Adding Exposure Without Adding Cash

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Leveraged ETFs as an Implementation Tool for Family Offices

By Vincent Randazzo, CMT and Ryan Gorman, CFA, CMT, BFA | Edited by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

Family offices often see an opportunity in public markets at a moment when their liquid capital is already committed to private investments, capital calls, taxes or operating needs. This paper examines leveraged exchange-traded funds as one way to add equity exposure without new cash, by restating part of an existing allocation at higher exposure. It explains the three mechanical features that separate appropriate uses from inappropriate ones (capital efficiency, the daily reset and path dependence, and embedded financing), compares leveraged ETFs with index futures, margin, options and total return swaps, and describes where each fits. It closes with six questions a family office should answer before any exposure goes on, and with the risks that remain however well a position is managed. It does not argue that leverage belongs in every portfolio, or that leveraged ETFs are the right vehicle for every purpose.

Nothing in this white paper constitutes investment, tax, legal, or accounting advice. The discussion of leveraged exchange-traded funds and other ways to add equity exposure is a general educational summary only, and individual results depend on specific facts and circumstances. Readers should consult their own qualified advisers before acting on anything described herein, and should not rely on this white paper as a substitute for such advice.

The Capacity Problem

Most discussions of leveraged ETFs start with the product. This one starts with a portfolio problem that family offices know well: an opportunity appears in public markets, and there is no capital available to act on it.

A family office balance sheet is rarely idle. Capital is deployed across public equities, private equity, private credit, real estate, and other alternatives, and much of what remains liquid is already spoken for by capital calls, distributions, taxes, or operating needs. When public equities pull back in an otherwise healthy market, the office may conclude that exposure should rise and still have no practical way to raise it.

Those pullbacks are not rare. Since 1928, the S&P 500 has had 47 declines of 5–10% that did not become a 20% bear market; median time to recover the prior high was 34 trading days.1

There are four ways to resolve the constraint: hold cash in advance, sell something else, borrow, or use an instrument with leverage built in. Cash held in advance carries a permanent opportunity cost for a temporary need. Selling another position moves exposure around the balance sheet without adding to it. That leaves borrowing and embedded leverage, and within those, the choice of vehicle matters as much as the decision to add exposure.

This paper explains how leveraged ETFs work as one such vehicle, compares them with the alternatives, and sets out the governance questions a family office should answer before using any of them. It does not argue that leverage belongs in every portfolio, or that leveraged ETFs are the right vehicle for every purpose.

How Leveraged ETFs Actually Work

Leveraged ETFs have a reputation, much of it earned by investors who used them for purposes they were not designed for. Three mechanical features account for most of the difference between an appropriate use and an inappropriate one.

Capital efficiency

A leveraged ETF delivers a multiple of an index’s daily return per dollar invested. That changes the question from “where do we find new cash?” to “how much of an existing allocation can be restated at higher exposure?”

Consider a portfolio with 100% equity exposure. It sells 7.5% of its unlevered index position and buys 7.5% of a 3x fund on the same index. Equity exposure rises to 115% (92.5% × 1 + 7.5% × 3) with no new capital. Restating 20% of the portfolio the same way takes exposure to 140%. The rest of the portfolio is unchanged, and the incremental exposure sits in a single position that can be sized, monitored, and sold.

The efficiency works in both directions. In that 140% case, a 10% index decline costs the 20% sleeve 6% of portfolio value, against 2% had it stayed unlevered.

Bar chart: restating 7.5% or 20% of an index position into a 3x fund raises equity exposure from 100% to 115% or 140% with no new capital

Figure 1. Restating 7.5% or 20% of an unlevered index position into a 3x fund on the same index raises equity exposure to 115% or 140% with no new capital. Original TFOA illustration.

Daily reset and path dependence

Most leveraged ETFs target a multiple of the index’s daily return and rebalance each day to maintain it. Over any period longer than a day, the result depends on the path the index takes, not only on where it ends. Table 1 shows five hypothetical ten-day paths.

Table 1. Ten-day outcomes for a 3x daily-reset fund along hypothetical index paths

Index path (10 trading days) Index return 3x the index return 3x daily-reset fund Difference
Steady rise (+1% per day) +10.5% +31.4% +34.4% +3.0 pts
Steady decline (−1% per day) −9.6% −28.7% −26.3% +2.4 pts
Choppy, low volatility (±1% alternating) −0.05% −0.15% −0.45% −0.3 pts
Choppy, high volatility (±3% alternating) −0.45% −1.35% −3.98% −2.6 pts
Sharp drop, then recovery (−3% × 4 days, +3% × 6 days) +5.7% +17.1% +15.0% −2.1 pts

Hypothetical and illustrative only. Excludes expense ratios, financing costs, and trading costs. Does not represent the performance of any fund or strategy.

Two patterns matter. In trending markets, daily compounding works in the holder’s favor, in either direction: the fund did better than three times the index in both the steady rise and the steady decline. In choppy markets it works against the holder, and the drag grows with volatility. The same roughly flat path costs 0.3 points relative to three times the index at 1% daily moves and 2.6 points at 3% daily moves. The drag scales roughly with the square of volatility, which is why holding period and volatility regime matter more than the leverage ratio itself.

Chart: the cost of the daily reset on a flat alternating path rises roughly with the square of the daily move

Figure 2. On a flat, alternating path, the cost of the daily reset rises roughly with the square of each day’s move. Computed from the hypothetical paths in Table 1. Original TFOA illustration.

This bears directly on the use case in this paper. Pullbacks are periods of elevated volatility, the conditions in which daily-reset drag is greatest. The last row is closest to that case: a sharp four-day decline followed by a recovery. The fund captured most of the move but trailed three times the index by about two points. A program that uses leveraged ETFs during pullbacks should expect to pay this cost and set position size and holding period accordingly. Monitoring the position does not reduce it.

Line charts: ten-day paths of a 3x daily-reset fund against three times the index, choppy and sharp drop then recovery

Figure 3. Ten-day paths for a 3x daily-reset fund against three times the index, in the two Table 1 cases closest to a pullback. Original TFOA illustration.

Embedded financing

A leveraged ETF gets most of its exposure through total return swaps and futures, and it pays for that leverage inside its returns rather than as a separate line item. Total cost of ownership has three parts: the disclosed expense ratio typically 0.5–1.0% for broad-index 2x and 3x funds, as of 10/14/2026, the financing embedded in the swaps, broadly a short-term rate plus a spread on the borrowed portion of exposure; and trading costs, including the daily rebalancing. The expense ratio is fixed. The financing component moves with interest rates, as margin does. Vehicles should be compared on all-in cost, not on an expense ratio against a margin rate.

Five Ways to Add Exposure

Leveraged ETFs are one of five common ways to add equity exposure without new cash. Table 2 compares them on the dimensions that tend to decide the question in practice.

