One of the classic questions that seems to be drifting through the public consciousness at the moment is, “How are ultra-high-net-worth, super rich individuals different from mere mortals?” We wonder what makes them different? Well, my guest today is my old friend, Andy Kane, OBE. PhD., fellow London School of Economics alum, who has spent his whole life advising and consulting with ultra-high-net-worth individuals and families.
What you're going to hear today is his perspective on what actually makes UHNW families different. His is a fascinating insight and will give you some ideas and strategies for how to approach this elite group of individuals, both here in the United States and overseas as you try to raise money for your projects. Be sure to stick around to the very end of this podcast where Andy and I started chatting briefly after the interview.
What You're Going to Learn
What Are High Net Worth Families’ Approach to Investing
Four Factors that Drive Investment Decisions in High Net Worth Families
Why Relationship is the Key Criteria in High Net Worth Family Decisions to Invest
Who Are High Net Worth Families’ Investment Decision Makers
When to Pitch to a High Net Worth Family
Real Estate Investment Scenarios a High Net Worth Family Might Consider
How Ultra High Net Worth Families Choose Real Estate Investments
What is the Definition of an Ultra High Net Worth Family?
What is the Decision Making Process of an Ultra High Net Worth Family Office?
Why High Net Worth Families Want Control Over Real Estate Investments
How to Meet and Build Relationships with High Net Worth Families
What Are High Net Worth Families’ Approach to Investing
ADAM GOWER: I know that throughout your career, you have worked with high-net-worth families. So, my first question to you is, and you know the environment or the world that we inhabit, that I inhabit, right? The world of real estate sponsors who want to raise money, specifically from, ultra high-net-worth investors. You mentioned that they have very different challenges and the kinds of challenges that non ultra high-net-worth individuals have. Why don't we start with that because that was really a very clear dividing line that would be worth understanding, I think, right at the top.
ANDY KANE: My thought process is that, most people's decision-making in life, in part is impinged by how much money they have or how much they need to survive. And, you can go through Maslow's hierarchy of needs. But when you have enough money that your needs can be, all your reasonable needs can be satisfied, your approach to money is different. And in fact, my observation is that, the amount of wealth you have becomes, while one may look at it as an asset, it becomes a liability. It can inhibit your ability to thrive. It doesn't mean that wealthy families or individuals are the happiest. And so, I've experienced, both as an advisor and running families, I've experienced the pain that wealthy people have, having all this wealth. They also have a lot of joy, a lot of fun. But, when it comes to people soliciting them to invest or to become an adviser, their approach to the whole process is a little bit different than people who have a lack of funds, not tremendous wealth.
Four Factors that Drive Investment Decisions in High Net Worth Families
ADAM GOWER: You were talking about power and emotions and other factors that drive family dynamics that are very different from families who go out every day in order to earn the weekly envelope. So, talk about that, that you've seen.
ANDY KANE: Look, first of all, all families, all individuals are human beings and they experience the same range of issues. We all have emotions, we all have desires. We're all fallible as individuals. But I think it's when you put the wealthy family or client into perspective, when you're looking at them. They operate in a way that is a little bit different from families that are not super wealthy. An example. Most families will be very, very careful to try and not reveal their inner issues. They play it very close to the vest. When you have a lot of dissension inside a family and you let that spill out, it's pretty public. Here's my observation of the three or four things that are probably very apparent for ultra wealthy families that may or may not be seen by a firm or a consultant or an advisor trying to seek their capital investment. Number 1. Emotions are quite often bottled up and emotions are probably one of the biggest issues that you see within very wealthy families. And I'll come back to that in a moment but let's just park that as something that's worth exploring and why. Secondly, the perspective of risk and reward is different between different family members and, it plays by the way, into emotion. So, for example. You may not realize that you're dealing with a patriarch or a matriarch and there are second generation adult children involved, multiple ones, maybe even third generations. They may be playing a role in the family office or the certainly the family business. You know, just think about the patriarch who now gets approached to make an investment. He may feel that he wants to give the impression that he's got the ability to make a decision, and indeed he may. But, the reality is, he may know that he needs to consult with other members of the family. They may have different perspectives on risk and reward. So the patriarch or matriarch, I've often found who are that, sort of, big risk taker. Built the family business. The second generations are, quite often, have a different perspective and how much they want to take as risk. They may view this approach to investing opportunity differently and it creates all these tensions. I've seen it, within the family office. You may not see it as an adviser. And then thirdly, if you're ever approaching somebody and there's a family business involved, there are bound to be a lot of other issues under the surface that you need to dig into. And that's why, if you are trying to build a relationship with a wealthy family or a wealthy individual, you need to understand how they approach their decision-making because if they're focused on having to deal with emotions, maybe their own or other family members, different risk/reward stresses within the family, the impact to the family business and how they've set up their children within the family business for success, how they govern the family. And, just those four issues alone, can make a decision-making process quite turbulent and cause delay or answers that may surprise or be totally misaligned with how somebody's approaching the family to invest in a project.
