Presented by Carol Pepper The Annual Eisner Amper Private Wealth and Family Office Summit New York November 9, 2010

Presented by Carol Pepper

The Annual Eisner Amper Private Wealth and Family Office Summit New YorkNovember 9, 2010

Overview

Introduction to Pepper International

Overview of family office types

Review of the Single Family Office Study

Best Practices in Forming a Single Family Office

Pitfalls to Avoid in Forming a Single Family Office

Converting a Single Family Office to a Multi-Family Office

Conclusions

© Pepper International 2010 2

Introducing Pepper InternationalGlobal Experience

Pepper International is a family office for ultra high-net-worth families

Pepper International helps families around the world create single and multi-family offices

Pepper International acts as an external CIO for single family offices

Pepper International was listed by Barron’s as one of the top family offices in the United States in November 2009

Carol Pepper is a member of the Forbes Intelligent Investing Team

Carol Pepper writes a column on Forbes.com called“High Net Words”


Managing Wealth Today


Products are hard to understandRisks are difficult to managePerformance is hard to assess

CostsPricing is not clearCosts are hidden and complicatedProducts and services are expensive

Complexity

TimeManaging wealth takes a great deal of time

Why have Family Offices become Popular?

The Financial Services World

There are strong conflicts of interest in the business models of many wealth management businesses, so families want one advisor who only represents them

Managing wealth correctly is highly time consuming, and families prefer to delegate this task

Families cannot get what they need from existing providers—so they are creating their own solutions


The Client Without a Family Office

Client must juggle many contacts

Specialists are uncontrolled

Costs are not well controlled

Client involved in every matter

No clear picture of assets

No control of over time and money

6

Asset Asset ManagersManagers

PartnershipPartnershipManagersManagers

Legal &Legal &AccountingAccounting

AdvisorsAdvisors

OtherOtherExpertsExperts

Other FamilyOther FamilyMembersMembers

ClientClient

© Pepper International 2010

What are the Benefits of Working with a Family Office?


Complex issues are well managedThe office created is appropriate for the family

CostsCosts are controlledCosts are knownCosts are reduced

Complexity

ClarityThe vision of the family is realizedThe family’s wealth is well understood

The Family Office

8

ClientClient

Other FamilyOther FamilyMembersMembers

AssetAssetManagersManagers

ReportingReportingSystemSystem


AdvisorsAdvisors


© Pepper International 2010

Services Offered by a Family Office can be Comprehensive


Family OfficeInvestment

ServicesTax & Planning Other Services

Manager review Monitor accountants Banking services

Asset allocation Monitor tax planning Mortgages

Manager selectionReview estate planning

Education

Risk monitoring Oversee trusts Legal matters

Single stock positionsOrganize philanthropy

Security

Consolidated reporting

Issues from the Family’s Perspective


Control of the family’s privacy, investments, risk, legacy, etc. “We want to define our own destiny and we will not be controlled by others.”

Conflicts of interest within the financial world work against the family’s goals. “We want all referral deals, retrocession payments, etc. to be disclosed to us. We want real advice, not to be steered to someone who is paying you a fee, or to be invested in a product because it pays you a higher commission.”

Customization of information analysis and servicing our family members is important. “We have our own way of doing things…We don’t want a cookie cutter approach to our money.”

Cost minimization “We are willing to pay for what we need, but we don’t wantto be overcharged just because we are wealthy.”

Choosing the Office for the Family: Family Issues

Number and Complexity of Family Members The size of the family The number of generations The range of nationalities within the family Diversity of family members

Family Governance Rule by patriarch or matriarch Rule by elected council of family members Rule by Trustees Rule by consensus of informal committees


Choosing the Office for the Family: Wealth Issues

Number and Complexity of Family Assets Amount of wealth Variety of assets Publicly traded versus privately held assets Location of assets (number of countries) Specialized investment requirements

Ownership of Assets Owned by individuals Owned by corporations Owned by trusts or foundations Offshore or onshore ownership


Types of Family Offices

Single Family Office Dedicated to one family Has a physical office Internal staffing for most functions Focus on tailoring services for family