Table 2. Implementation alternatives

Vehicle Capital tied up Main cost driver Infrastructure needed Account reach Main drawback
Index futures Margin collateral Financing implied in futures price; roll Futures account, collateral and roll management Limited in retirement accounts and on many platforms Contract size can be coarse for small tranches
Margin None up front; full amount borrowed Broker margin rate (floating) Margin agreement Generally unavailable in retirement accounts Margin calls can force selling unrelated to the signal
Options (calls) Premium Implied volatility and time decay Options approval; strike and expiry management Restricted in some accounts Premiums rise with volatility, which is when pullbacks occur
Total return swaps Collateral Negotiated spread over a floating rate ISDA documentation, collateral, counterparties Institutional entities only, in practice Documentation burden and minimum sizes
Leveraged ETFs One-half or one-third of exposure added Expense ratio plus embedded swap financing (floating) Standard brokerage Broad, though some platforms restrict or require approval Daily-reset drag in volatile, choppy markets

Generalized comparison; terms vary by custodian, platform, and fund.

When each vehicle wins

  • Futures are usually the cheapest and most precise option for a single large pool of capital that already has the infrastructure. A family office that runs one consolidated institutional account with futures access may find futures more cost-efficient than leveraged ETFs for certain applications.
  • Margin is the simplest choice for a single taxable account adding small amounts for short periods, where the risk of a margin call at modest leverage is manageable.
  • Options fit when the objective includes a defined maximum loss. A call caps the overlay’s downside at the premium paid, which a leveraged ETF does not.
  • Swaps make sense for large, longer-dated exposures where negotiated terms justify the documentation.
  • Leveraged ETFs fit when exposure needs to be added in small, predefined increments, held for days or weeks rather than years, and applied identically across entities, custodians, and account types, which is a common situation in family office structures. They also avoid a separate financing relationship.

Where Leveraged ETFs Fit, and Where They Don’t

Appropriate uses

  • Tactical overlays with defined entry, sizing, and exit rules, typically held for days to weeks.
  • Freeing capital for a known commitment, such as a capital call, by restating part of a core allocation at higher exposure for a defined period.
  • Maintaining exposure through a transition: between managers, during a rebalance, or while a liquidity event settles.

Poor fits

  • Permanent, unconditional leverage held for years, especially in volatile markets.
  • Accounts where no one is assigned to monitor the position.
  • Situations where the maximum loss must be known in advance. Options do that; leveraged ETFs do not.
  • A substitute for conviction. If the case for more exposure is weak, a more efficient vehicle does not make it stronger.

A PRACTITIONER EXAMPLE

A rules-based pullback overlay

Tamarisk Capital Management’s Defender framework sets equity exposure based on market breadth, momentum, and other measures of market health. When the evidence is healthy, the strategy is fully invested. That creates the capacity problem described above: a meaningful pullback inside a healthy regime leaves no room to add.

The firm added a rules-based tactical overlay. It activates only when two conditions hold at once: a meaningful decline in price, and breadth and other evidence that still classify the regime as healthy. Price weakness alone is not enough. Exposure is added in four predefined tranches, sized from the historical behavior of market drawdowns, up to a maximum of approximately 140%. The incremental exposure is removed under a predefined rule once the drawdown has recovered.

In March 2026, the overlay generated buy signals on March 23 and March 30, adding 15 and 10 percentage points of equity exposure.

After comparing the five vehicles above, the firm chose a broad-index leveraged ETF. Two factors decided it: the same instruction had to apply across taxable, retirement, and third-party platform accounts, and tranches needed finer sizing than futures contracts allowed. The trade-off it accepted is daily-reset drag during the volatile periods when the overlay is active, which it manages through bounded size and a short, rules-defined holding period.

Questions to Answer Before Any Exposure Goes On

The broader lesson is that the vehicle should follow the problem, not the other way around. In practice, that means answering six questions in order.

  1. What portfolio problem are we solving? A tactical position needs a specific problem. “We want more return” is not one. “We cannot act on opportunities because our liquid capital is committed” is.
  2. Why leverage, rather than cash or reallocation? If holding cash or selling something else solves the problem at an acceptable cost, leverage may not be needed.
  3. How much, at most? Maximum exposure should be set in advance, with the office’s other liquidity needs in view. Capital efficiency makes it easy to add exposure; it should not make it easy to add too much.
  4. Which vehicle? Choose after the problem is defined, on all-in cost, operational requirements, and account eligibility. An office with a different holding period or infrastructure may reasonably reach a different answer.
  5. Who monitors it, and how often? Daily-reset instruments need a named owner, a review frequency, and a defined set of information to review.
  6. What takes it off? The exit rule should exist before the position does. Without one, a temporary position can drift into a permanent leveraged allocation, which is a different risk and calls for a different decision.

Diagram: the six questions to answer, in order, before any exposure goes on

Figure 4. The six questions set out in this paper, in the order the authors recommend answering them. Original TFOA illustration.

Together, these questions amount to a governance process: the objective, sizing, monitoring, and exit are agreed before the exposure goes on, so decisions made during a drawdown follow a framework rather than a mood. Whether leverage belongs in a given portfolio at all is a decision for each family office and its advisers.

Risk Considerations

  • Daily-reset drag. Leveraged ETFs are designed around daily objectives, and their returns over longer periods can differ materially from a simple multiple of the index. A pullback overlay is active in exactly the volatile conditions where that difference is largest.
  • The pullback may not be temporary. The evidence that a regime is healthy can change after exposure has been added, and losses on the levered position are a multiple of the index decline. Bounded size and incremental additions limit this risk; they do not remove it.
  • Liquidity stress can coincide. Capital calls and other demands on liquidity tend to cluster around market stress, so tactical exposure may be largest when liquidity is scarcest.
  • Gap risk. Large overnight moves pass through at the full multiple. In theory, a single-day index decline of one-third would eliminate the value of a 3x fund.
  • Financing, tax, and platform considerations. Embedded financing costs rise with short-term rates. Leveraged ETFs can make taxable distributions, and treatment should be evaluated for each entity. Some custodians and platforms restrict leveraged ETFs or require additional approval.

Conclusion

Leveraged ETFs answer a specific problem: adding equity exposure when an opportunity appears and liquid capital is already committed. Restating part of an existing allocation at higher exposure raises exposure without new cash, keeps the incremental risk in a single position that can be sized, monitored and sold, and lets the same instruction apply across entities, custodians and account types.

The costs are real. Daily-reset drag is greatest in the volatile, choppy conditions in which a pullback overlay is active; embedded financing moves with short-term rates; and if a pullback proves not to be temporary, losses are a multiple of the index decline. Futures, margin, options and swaps each win in other circumstances. The vehicle should follow the problem, and the objective, sizing, monitoring and exit should be agreed before the exposure goes on. Whether leverage belongs in a given portfolio at all remains a decision for each family office and its advisers.