Why Relationship is the Key Criteria in High Net Worth Family Decisions to Invest
ADAM GOWER: The things that you mentioned last week, were things like, for example, lack of trust or intra- family relationships. Desires around control by those who have and have not. Can you talk about those a little because it might be confusing to somebody talking to family members, or to members in a family, when you're trying to raise money and getting signals that aren't what you would expect, what you're used to with...I want to use the term "normal" families, right, less wealthy families.
ANDY KANE: So, the first premise Adam, is that, if you or I were talking and I thought you were a very wealthy person and I wanted to invest, I'd be talking to you as Adam. I want to try and sell you on why you should hire me. But, the reality is, it may not be your decision or it may be your decision along with several others. Or you may have to confer with others. And so, you really want to dig in to, how do you make make the decision? Who's involved in this process? What are the dynamics? How do you evaluate opportunities? What are you looking for? And, as I said a few minutes ago, it's very hard to detect where the emotions may be playing. So sometimes, when you're dealing with families, you're building relationships with their outside advisers, lawyers, accountants, people inside the family office. If you build those relationships, you'll start detecting some patterns of inside tips on how to approach, how to manage, how to have a dialog. Most families I've ever come into contact with, are like every other human being. They have issues. They have challenges of control, how to address fairness among the children, how to address governance, legacy, emotions run rampant because entitlement issues. You can name it, we can go through a whole afternoon. The question is. Can you bring these up and should you bring these up in a way that helps you in your decision-making to get somebody to invest with you? And what I would say is that, the most important thing, before you even get to the investment, is to really build a relationship with the family. So you are perceived to be a trusted person, which means that, you know, they've checked you out. Your product, obviously, has got strength. You get to understand them. You really can build rapport. You ask open ended questions. You spend the investment time really building the relationship because most wealthy families will use the quality of a relationship as a key criteria in their decision to invest. The issues that you asked me about, like emotions and risk reward, you're not going to find out just by asking the question.
Who Are High Net Worth Families’ Investment Decision Makers
ADAM GOWER: But there are different kinds, aren't there? If you're pitching a family that is not a real estate family. There are two types. There's those where there's, I'm putting words into your mouth. This is what I'm assuming. There's those where the wealth of the family is held within a business in which all the members of the family are employed and then there are those where the wealth has come through some other channel, into the family, right, so can you talk about those two differences, what those look like?
ANDY KANE: Well, first of all, when it comes to family business, it's not my experience that all the family members are employed and involved. In fact, I would say that's probably the exception to the rule. Many family, second generation members may want to strike out on their own for all sorts of reasons. They may carry equity in the family business. They may have shares but they're not actively involved, which all comes back to governance and a big issue I've seen when you have different children, have different roles of how you treat them fairly. And fairness in business doesn't necessarily equate to reality. But so, first of all, not all the family members are actively involved in the family business. Secondly, not all of the family members may be actively involved in investment opportunities. They may be beneficiaries of trusts that have been set up. They may not even be aware of some of the investments that their parents or grandparents have been making or are making, but they are going to be beneficiaries at some point. So, it varies obviously. Some are very active and some are not very active. And the question is to really understand the decision-making process, the capacity for people to be able to make a decision and what the risk/reward profile is, so you can really understand what drives this family.
When to Pitch to a High Net Worth Family
ADAM GOWER: Okay, so is it worthwhile, if one has a good connection with a child of a wealthy family? Or even a grandchild or a third, second or third generation. Does it make sense to, if that's your only contact, to develop a relationship with that person in order to attempt to step up to pitch, ultimately, the decision makers within the family, especially if that person isn't actively involved in the running of the business?
ANDY KANE: If they are or are not? Not actively involved?
ADAM GOWER: Not actively involved, right?
ANDY KANE: It's hard, but it doesn't mean that that individual doesn't have a stake in the family and some families are very progressive. I've been involved with families that, for example, on the philanthropic side will have a philanthropic family board, around their foundation. And you may find younger members of the family who are adults, who may not be involved in the family business, actively get a seat at the table to recommend where philanthropic investments can me made. And, they may also have a seat at a family governance meeting. A family may get everybody together a couple of times a year and if people have an opportunity to speak, and you know, it never hurts to have a relationship with somebody you just don't know until you ask the right questions. You know, to what extent are you involved? Would you feel comfortable? Is there a way that I can be introduced? And you gotta see if you can use that as an opportunity to make your presence felt.
