LIDO INSIGHTS | How To Construct Your Family Finances As The Sophisticated Family Offices Do | June 2021
By: Gregory Kushner
Most individual investors are relegated to invest in mainly mainstream investments like stocks and bonds. As someone who has advised some of the wealthiest families in America (“family offices”) for over 25 years, I can absolutely state that with more money comes many more investment choices. These wealthy families do not just invest in stocks and bonds and sit back and watch their portfolios go up and down with the gyrations of the investment markets. Rather, they are always looking to find good risk-adjusted returns, wherever they may be. They invest in real estate, they make loans secured by assets like real estate or businesses, they invest in private equity and they often times hedge large, concentrated positions in publicly traded stocks. The thing is, if an individual investor with significant wealth, say $1 million, $5 million, $10 million or even much more but not the typical hundreds of millions of dollars that these family offices oversee, can still gain access to these same types of investments. There are wealth management firms that specialize in this family office approach that are sometimes referred to as Multi Family Offices (“MFOs”). These MFOs research and perform due diligence on some of these more esoteric investments and then typically arrange for their clients to invest in a pooled vehicle to gain access to these investments usually reserved for these much wealthier investors. For example, at my firm, Lido Advisors we have been providing our clients access to asset-based lending opportunities for well over a decade and have been involved with over $1 billion of these types of loans. These are partnerships that make loans to real estate owners but unlike the traditional banks, they will make loans much more quickly and will loan against assets that might not be ready for the permanent financing that banks provide. For example, perhaps an investor is buying a building at a great price with the idea of reducing vacancy and getting it leased to create value. Many banks will not even consider making a loan unless the building is at least 80% leased. In these instances, these so called “Bridge Lenders” step in and make loans, usually in first position with no more than 60-65% loan to value (i.e.,35%-40% equity). Since these are short term (usually 1 to 1.5 years) there is very little interest rate risk (when rates go up, bond prices go down). However, you are not lending your money to major credit worthy borrower. That said, the credit risk is generally mitigated by the collateral and equity that the borrower would lose if the loan has to be foreclosed.
The point is, the investor who has a significant portfolio (over $1 million) can invest like these very wealthy family offices if they can identify firms that have expertise that can be shared and believe that all investors should be able to access the investments generally reserved for the uber wealthy.
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