Bibliography

  • Financial Industry Regulatory Authority. (2009, June). Regulatory Notice 09-31: Non-traditional ETFs — FINRA reminds firms of sales practice obligations relating to leveraged and inverse exchange-traded funds.
  • StatOasis. S&P 500 declines of 5–10% that did not become a 20% bear market, 1928 to date, computed from daily S&P 500 closes.
  • U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. (2023, August 29). Updated investor bulletin: Leveraged and inverse ETFs.
  • Expense ratios cited for broad-index 2x and 3x funds are as of 14 October 2026, as stated by the authors.
  • Figures 1 to 4 are original illustrations prepared by The Family Office Association for this paper from the hypothetical examples in the text. Tables 1 and 2 are the authors’.

1 Source: StatOasis, computed from daily S&P 500 closes since 1928. See Bibliography.

Frequently Asked Questions

What is a leveraged ETF?

An exchange-traded fund that delivers a multiple of an index’s daily return per dollar invested, typically two or three times, and rebalances each day to maintain that multiple. It gets most of its exposure through total return swaps and futures and pays for the leverage inside its returns rather than as a separate line item.

How can a family office add equity exposure without new cash?

By restating part of an existing allocation at higher exposure. Selling 7.5% of an unlevered index position and buying 7.5% of a 3x fund on the same index raises equity exposure from 100% to 115% (92.5% × 1 + 7.5% × 3). Restating 20% the same way takes it to 140%. The rest of the portfolio is unchanged, and the incremental exposure sits in a single position that can be sized, monitored and sold.

What is daily-reset drag?

Because the fund rebalances every day, its return over a longer period depends on the path the index takes, not only on where it ends. On the paper’s roughly flat ten-day paths, a 3x fund trailed three times the index by 0.3 points when the index moved 1% a day and by 2.6 points when it moved 3% a day. The drag scales roughly with the square of volatility.

Why does the daily reset matter for a pullback strategy?

Pullbacks are periods of elevated volatility, the conditions in which daily-reset drag is greatest. In the paper’s sharp-drop-then-recovery path the fund captured most of the move but trailed three times the index by about two points. Monitoring the position does not reduce this cost, so position size and holding period have to allow for it.

What does a leveraged ETF actually cost to hold?

Three things: the disclosed expense ratio, typically 0.5–1.0% for broad-index 2x and 3x funds as of 14 October 2026; the financing embedded in the swaps, broadly a short-term rate plus a spread on the borrowed portion of exposure; and trading costs, including the daily rebalancing. The financing component moves with interest rates, so vehicles should be compared on all-in cost.

How do leveraged ETFs compare with futures, margin, options and swaps?

Futures are usually the cheapest and most precise option for a single large pool of capital that already has the infrastructure. Margin is the simplest choice for a single taxable account adding small amounts for short periods. Options fit when the objective includes a defined maximum loss. Swaps make sense for large, longer-dated exposures. Leveraged ETFs fit small, predefined increments held for days or weeks and applied identically across entities, custodians and account types.

When is a leveraged ETF a poor fit?

For permanent, unconditional leverage held for years, especially in volatile markets; in accounts where no one is assigned to monitor the position; where the maximum loss must be known in advance, which options provide and leveraged ETFs do not; and as a substitute for conviction. If the case for more exposure is weak, a more efficient vehicle does not make it stronger.

What should a family office decide before adding exposure?

Six questions, in order: what portfolio problem is being solved; why leverage rather than cash or reallocation; how much exposure at most; which vehicle; who monitors the position and how often; and what takes it off. The exit rule should exist before the position does, or a temporary position can drift into a permanent leveraged allocation.

About the Authors

Vincent Randazzo, CMT is a Portfolio Manager at Tamarisk Capital Management, founder of ViewRight Advisors, and developer of the Defender framework. His background includes Lowry Research, CFRA, Morgan Stanley, UBS, and Nasdaq, with more than 20 years in institutional technical and breadth-based market analysis.

Ryan Gorman, CFA, CMT, BFA is a Portfolio Manager at Tamarisk Capital Management and Chief Investment Officer of West Michigan Advisors and Tamarisk Research. His work combines fundamental and technical analysis in systematic, rules-based processes.

Marc J. Sharpe, M.A., M.Phil., MBA is a global investment executive and board member with a career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Important Disclosures

This paper is for informational and educational purposes only and is not an offer or solicitation to buy or sell any security or to adopt any investment strategy. Leveraged ETFs seek a multiple of an index’s daily return; their returns over longer periods can differ significantly from that multiple, and they are not suitable for all investors. Table 1 is hypothetical, excludes all costs, and does not represent the performance of any fund, account, or strategy. References to the March 2026 signals describe a process and are not a representation of results. All investing involves risk, including loss of principal. The figures in this paper are original illustrations prepared by The Family Office Association. They reproduce no third-party artwork.

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

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Related Reading

What a family office should establish before borrowing against a private markets portfolio

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By Alex Branton and Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

A family office whose private markets allocation has matured, whose distributions have slowed and whose capital calls have not, faces a liquidity problem of timing rather than solvency. Borrowing against the portfolio (NAV financing) is one of six or seven responses available to it, and the one least often explained properly. This paper compares a portfolio-level NAV facility against the alternatives. It distinguishes fund-level, portfolio-level and concentrated-position facilities, and shows why the governance question survives the choice to lever oneself. It explains why a lender almost never takes security over the underlying companies — because limited partnership agreements restrict transfers and pledges, often including indirect ones — and why that single constraint produces the three structures a family is likely to be offered, together with the covenants, cash traps and sweeps that accompany the most common of them. It then separates reported net asset value from eligible net asset value, the defined term to which an advance rate is actually applied and sets out what a position-level schedule must disclose before borrowing capacity can be assessed. It models what a cash sweep does to family liquidity when it operates from closing on a performing loan, compares a matched-cash partial secondary sale against a facility on the same date, and closes with four tests a requirement must pass before a facility might be considered the right solution.

Nothing in this white paper constitutes tax, legal, or accounting advice. The discussion of NAV credit facilities, security structures and secondary market pricing is a general educational summary only, and individual results depend on specific facts and circumstances. Readers should consult their own qualified counsel before acting on anything described herein and should not rely on this white paper as a substitute for such advice.

Introduction

Most families arrive at this issue the same way. The private markets allocation has matured, the distributions that were supposed to fund this year’s calls have not turned up, and the calls have. Nothing has gone wrong exactly. The cash is just in the wrong place at the wrong time.

At that point a family office has six or seven things it can do:

  1. Hold more cash.
  2. Sell liquid assets.
  3. Draw on credit it already has.
  4. Sell some LP interests in the secondary market.
  5. Borrow against the private portfolio.
  6. Slow down future commitments.