Real Estate Investment Scenarios a High Net Worth Family Might Consider
ADAM GOWER: What is motivating them, if it's not making money, what are the key things that they're really looking for when you stand in front of them? If your agenda is, I want to raise money for you, what's going to trigger a positive response?
ANDY KANE: Well, I'm not sure I concur that they're not looking to make money. So, all the families I've ever been involved with, are always looking to make a return on their investment. So the question isn't are you looking to make money or not? The question is, what is it that you're looking to make relative to your family's needs? Because, you know, some people may be looking to hit it out of the park as a home run. They're looking for private equity where they are in control and they can hit a grand slam. Others may be looking for yield, to balance out the risk of what they've got in a family business. Some may be looking for yield in what I'll call, a sort of, fixed income scenario. Others may have no capacity to invest in equities and are looking for a balanced portfolio so that the income can be tripped into trusts. Some may be looking to build a real estate portfolio up as a counter to the family business and are looking for long-term appreciation as opposed to a lot of income. So, I've just given you, Adam, four scenarios and so everybody's got a different need. The key question is: what is it you're looking for? And then you can start to address whether the asset that somebody is trying to raise, fits that need. Because, if I came to you and I said, you know, I've got a great deal. You put in three million dollars and we're going to raise ten million dollars and I expect to get out of this in four years and you're going to get a 40 percent return and I don't know you, you may say, you know, I just don't want to take that sort of risk. If I lose that sort of money, I've got to be answerable to the family. We're a conservative investor. That's not our bag of tricks. And so, understanding what drives a family and what they're looking for is really critical and everyone's different. That's why I was saying, you have to invest the time to really get... and that's what private bankers do. A really good private banker, invests the time to build a relationship so that they have the deep discussions. They understand the insecurities. They understand the desires. They understand who else is a decision maker? Who's going to be, are the children, somebody who's going to have a seat at the table. How do you get everybody together so when the opportunity to invest is made, it becomes one that everybody is happy with.
How Ultra High Net Worth Families Choose Real Estate Investments
ADAM GOWER: One of the most important things, you know, that we look for, when selling anything is not describing the product itself. It's a little cliché, but it's talking about the benefits. And the benefits of investing in real estate do go beyond, just the financial benefits, don't they? I mean they do for everybody, but for people, for ultra-high-net-worth families, they're also solving other challenges and you've touched on a few of them. For example, a child who wants to branch out. That might be a motivating factor, right, and there may be other challenges. Are there any other, kind of, classic challenges that families are trying to solve when they look at real estate that do go beyond just the simple financial considerations?
ANDY KANE: So the private banks, really good private banks have done this very well over the years. They spend a lot of time investing their time and educating younger members of the family about what it means to be part of a wealthy family, how to get a seat at the table, how to use bankers, how to be value-added to the family and it's all part of the relationship building. It includes building relationships with the patriarch who may be the founder of the family business. It also involves, Adam, really building a relationship with the matriarch who often is a critical component in a family, is the glue, that can hold a lot of the family together. When you've gone through that and you really understand the family, then you can start addressing the answer to your question, which is, how does real estate, which is a critical asset, an asset I'm very familiar with. How does that fit into the cornerstone of the building of the family's dynasty and wealth? And, it clearly does. Real estate has played a key role for most families in the world, you know, whether it's in the homes that they acquire, whether it's in the buildings they own for their family business, whether it's in a building they own for their foundation, whether it's a partnership with their best friends that they've known for 40 years, that they've been buying. There's normally a significant amount of wealth. Not talking about ultra high net worth families. So, once you answer that question, you can then put real estate into perspective and it would be it unusual for a very wealthy family to have not played in the real estate space and to think that they just want to get into it for the first time.
What is the Definition of an Ultra High Net Worth Family?
ADAM GOWER: First, tell me, what is the definition of ultra-high-net worth family and then tell me how do billion dollar family offices make decisions?
ANDY KANE: Well, I don't think there's one criteria that everybody will live with. I think that ultra-high-net- worth families that have single family offices, today with the cost of a single family office, they're probably north of a quarter of a billion dollars in assets and above. It's getting pretty expensive to hold a single family office. Those that share in a multifamily office, probably 50 million and up, in total assets. But the real question is, how much disposable assets do you have and that depends upon where they are in their age and lifestyle. So, ultra-high-net-worth probably, you're talking about families or individuals that have a net worth of 50 million and up. It's not black and white.
