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

 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

Global 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”
© Pepper International 2010 3

Costs
Pricing is not clear
Costs are hidden and complicated
Products and services are expensive
Complexity
Products are hard to understand
Risks are difficult to manage
Performance is hard to assess
Time
Managing wealth takes a great deal of time
© Pepper International 2010 4

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
© Pepper International 2010 5

 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
Asset
Managers
Client
Other Family
Members
Partnership
Managers
Legal &
Accounting
Advisors
Other
Experts
© Pepper International 2010 6

Costs
Costs are controlled
Costs are known
Costs are reduced
Complexity
Complex issues are well managed
The office created is appropriate for the family
Clarity
The vision of the family is realized
The family’s wealth is well understood
© Pepper International 2010 7

Other Family
Members
Client
Other
Experts
Asset
Managers
Reporting
System
Legal &
Accounting
Advisors
8 © Pepper International 2010

Investment Services
Manager review
Asset allocation
Manager selection
Risk monitoring
Single stock positions
Consolidated reporting
Tax & Planning
Monitor accountants
Monitor tax planning
Review estate planning
Oversee trusts
Organize philanthropy
Other Services
Banking services
Mortgages
Education
Legal matters
Security
© Pepper International 2010 9

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 want to be overcharged just because we are wealthy.”
© Pepper International 2010 10

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
© Pepper International 2010 11

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
© Pepper International 2010 12

Single Family Office
 Dedicated to one family
 Has a physical office
 Internal staffing for most functions
 Focus on tailoring services for family
© Pepper International 2010 13

Multi-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
© Pepper International 2010 14

 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
© Pepper International 2010 15

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
© Pepper International 2010 16

Study 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?
© Pepper International 2010 17

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
© Pepper International 2010 18

Study Focuses on the Drivers of Investment Performance
 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.
© Pepper International 2010 19

Study Focuses on the Drivers of Investment Performance
 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
© Pepper International 2010 20

Study Focuses on the Drivers of Investment Performance
 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
© Pepper International 2010 21

Study Focuses on the Drivers of Investment Performance
 High Performing SFOs tended to have a higher allocation to principal investing where they have control over the fate of the investment
© Pepper International 2010 22

Study Focuses on the Drivers of Investment Performance
 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
© Pepper International 2010 23

Family
Members
Family
Office
© Pepper International 2010
Portfolio
Managers
Legal &
Accounting
Advisors
Other
Experts
24

STEP 1
STRATEGIC PLAN
3-6 Months
Assess family needs
Assess assets
Assess budget
STEP 2
OPERATIONALPLAN
6-9 Months
Create detailed budgets
Decide in-house versus outsourced functions
Create detailed procedures
STEP 3
FAMILY OFFICE
6 Months – 1 Year
Hire staff
Invest money
Offer other services
© Pepper International 2010 25

 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
© Pepper International 2010 26

 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
© Pepper International 2010 27

 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
© Pepper International 2010 28

 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
© Pepper International 2010 29

 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
© Pepper International 2010 30

 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
© Pepper International 2010 31

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
© Pepper International 2010 32

Compensation High
Salary
Bonus
Deferred Compensation
Total Compensation
$1,000,000
$800,000
$200,000
$1,400,000
*
Usually family member taking no salary
Source: Family Wealth Alliance 6 th Annual MFO study of 32 single family offices published in October 2009 www.fwalliance.com
.
Low*
0
0
0
0
Mean
$308,314
$122,000
$82,500
$338,000
© Pepper International 2010 33

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
© Pepper International 2010 34

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
© Pepper International 2010 35

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
© Pepper International 2010 36

Challenge
Sustainability/Succession/Keeping the family together
Markets/Investment Returns/Managing Assets
Human Capital
Interacting with family members/conflicts/demands
Charging for Services/Justifying costs and value added
Educating/Preparing Next Generation
Cash Management/Liquidity
Weighted Score
53
38
20
18
12
8
8
Source: Family Wealth Alliance 6th Annual MFO study of 32 single family offices published in October 2009 www.fwalliance.com
.
© Pepper International 2010 37

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
© Pepper International 2010 38

Family
The office needs to be tailored to the needs of the family
Strategy
The strategy needs to be clear and measurable
Investment
The investment process needs to fit the family and provide adequate controls
© Pepper International 2010 39

Website: www.pepperinternational.com
Email: carol@pepperinternational.com
Mailing
Address:
Carol Pepper, CEO & Founder
Pepper International
311 East 72nd Street, Suite 11H
New York, NY 10021
Telephone: 212-472-7596
Cell Phone: 917-923-6053
© Pepper International 2010 40