In practice most families do two or three of these at once. The fifth is the one nobody explains properly to families, so it is the one we will compare against the others here. What a lender is really securing. How much of a portfolio actually counts toward borrowing capacity. What a cash sweep does to your liquidity. And when the answer ought to be no.

Who is borrowing, and against what?

Several quite different things get called NAV lending, and the distinction that matters is who the borrower is.

A fund-level facility has the private equity fund borrowing against its own portfolio companies. Its limited partners end up carrying leverage the general partner chose.

A portfolio-level facility has the holder of a set of fund interests borrowing against them. That is typically the version available to a family office.

A facility against a handful of positions uses the same legal machinery on a concentrated pool. The credit changes. The law does not.

Choosing your own leverage does not dispose of the governance question, and this is where families sometimes get caught out. The borrower, the entity holding the interests, any guarantor, and the people who actually benefit from the proceeds, are often four different parties. Once trusts hold part of the portfolio it gets even more tangled still. Work out early which entity can borrow, which can pledge, and who would fund a cure. Then look at what leverage already sits inside the funds and their portfolio companies, because whatever you will sign sits on top of all of it.

How the security actually works, and why it drives everything else

Families often assume the lender takes security over the underlying companies. It almost never can, and the reason explains most of what you will see in a term sheet.

Most limited partnership agreements restrict transfers and pledges. Plenty go further and treat an indirect pledge, or an indirect change of control, as a restricted transfer too. That last part is what catches many people. Pledging the equity of a holding vehicle sitting above the interests can trip the restriction just as a direct pledge would.

The law firm, Mayer Brown, looked at this in March 2026 and put the consequence bluntly. A lender that took security without the consent it needed may find it cannot foreclose or sell the interest on a default. It may be left holding the economic proceeds and nothing else.

So, permission to grant a pledge is not permission to enforce one. Out of that gap come the three structures a family office is likely to be offered.

The three NAV structures available to a family office and the trade-off each one carries

Figure 1. The three structures described in this paper, and the trade-off each one carries. Original TFOA illustration.

The first limits the collateral to cash. The lender takes a pledge of the right to receive distributions, a covenant that distributions go into a pledged account, and security over that account. Mayer Brown calls it security lite and notes it keeps gaining ground, because it sidesteps the transfer restriction problem altogether.

There is a price for that, and you should expect to pay it. The lender cannot reach the assets, so it leans instead on strict loan-to-value thresholds, cash trap triggers, diversification covenants, and the right to sweep all net proceeds.

The second structure pledges every equity interest except those carrying a restriction that would block a pledge, carving the restricted ones out automatically. It saves reviewing hundreds of documents on day one, and it has become common on larger deals. The third takes a full equity pledge and needs the consents.

Ask which of the three you are being offered before anybody talks about price. A family that knows it is looking at security lite will understand why the covenants and the sweep are as tight as they are and can negotiate on that footing rather than treating the terms as difficult or contentious.

One more thing sets the US timetable, and it is purely mechanical. A security interest in a deposit account can only be perfected by control. Unless your lender happens to be the depositary bank, it needs a control agreement with every bank holding a distribution account. Getting those agreed across several custodians, on top of any consents and notices, is usually why a deal takes longer than the credit work alone would suggest.

Eligible net asset value, not net asset value

Borrowing capacity is not an advance rate applied to the sum of your general partners’ marks. It is applied to eligible net asset value, which is a defined term buried in the facility, and the two numbers can sit a long way apart.

Generic advance rates are close to useless here. Ask instead for a position-level schedule, and read it for:

  1. Reported value and the date it was struck
  2. Which positions are excluded, and why
  3. Concentration caps by fund, by manager, and by underlying asset
  4. Valuation and currency adjustments
  5. How unfunded commitments and existing debt are counted, and whether the marks already reflect them

Three further questions decide how much headroom a family office really has:

  1. Does capitalized interest count as debt?
  2. Can the lender challenge a valuation between reporting dates?
  3. Is the initial advance limit the same as the maintenance threshold, and the same again as the level where cash starts being trapped? Often it is not, and nobody volunteers that.

Why reported net asset value overstates borrowing capacity, and the arithmetic of a 20 per cent markdown

Figure 2. Why reported value overstates borrowing capacity, and the arithmetic of a 20% markdown. Original TFOA illustration.

Two portfolios with identical reported value can support very different facilities once those definitions bite. Diversification across fifteen funds can also hide the same managers, or the same companies, sitting underneath them.

What a cash sweep does to family office liquidity

Borrowers tend to read the sweep as a default remedy and move on. It is usually rather more than that. In many structures it runs from closing, on a perfectly performing loan, routing distributions to the lender before anything reaches the family office.

Accrued interest makes it worse. The balance climbs while the lender is taking the distributions. The calls still arrive. The cash you had earmarked for them has gone.

Where distributions go under normal operation, at cash trap level and in covenant breach

Figure 3. Where the distributions go: one distribution routed under normal operation, at cash trap level, and in covenant breach, showing what is captured on the way and what reaches the family at each stage. Original TFOA illustration.

So, model the sweep on its own, before you model any breach.

  1. How much of each distribution gets captured?
  2. Are there carve-outs for capital calls, taxes and running costs?
  3. At what point does it switch off?

Then push the case. Delay the realizations, mark the portfolio down, and look at what is left. If the answer is nothing, somebody has to find it, and the family office should know who that is well before it signs.

The arithmetic itself is easy. Hold the debt flat, drop the value 20%, and a facility drawn at 35% LTV sits at roughly 44%. Whether that is a problem depends on where the thresholds were set in the first place. It also depends on something less obvious. If the asset that fell is no longer eligible, an exclusion can push the effective ratio a good deal further than the markdown alone would.

Comparing cost, and comparing options

Headline margin is not a comparison. Nor is total cost divided by expected usage, because the offers will differ in fee base, draw timing, and repayment assumptions.

Put every proposal on the same dated schedule of drawings and repayments. Then look hard at what each fee is charged on. An origination fee on the full commitment is a different animal from one charged on amounts drawn, and on a partly used facility that gap gets wide.

Build in the benchmark convention and any floor, the split between cash and capitalized interest, the sweep, and anything payable on prepayment or extension. Produce a dollar total and an effective annual rate off the dated flows. Then run it again on lower utilization. Then once more on a delayed exit, because that is the case that typically happens.

Borrowing against the portfolio, or selling part of it

Both routes have to raise the same cash on the same date or the comparison is theatre.

Say a family office needs $20m. At a bid of 91% of reported value, raising it means selling ~$22m of reported value, so the discount is ~$2m before transaction costs and taxes. The alternative is a $20m drawing, which leaves $20m to repay plus interest, fees and covenant exposure.

A matched-cash partial secondary sale compared against a proposed NAV facility

Figure 4. Same cash today, what is left tomorrow: a matched-cash partial secondary sale against a proposed facility, and the unrestricted cash each leaves after capital calls and debt service, in a base case and a delayed realization case. Original TFOA illustration.