Types of Family OfficesMulti-Family Office

Serves needs of more than one family May have a founding family as the key investor Outsources a portion of required services Started with an eye to eventual sale/merger May be very small or quite large

Corporate Multi-Family Office Limited/no family involvement Often division of a larger corporation Large staff and multiple offices Mix in-house/external management Focus on bringing institutional opportunities

to wealthy clients


Main Issues across All Models

Governance should drive firm development and match family’s strategy; the office needs to recognize and manage conflicts of interest

Privacy and Security need to be managed as top priorities

Personnel needs to fit the organization and the family

Service Levels need to be selected and drive business design

Investment Management structure of business requires many decisions: in-house versus outsourced, fees, access, asset allocation, reporting, analysis tools, consolidation

Technology costs and decisions are a major driver in the way the business model is shaped


The Single Family Office Study

Comprehensive Analysis of Single Family Offices

• Conducted by Wharton Business School (University of Pennsylvania) and IESE Business School (University of Navarra)

• Interviewed 167 families in the summer and fall of 2008

• 50% in Europe, 44% in the Americas and 5% elsewhere

• 40% AUM greater than $1 billion

• 49% in Americas have a family business


SFO Study Looks at PerformanceStudy Focuses on the Drivers of Investment

Performance

High Performing SFOs have an investment return of over 6% per annum over a five year period (2003-2008)

Low Performing SFOs have an investment return of less than 6% per annum over the last five year period (2003-2008)

What distinguishes high performing SFOs from low performing SFOs?


Study Focuses on the Drivers of Investment Performance

High Performing SFOs control Asset Allocation, Manager Selection and Monitoring, and Investing with more in-house resources than low performing SFOs.

High performers have a high quality operation. They pay close attention to the following:

Governance Documentation Investment Management Processes Communication Human Resources Education and Succession Planning


In-House Versus Outsourcing


High Performing SFOs are very process oriented. They create and stick to formalized processes to manage investments. They tend to have many committees:

Investment Committee Management Committee Audit Committee Education Committee Contract Committee Client relationship committee

They provide guidance to the committees They get involved with due diligence, accounting , etc.


Governance, Guidance and Communication


High Performing SFOs are very education oriented. They provide family members with numerous substantial financial education opportunities:

In-house seminars facilitated by professionals In-house seminar facilitated by family members Formal courses at educational institutions Courses offered by vendors Internships in family controlled businesses University tuition Social or recreational activities

Low performers focused mostly on social activities


Education of Family Members


High Performing SFOs give their managers a chance to earn higher compensation through performance-based incentives:

Cash bonus for good performance Carried interest in principal investments Co-investment opportunities

The SFOs with the highest five year performance had the most incentive compensation schemes


Entrepreneurial Compensation Schemes


High Performing SFOs tended to have a higher allocation to principal investing where they have control over the fate of the investment


Entrepreneurial Asset Allocation


High Performing SFOs invest heavily in:

Good governance Communicating family values through education and

frequent communication programs Educating the next generation

These steps lead to higher respect and greater happiness


Sense of Purpose and Moral Responsibility

The Single Family Office


FamilyFamilyOfficeOffice

FamilyFamilyMembersMembers

PortfolioPortfolioManagersManagers


AdvisorsAdvisors


The Three-Step Process fora Single Family Office


STEP 1 STRATEGIC PLAN

STEP 2 OPERATIONALPLAN

STEP 3FAMILY OFFICE

3-6 Months 6-9 Months 6 Months – 1 Year

Assess family needs Create detailed budgets Hire staff

Assess assetsDecide in-house versus outsourced functions

Invest money

Assess budgetCreate detailed procedures

Offer other services

Strategic Business Plan for a Single Family Office

The strategic plan is the basis for the detailed operating business plan

After the strategic planning phase the family can assess whether it really wants to go forward or whether the family should join an existing multi-family office


The Importance of a Written Strategic Plan in Clarifying Family Issues Writing a strategic plan helps families decide together

what is most important and helps to clarify the tradeoffs that everyone is willing to make

A written plan allows all family members to get involved and have a say in deciding what type of office to have

A plan is an efficient way to communicate with potential employees, service providers and partners