What is the Decision Making Process of an Ultra High Net Worth Family Office?
ADAM GOWER: So tell me now about the decision making process in a billion dollar super ultra-high-net-worth. Not sure what the term is for that. Family office, that was the kind that you had personally run.
ANDY KANE: Well, first of all, the ultimate decision rests with the family. So, all the people that are around from lawyers, accountants, has a family office CFOs, friends, advisers. Don't fool yourself. The ultimate decision will be made by the family, or the key people in the family, and that's the way it should be. What the key people in a family office should be doing, is helping the family patriarch, matriarch, adult children who are involved, in their decision making process and in the management of the asset. So quite often, people in the family office, at least in the role that I played where I was running them, I would get on my desk constantly, lots of different opportunities. People would, who knew me, would come to me as a screen. And so my first job as a screen is to figure out, since I've invested the time to really know what the family are looking for, is to say no. And it doesn't mean that an investment isn't a good investment. It's just, it doesn't meet the screen of what they're looking for because of the type of risk profile or how the family views their objectives. So a rejection doesn't mean the investment opportunity isn't good. It just means it's not good for that particular family. So, the first screen is, things would sit in my desk for a very short period of time because I just know the family would have no interest. I knew what interested them and I knew that they would want to know if somebody came out of the cold, where did they come from? What's their track record? Who they worked with? How do you get confidence that you can trust? So, I would dig around, do a lot of digging around. I would say 90 percent of the time, for the family to pick up an opportunity, it's because they know either another family or they've got a relationship with the principal, the general partner. Relationships are mission critical, in my view, for how families operate.
Why High Net Worth Families Want Control Over Real Estate Investments
ANDY KANE: Most families don't really want to be just another number in a real estate deal. They either want to be involved or they're doing it with one or two other parties that they know. So real estate is a little bit different from a private equity deal or from a portfolio decision for stocks or bonds.
ADAM GOWER: So you would say that typically they would like to have a major role in a real estate deal and presumably therefore some measure of control over the deal.
ANDY KANE: Most of my experience on the real estate deals are either they are driving the deal because it's critical to their business. The family business may be in real estate or they're coming in as a private limited partner, but they know the general partner pretty well. Unless it's a particular fund, let's say it's an energy fund that's going after distressed energy or distressed sectors of real estate.
How to Meet and Build Relationships with High Net Worth Families
ADAM GOWER: What are the best ways to meet families, high-net-worth families and to begin that path or begin that journey of getting to know them and get them to know you? And I've written three examples down. You said, in the community, but I've written three possible ways down, one, with tongue-in-cheek. So, philanthropy, golf clubs or Facebook advertising. See if you can guess which one is tongue-in-cheek. But what are the best ways of getting to know them.
ANDY KANE: I think, it's always going to be face-to-face, okay, and look, it's a lot easier to build a relationship when you're dealing with a, sort of a, peer-to-peer generational. So, the investments you make when you're in your 20s and 30s and early 40s with people who are in their 20s, 30s and 40s will pay dividends when they're in their 30s, 40s, 50s, 60s, 70s. So, you start early. Secondly, you really have to play by being in the space that they're in. The places where they go. You know, if your passion is golf or tennis, country clubs is certainly one place. Other is philanthropy, other in the arts and there's a lot of places, but you go to where you can meet them because you've got to build a relationship.
ADAM GOWER: You've sat on, I can't count how many boards. Very senior levels from banking to all across the line. Have you made good contacts and good connections doing that kind of thing as well?
ANDY KANE: So, I've sat on probably over 30 boards. What boards allow you to do is to build relationships. A lot of them are business relationships, but they are conduits. You know somebody on the board who knows somebody else and it's a networking form, no different than a country club. But, at the end of the day, it's an icebreaker. I was introduced by Adam. You can have a conversation. You still got to be able to ask, when you're in front of somebody. Tell me a little bit more about what you're looking for and let me tell you what I, let's see if there's a particular fit and not try to make it as, this is the best thing since ice cream and you should sell, you know, get your money in two weeks. So, that capacity to establish yourself is important. There are also other avenues. You can get credibility just by the organization you're with. That's why firms like Goldman Sachs or JP Morgan or the other esteemed private banks, or esteemed wealth management firms are able to use the leveraging of their network in relationships. So, don't underestimate the power of the organization that you're associated with and how you can use that as a networking tool. You know, some use religious connections, some use social connections. You have to decide what's good for you. You can't do everything and you don't want to be a duck out of water. So, you want to do something that feels very natural for you and if it's natural for you, you'll meet people naturally and that's where it will emanate from.