Setting a discount on the whole portfolio against interest on a partial drawing is not a comparison at all. It flatters borrowing, and it is how decisions get made badly.

Three warnings belong with that arithmetic:

  1. Buyers select. A strong bid on your two best funds does not price the rest, and a published average is market color rather than an offer for your interests.
  2. Headline price is not cash. A good share of LP sales now carry deferrals or other structured terms, so what settles at closing can be well below the number quoted.
  3. A sale takes the unfunded commitments with it, and borrowing does not. Where the real difficulty is the pace of future calls, borrowing to meet them finances commitments whose value dips through the early years, shrinking borrowing capacity at exactly the moment the balance is growing.

Some context, though not a forecast. In the first half of 2026, Jefferies, the investment bank, put average LP portfolio pricing near 87% of net asset value. Buyout was around 91%. Real estate was around 68%. Those are dated observations of dispersion. None of them is a bid for your interests, so family offices will need to go and get real ones when considering options.

When another route is better

A few situations argue against a facility:

  1. A recurring shortfall is the clearest of them. Borrowing turns an allocation problem into a leveraged allocation problem, and the problem is still sitting there next year.
  2. Concentration is the next. If one or two positions carry the portfolio, the terms on offer will tell you so.
  3. Repayment is where families most often fool themselves. Portfolio distributions are the normal repayment source and there is nothing wrong with that at all. What does not work is a plan resting on values recovering, or on a refinancing nobody has committed to.
  4. Then governance. If the committee has not settled who authorizes a cure, and whose assets fund it, have that conversation before signature rather than in the middle of a bad quarter.
  5. And if the family would exit the assets anyway, a discount to a stale mark may simply be what they are worth.

A decision rule

Thin distributions do not automatically call for a facility. Four things have to line up:

  1. The requirement should be temporary and defined.
  2. The portfolio should be diversified, and one you actually mean to keep.
  3. The sweep and covenants should still leave enough cash for known calls in a downside case.
  4. And repayment should not rest on an assumption your committee would throw out in any other context.

The four tests a family office should apply before borrowing against a private markets portfolio

Figure 5. The four tests set out in this paper. Original TFOA illustration.

Miss any of the four and other alternatives deserve the same arithmetic, done properly, before anyone signs anything.

Bibliography

  • Jefferies. (2026, July). Global secondary market review. Jefferies Financial Group. Cited in this paper for first-half 2026 average LP portfolio pricing of approximately 87% of net asset value, buyout at approximately 91%, and real estate at approximately 68%.
  • Mayer Brown. (2026, March). Transfer restrictions in NAV credit facilities. Mayer Brown LLP. Cited in this paper for the treatment of direct and indirect pledges under limited partnership agreements, the consequences for a lender’s ability to foreclose, and the “security lite” collateral structure.
  • Figures 1 to 5 in the PDF edition of this paper are original illustrations prepared by The Family Office Association from the content of this paper. They reproduce no third-party artwork.

Frequently Asked Questions

What is a NAV credit facility?

A NAV facility is a loan secured against a portfolio of private fund interests rather than against the underlying companies. A fund-level facility has the fund itself borrowing against its portfolio companies. A portfolio-level facility, which is the version normally available to a family office, has the holder of a set of fund interests borrowing against them. A third variety lends against a handful of concentrated positions using the same legal machinery.

Why can a lender rarely take security over the underlying companies?

Most limited partnership agreements restrict transfers and pledges, and many treat an indirect pledge or an indirect change of control as a restricted transfer too. Pledging the equity of a holding vehicle above the interests can trip the restriction just as a direct pledge would. Mayer Brown noted in March 2026 that a lender taking security without the consent it needed may be unable to foreclose or sell the interest on a default, and may be left holding the economic proceeds and nothing else.

What is a security lite structure?

Security lite limits the collateral to cash. The lender takes a pledge of the right to receive distributions, a covenant that distributions are paid into a pledged account, and security over that account. It sidesteps the transfer restriction problem, and the price is strict loan-to-value thresholds, cash trap triggers, diversification covenants and the right to sweep all net proceeds.

What is eligible net asset value, and why does it differ from reported NAV?

The advance rate in a facility is applied to eligible net asset value, a defined term in the facility document, not to the sum of the general partners’ marks. Exclusions, concentration caps by fund, by manager and by underlying asset, valuation and currency adjustments, and the treatment of unfunded commitments and existing debt can put the two numbers a long way apart. Two portfolios with identical reported value can support very different facilities.

What does a cash sweep do to family office liquidity?

In many structures the sweep runs from closing on a perfectly performing loan, routing distributions to the lender before anything reaches the family. Interest continues to accrue while the lender is taking the distributions, and the capital calls still arrive. The sweep should be modelled on its own, before any breach is modelled.

How far does a 20 percent markdown move the loan-to-value ratio?

Holding the debt flat and dropping the value by 20 percent takes a facility drawn at 35 percent loan-to-value to roughly 44 percent. Whether that is a problem depends on where the thresholds were set in the first place. If the asset that fell is no longer eligible, an exclusion can push the effective ratio further than the markdown alone would.

How should a family office compare a facility against selling LP interests?

Both routes have to raise the same cash on the same date or the comparison is theatre. Raising 20 million dollars at a bid of 91 percent of reported value means selling about 21.98 million dollars of reported value, a discount of roughly 1.98 million before transaction costs and taxes. The alternative is a 20 million dollar drawing, which leaves 20 million to repay plus interest, fees and covenant exposure. Setting a discount on the whole portfolio against interest on a partial drawing is not a comparison at all.

When is a NAV facility the wrong answer?

When the shortfall is recurring rather than temporary, because borrowing turns an allocation problem into a leveraged allocation problem. When one or two positions carry the portfolio. When repayment rests on values recovering or on a refinancing nobody has committed to. When the committee has not settled who authorises a cure and whose assets fund it. And when the family would exit the assets anyway, in which case a discount to a stale mark may simply be what they are worth.

About the Authors

Alex Branton is Chief Investment Officer of Nodem Capital, an investment firm working with family offices and private markets investors on NAV financing and GP financing. Nodem Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom, firm reference number 1017481. Authorization by the FCA concerns Nodem’s regulated activities in the United Kingdom and does not itself constitute authorization to lend in any other jurisdiction. Contact: abranton@nodem.com

Marc J. Sharpe is a global investment executive and board member with a career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

Educational only. Not investment, legal, tax or accounting advice. Not a recommendation. Not an offer of financing.

What is described here are general market structures. Terms vary by transaction and turn on the relevant fund and facility documents. Readers should take their own professional advice and get their own proposals and bids.

Market data is a dated illustration drawn from the Jefferies Global Secondary Market Review, July 2026. It reflects aggregate transaction observations, not executable prices. Legal structuring points draw on Mayer Brown, Transfer Restrictions in NAV Credit Facilities, March 2026.