A plan with a budget helps the family understand how much they are going to have to pay to have the services they want

A strategic plan helps the family assess whether the family office structure the are considering will meet their needs


Sample Table of Contents for SFO Strategic Plan Executive Summary

Family mission statement

Governance of the office, including boards

Description of office structure

Staff functions and with organizational charts

Description of services

Real Estate and fixtures

Technology and back office functions

Compliance and legal considerations

Estimated budget


Consult with all Family Members

If possible, a group meeting or an individual meeting with each family member who may participate in the family office, including the representatives for minors, is a good way to start

The first assessment is to get a feel for the type of services, return expectation, cash flow requirements

and risk tolerance of family members

Existing advisors should be consulted as well to help

fill in the portrait of the family


Review the Family’s Assets

Asset allocation is reviewed at the individual level, the entity level and the family level

Need to understand the mix of liquid assets, real estate, operating businesses

Evaluate the overall risk of the portfolio of assets relative to the risk the family wishes to assume

Consider the time horizon of current holdings versus the time horizon the family uses to consider investments


Consider the Budget Available for the Family Office

An initial document can be prepared describing the services to be provided and the estimated cost of providing these services on an in-house versus outsourced basis

The strategic plan should be circulated among all family members and discussed as a group

The family needs to decide at this point whether it wishes to go forward to create a detailed operating plan with full cost estimates


Major Costs of a Family Office

The Biggest Budget Items

If investment management is outsourced the biggest budget items are: staff, real estate and fixtures and technology

If the investment function is performed in-house, this is usually the largest expense


Chief Executive Compensation forSingle Family Offices, 2007


Compensation High Low* Mean

Salary$1,000,0

000

$308,314

Bonus $800,000 0$122,00

0

Deferred Compensation

$200,000 0 $82,500

Total Compensation$1,400,0

000

$338,000

Source: Family Wealth Alliance 6th Annual MFO study of 32 single family offices published in October 2009 www.fwalliance.com.

* Usually family member taking no salary

http://www.fwalliance.com/

Who Should Run the Investment Function of the Family Office?

Investment Responsibility

Choices: Family member versus professional, in-house versus outsourced, Family Office CEO versus a separate Chief Investment Office Function

The direct investment experience of family members drives this decision in many cases

Oversight above the CIO: family board, external board, external performance measurement and reporting


Responsibility of FamilyRegarding Investments

Education is the Best Defense

Designating family members to be educated in investments

Basic training in reading statements for all family members

Creating an open culture where all can speak up


Investment Policies and Procedures

Investment Controls are Vital

Investment management policies and procedures should be in written form

Clear responsibility for investment functions should be assigned

External audits should be periodically performed to assure that procedures are followed and records are being kept properly


Biggest Challengesfor Single Family Offices


Source: Family Wealth Alliance 6th Annual MFO study of 32 single family offices published in October 2009 www.fwalliance.com.

Challenge Weighted Score

Sustainability/Succession/Keeping the family together

53

Markets/Investment Returns/Managing Assets 38

Human Capital 20

Interacting with family members/conflicts/demands

18

Charging for Services/Justifying costs and value added

12

Educating/Preparing Next Generation 8

Cash Management/Liquidity 8

http://www.fwalliance.com/

Pitfalls to Avoid

Create Processes from the beginning or face chaos

All procedures should be in written form

Clear responsibility for all functions should be assigned

External audits should be periodically performed to assure that procedures are followed and records are being kept properly

All employees should understand their functions and how their performance is measured

Problems should be addressed as soon as they arise

Financial and managerial controls are vital


Summary


The strategy needs to be clear and measurable

FamilyThe office needs to be tailored to the needs of the family

Strategy

InvestmentThe investment process needs to fit the family and provide adequate controls

To Contact Pepper International

Website: www.pepperinternational.com

Email: [email protected]

Mailing Address:

Carol Pepper, CEO & FounderPepper International311 East 72nd Street, Suite 11HNew York, NY 10021

Telephone: 212-472-7596

Cell Phone: 917-923-6053

40© Pepper International 2010

Documents

Presented by Carol Pepper The Annual Eisner Amper Private Wealth and Family Office Summit New York November 9, 2010