sector of service providers is developing around them. A stream of independent advisors and wealth managers, such as CV Advisors or WE Family Offices, are examples. CV Advisors, a multi-family office based in Miami serving Latin American high net worth individuals (HNWI), managed $3.5 billion in assets in 2013, according to media reports. One year later, the organization has reportedly accumulated $4.6 billion in assets under management. Banks have also created branches to specifically cater to these clients.
“WE Family Offices was created because we noticed the growth of wealth in Latin America,” Ulloa says. “The families needed a structure that was aligned with them with a long-term strategy, not only focused on generating profits in financial markets, but that considers the inheritance plan, legal aspects of the patrimony, and draws a balance between how much comes from, and is placed, in their industries as original sources of capital, and how much in financial investments.”
A few advisors have evolved independently to operate as investment funds, employing in-house analysts and staff to manage and allocate investments. Legal counseling, tax and fiscal reporting and markets research are among the range of services sought to support these outfits, says Roberto Pupo, partner at Holland & Knight. A common challenge for family offices is establishing a clear governance structure within the family, a process of decision making, an understanding of how they will operate the business going forward, as well as general office management, Pupo says.
“They need to be professional and avoid high costs. That’s why you can see a significant movement of family offices, with the merger of three or four in a bigger structure, with lower costs, better engineering and better market research,” says de Pieri. “This is what we do here: we are paid to think, not to sell. We provide relationship continuity and work with best of breed banks, brokers and independent fund managers to address our family offices’ long- and short-term goals. We have known many of our clients and our counterparties for the length of our careers.” LF