The figures in this paper are original illustrations prepared by The Family Office Association from the content of this paper. They reproduce no third-party artwork.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Related Reading

When a Family Office Becomes a Business: The Lender Management Case

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Authored by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

In Lender Management, LLC v. Commissioner, T.C. Memo. 2017-246, the United States Tax Court held that a family office serving the family behind Lender’s Bagels was engaged in a trade or business under Section 162 of the Internal Revenue Code — not merely managing the family’s own investments — making its operating expenses fully deductible. The decision turned on a favorable fact pattern: the office was compensated through a profits interest comparable to a hedge-fund manager’s carried interest; it delivered individualized investment advice to geographically dispersed family members with differing objectives; it operated with dedicated professional staff on arm’s-length terms; and it held only a small stake in the capital it managed. Decided nine days before the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions — a suspension made permanent by 2025 legislation — Lender now defines, for many families, the only remaining path to deductibility of family office expenses. This whitepaper reviews the case, the legal framework, the structuring lessons advisors have drawn from it, and the important cautions that families should weigh with their own counsel. It is educational only and is not tax, legal, or accounting advice.

Introduction

Running a family office is expensive. Investment staff, research, technology, office space, accounting, custody, legal support and advisory fees can easily run into seven figures each year. For decades, families organized their affairs on the comfortable assumption that at least some of these costs would be deductible as expenses incurred for the production of income. That assumption quietly collapsed at the end of 2017, and the ground has not shifted back.

The reason lies in a distinction that runs through the entire Internal Revenue Code: the difference between investing and carrying on a trade or business. A person who manages even a very large portfolio of their own is, in the eyes of the tax law, an investor — and the expenses of investing receive markedly less favorable treatment than the expenses of a business. Lender Management is the most important modern authority for the proposition that a family office, properly structured, can cross that line and be treated as a business.

The stakes in one sentence: whether the same dollar of family office expense is fully deductible or effectively non-deductible can depend entirely on whether the office is characterized as a business under Section 162 or as investing under Section 212.

The Legal Backdrop: Section 162 Versus Section 212

Two provisions frame the entire question. Section 162 allows a deduction for the ordinary and necessary expenses of carrying on a trade or business. These are “above-the-line” deductions: they are subtracted in arriving at income and are not subject to the limitations that fall on personal itemized deductions.

Section 212, by contrast, allows a deduction for expenses incurred for the production or collection of income, or for the management of property held for the production of income — in other words, the expenses of investing. Historically these were miscellaneous itemized deductions, allowed only to the extent they exceeded 2% of adjusted gross income under Section 67(a), and disallowed entirely for alternative minimum tax purposes. They were never as valuable as business deductions, and for many high-income families they were worth little even before 2018.

The Tax Cuts and Jobs Act then removed them altogether. New Section 67(g) suspended all miscellaneous itemized deductions for tax years 2018 through 2025. The 2025 budget-reconciliation law — informally, the One Big Beautiful Bill Act — made that change permanent. For today’s family office, expenses that fall under Section 212 are, as a practical matter, simply lost. Expenses that qualify under Section 162 are not.

Diagram: the same family office expenses treated as investing under Section 212 or as a trade or business under Section 162

Figure 1. The same expenses lead to very different outcomes depending on characterization. Original TFOA illustration.

The Lender Family and the Structure

The family at the center of the case built its wealth on an American staple. Harry Lender, a Polish-Jewish immigrant, founded the New Haven, Connecticut bakery that his sons — among them Murray and Marvin Lender — grew into Lender’s Bagels, the company widely credited with bringing frozen, pre-packaged bagels to supermarkets across the country. After the family sold the business, the proceeds had to be invested and stewarded across a growing number of descendants. That is the work the family office was created to do.

The office itself was Lender Management, LLC. Over the years at issue it was owned almost entirely through family trusts — initially the Marvin Lender Trust (with a small interest held by a revocable trust of Marvin’s wife), and later, by assignment, principally the Keith Lender Trust. Keith Lender, of the third generation, served as the office’s chief investment officer and managing member and devoted substantial time to the work.

Lender Management did not hold the family’s money directly. Instead it managed three separate investment LLCs, each taxed as a partnership and each pursuing a different strategy — broadly, private equity, marketable public securities, and hedge funds. The members of those LLCs were Lender family descendants spread across multiple generations. Critically, they were not a single unified investor: they lived in different places, had different objectives, risk tolerances and cash-flow needs, and some were in conflict with one another or did not even know one another. Many of them held no interest at all in Lender Management, the manager.

Diagram: the Lender family office structure - family owners, Lender Management LLC as manager, and three investment LLCs

Figure 2. The Lender family office separated the manager (a service provider) from the owners (its clients). Original TFOA illustration.

The economic arrangement mattered as much as the boxes and lines. In exchange for its services, Lender Management received a profits interest in each investment LLC — an allocation tied to the net asset value and investment performance of the pools it managed, comparable to the carried interest a hedge-fund or private-equity manager earns. Because Lender Management itself held only a small indirect stake in the underlying capital, the great majority of the money it worked with belonged to other people. It was, in substance, being paid to manage other people’s wealth.

The Dispute

Lender Management deducted its operating expenses as business expenses under Section 162. The Internal Revenue Service disagreed. In the Service’s view, the office was doing nothing more than managing the Lender family’s own investments — a quintessential investor activity — so its expenses belonged under Section 212, subject to the 2% floor and the other limitations on miscellaneous itemized deductions. The tax years in dispute were 2010 through 2012, and the amounts were not trivial: the office’s expenses exceeded roughly $1.1 million annually in the later years at issue.

The question before Judge Kerrigan of the Tax Court was therefore narrow but decisive: on these facts, was Lender Management carrying on a trade or business, or was it merely investing?

The Court’s Analysis: Investor or Business?

The Code does not define “trade or business,” so the court turned to the two guideposts the Supreme Court has supplied. Under Commissioner v. Groetzinger (1987), an activity is a trade or business if the taxpayer is involved in it with continuity and regularity, and the taxpayer’s primary purpose is income or profit; a sporadic activity or a hobby will not do.

The countervailing authority is Higgins v. Commissioner (1941), in which the Supreme Court held that a taxpayer who merely manages his own investments — however extensive, and however much personal attention he devotes to them — is not for that reason carrying on a trade or business. Higgins is the reason a wealthy individual cannot simply declare the oversight of a personal portfolio to be a business. The whole of Lender is an exercise in distinguishing Higgins.

The court found that Lender Management’s activities “went far beyond those of an investor.” The office sourced, investigated, negotiated and monitored investments; it managed cash flow and prepared asset allocations; and — most importantly — it delivered individualized investment advice and financial planning to family members whose needs did not coincide. It employed a professional staff of roughly five people and engaged outside accountants and other providers. The court likened this to the work of a hedge-fund manager, drawing directly on Dagres v. Commissioner (2011), which had treated a venture-capital manager’s carried interest as compensation for services performed in a trade or business.

Diagram: the factors that moved the Lender family office from mere investor toward trade or business

Figure 3. The factors that moved the Lender family office along the spectrum from investor to enterprise. Original TFOA illustration.

Because the manager and the investors were related, the court applied heightened scrutiny — related parties can dress up a personal arrangement to look like a business. But the substance held up. The family members were treated as genuine clients: they received tailored advice, they could withdraw their capital subject to liquidity constraints, and the services were terminable. The relationship, the court concluded, was a bona fide business relationship notwithstanding the family ties.

Why the Profits Interest Mattered

If a single fact carried the case, it was how Lender Management was paid. A mere co-investor earns a return on the capital it contributes; that return is not compensation for services, and managing one’s own money is not a business. A service provider, by contrast, is paid for the work it performs on other people’s capital — and that is precisely what a profits interest represents.

The Service argued that because the profits interest was contingent on investment success, it was really just an investment return in disguise. The court rejected that argument. Contingent pay is still pay: a hedge-fund manager’s carry is contingent too, and no one doubts that a hedge-fund manager is in business. The disproportion between Lender Management’s small ownership of the underlying capital and the performance-based compensation it earned was itself powerful evidence that the payment was for services rather than a return on the manager’s own investment.

Diagram: a mere co-investor versus a service provider paid by a profits interest

Figure 4. Being paid for services — not merely earning a return on one’s own capital — was the decisive distinction. Original TFOA illustration.

After Lender: The TCJA and the 2025 Permanent Repeal

The legal significance of Lender is inseparable from what happened next. The decision came down on December 13, 2017. Nine days later, the Tax Cuts and Jobs Act became law and, through new Section 67(g), suspended every miscellaneous itemized deduction for 2018 through 2025. Overnight, the Section 212 route that many family offices had relied on — imperfect as it already was — disappeared.

For several years, some families waited, reasoning that the suspension was temporary and would sunset after 2025. That bet did not pay off. The 2025 budget-reconciliation law made the disallowance permanent, and there is now no scheduled return of the miscellaneous itemized deduction. The practical consequence is stark: for a family office characterized as an investor, ongoing operating expenses are effectively non-deductible with no expiration date in sight. The Lender path is not a clever enhancement; for many families it is the difference between deductibility and none.

Timeline: the legal arc from Higgins (1941) through Lender (2017) to the 2025 permanent repeal

Figure 5. The legal arc from Higgins to the 2025 permanent repeal — which makes Lender’s lesson more valuable, not less. Original TFOA illustration.

A Structuring Playbook

Commentators and advisors have distilled Lender into a set of design principles. None is a magic formula — the analysis is always one of facts and circumstances — but together they describe the fact pattern that a family office hoping to rely on Section 162 would like to be able to point to.

  • How the manager is paid. A profits or carried interest earned for services is far stronger than bare cost reimbursement, which suggests a cost-sharing arrangement rather than a business.
  • Who owns the capital. The structure is stronger when most of the managed capital belongs to family members and trusts other than the manager’s owners.
  • Individualized service. Tailored advice delivered to distinct clients with differing objectives resembles an advisory business; a single undifferentiated family pool does not.
  • Continuity and staff. Dedicated professionals engaged in regular, ongoing activity demonstrate the continuity and regularity that Groetzinger requires.
  • Arm’s-length terms. Terminable services and the ability to withdraw capital evidence a bona fide business relationship rather than an informal family arrangement.
  • Documentation. Written agreements that reflect the real economics — and conduct that matches them — matter enormously under the heightened scrutiny applied to related parties.

Two further points recur in professional commentary. First, substance must match form: the written agreements, the compensation actually paid, and the day-to-day conduct of the office all need to tell the same story of a business serving clients. Second, the approach is only appropriate in the right situation — typically a larger, multi-generational family with genuinely distinct investors, a real professional operation, and the willingness to run the office on arm’s-length terms. Retrofitting a single-investor arrangement to look like a business after the fact invites exactly the scrutiny the court applied here.

Cautions and Limitations

Enthusiasm for Lender should be tempered by several sober realities.

  • It is a memorandum decision on its own facts. Lender is a Tax Court memorandum opinion, persuasive but not binding precedent, and it rests on a specific and favorable set of facts. A family whose circumstances differ — especially one where the manager and the investors are effectively the same economic unit — cannot assume the same result.
  • Related-party scrutiny is real. The court applied heightened scrutiny precisely because the parties were family. A structure without genuine business substance — real services, real clients, real arm’s-length terms — is unlikely to survive.
  • Business status carries its own tax consequences. Treating a family office as a trade or business can raise questions the case did not resolve, including self-employment tax, the net investment income tax, and the treatment of the manager’s compensation. These trade-offs deserve careful modeling with qualified advisors.
  • Restructuring is not free. Achieving a defensible Section 162 posture can require meaningful legal and operational change — separate entities, real governance, contemporaneous documentation and ongoing discipline — with costs of its own.
  • The law can change. This whitepaper reflects developments through mid-2026. Statutes, regulations and IRS positions evolve, and later authority may refine or limit what Lender appears to permit.

Conclusion

Lender Management, LLC v. Commissioner endures because it answers, with unusual clarity, a question that sits at the heart of family office design: when does stewarding a family’s wealth stop being investing and start being a business? The court’s answer was that it depends on what the office actually does and how it is paid — on whether it delivers professional services to distinct clients and is compensated for those services, as Lender Management was through its profits interest, rather than simply earning a return on its own capital.

In a world where the investor’s deduction has been permanently withdrawn, that answer has only grown in importance. Lender does not hand every family a deduction; it describes the conditions under which one may be available, and it rewards genuine substance over labels. For families with the scale, complexity and discipline to meet those conditions, it remains one of the most valuable decisions of the modern family office era — and a reminder that thoughtful structure, undertaken with expert counsel and for real business reasons, is worth the effort.

Bibliography

  • Lender Management, LLC, Marvin K. Lender Revocable Trust, Tax Matters Partner v. Commissioner, T.C. Memo. 2017-246 (U.S. Tax Court, Dec. 13, 2017).
  • Commissioner v. Groetzinger, 480 U.S. 23 (1987).
  • Higgins v. Commissioner, 312 U.S. 212 (1941).
  • Dagres v. Commissioner, 136 T.C. 263 (2011).
  • Internal Revenue Code §§ 62, 67(a), 67(g), 162, and 212.
  • The Tax Adviser (AICPA). (2018, August). Lender Management LLC and its impact on investment partnerships.
  • RSM US. Tax Court rules family office activities are trade or business services.
  • BDO. Family office structuring in light of Lender ruling.
  • Williams Mullen. IRS gets “bageled” in Tax Court over family office expenses.
  • Northern Trust Institute. The Lender playbook for modern family offices.
  • Coblentz Patch Duffy & Bass LLP. Distinguishing investment and business expenses — family office structuring after Lender.
  • McDermott Will & Emery. (2018, January). Court rules that a family office is a business! Tax Controversy 360.
  • Holland & Knight. (2025, September). The impact of the One Big Beautiful Bill Act on family offices.
  • Journal of Accountancy. (2025). Tax provisions in the One Big Beautiful Bill Act.
  • Walk New Haven. Lender’s Bagels (family and company history).

About the Author

Marc J. Sharpe is a global investment executive and board member with a distinguished career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

Nothing in this whitepaper constitutes tax, legal, or accounting advice. The discussion of Lender Management, LLC v. Commissioner and related authorities is a general educational summary only, and individual results depend on specific facts and circumstances. Readers should consult their own qualified tax counsel before acting on anything described herein, and should not rely on this whitepaper as a substitute for such advice.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

What is the Lender Management case?

Lender Management, LLC v. Commissioner, T.C. Memo. 2017-246, is a 2017 United States Tax Court decision holding that the family office serving the Lender’s Bagels family was carrying on a trade or business under Section 162 of the Internal Revenue Code, making its operating expenses fully deductible rather than limited investor expenses under Section 212.

Why does trade or business status matter so much for a family office?

Business expenses under Section 162 are fully deductible, while investor expenses under Section 212 were miscellaneous itemized deductions that the Tax Cuts and Jobs Act suspended for 2018 through 2025 and 2025 legislation permanently repealed. For many families, Section 162 characterization is now the only remaining path to deducting family office operating costs.

What made Lender Management a business rather than a mere investor?

The court emphasized that the office provided individualized investment advice to geographically dispersed family members with differing goals, employed a professional staff, operated with continuity and regularity, held only a small stake in the capital it managed, and was compensated for its services through a profits interest — activities that went far beyond those of an investor managing its own portfolio.

What is a profits interest and why was it decisive?

A profits interest — comparable to a hedge-fund manager’s carried interest — is an allocation of investment profits received as compensation for services to other people’s capital. The court held that contingent, performance-based pay is still pay for services, which distinguished Lender Management from a co-investor simply earning a return on its own money.

What happened to Section 212 investment expense deductions?

The Tax Cuts and Jobs Act, enacted nine days after the Lender decision, suspended all miscellaneous itemized deductions — including Section 212 investment expenses — for tax years 2018 through 2025, and the 2025 budget-reconciliation law made that disallowance permanent.

Does the Lender decision apply to every family office?

No. Lender is a Tax Court memorandum opinion decided on its own favorable facts, and courts apply heightened scrutiny to related-party arrangements. A family office where the manager and the investors are effectively the same economic unit, or where services and compensation lack genuine business substance, cannot assume the same result.

What structural features should families discuss with their advisors after Lender?

Professional commentary highlights service-based compensation such as a profits interest, separation between the manager’s owners and the families whose capital is managed, individualized advice to distinct clients, dedicated professional staff, arm’s-length and terminable relationship terms, and written agreements whose economics match actual conduct.

Is this whitepaper tax advice?

No. This whitepaper is a general educational summary provided by The Family Office Association. It is not tax, legal, or accounting advice, and readers should consult their own qualified tax counsel about their specific facts and circumstances before acting on anything it describes.

Related Reading

The Math Behind Career and Life Success

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Authored by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

This whitepaper presents a conceptual framework for career and life success: Success = (Desire − Fear)^Luck, where Luck = (Relationships × Timing). While individual effort and talent provide the foundation, outcomes frequently amplify through net conviction and engineered serendipity. Academic studies, including Pluchino et al. (2018) simulations showing luck’s dominance in extreme success, Mauboussin (2012) on the skill-luck continuum, and Sinatra et al. (2020) quantifying randomness in creative careers, substantiate this perspective. Case studies of Bill Gates, Jeff Bezos, and Oprah Winfrey demonstrate the equation’s components in action. Implications for professionals emphasize managing controllable factors while positioning for fortunate alignments.

Success = (Desire − Fear) ^ (Relationships × Timing)

Introduction

Career trajectories and life fulfillment are often ascribed to talent or perseverance alone, yet substantial variance remains unexplained. Prominent figures frequently acknowledge circumstantial advantages—Bill Gates, for instance, credits access to early computers and supportive networks (Gladwell, 2008). This paper articulates Success = (Desire − Fear)^Luck, with Luck = Relationships × Timing.

Desire embodies sustained drive toward meaningful goals. Fear manifests as hesitation, risk aversion, or self-doubt. A positive base sustains pursuit amid setbacks. Luck compounds this: relationships foster opportunities and mentorship; timing aligns personal readiness with external shifts. This aligns with empirical models where moderately talented individuals with favorable events outperform pure talent (Pluchino et al., 2018).

Deconstructing the Base: Desire Minus Fear

Desire fuels persistent effort: fear erodes it through doubt or loss aversion. Sustaining desire over fear creates resilience essential for long-term achievement.

Jeff Bezos exemplified this during Amazon’s founding. In 1994, secure in a Wall Street vice presidency, Bezos identified internet growth potential (2300% annual web usage increase). Despite fears of abandoning stability, his desire for entrepreneurial impact prevailed. He drove cross-country to launch an online bookstore, maintaining conviction through early losses exceeding $1 billion cumulatively by 2000 (Brandt, 2011).

Oprah Winfrey similarly overcame fear. Early career instability and personal trauma could have deterred ambition, yet desire for authentic connection propelled her. Transitioning from local news to hosting, she persisted despite initial ratings struggles, building a media empire through relentless focus on empathy-driven content.

The Exponent: Luck as Relationships × Timing

Luck elevates the base exponentially. Relationships provide access and support; timing synchronizes effort with opportunity.

Bill Gates benefited profoundly. Born 1955, he accessed computers rare for teenagers—Lakeside School’s terminal in 1968 enabled thousands of programming hours (Gladwell, 2008). Relationship with Paul Allen led to co-founding Microsoft; timing aligned with 1975 Altair microcomputer release, prompting BASIC interpreter development. IBM’s 1980 PC deal—secured partly through familial connections—catapulted Microsoft (Isaacson, 2014).

Bezos timed the 1990s internet boom perfectly, launching Amazon amid deregulation and connectivity growth. Early investor relationships sustained operations during dot-com volatility.

Winfrey’s breakthrough involved timing and relationships. Hired in television post-1970s affirmative action shifts, she met Quincy Jones, who cast her in The Color Purple (1985), earning an Oscar nomination and elevating her profile (Academy of Achievement interviews).

Empirical Insights from Research

Simulations reveal luck’s outsized role. Pluchino et al. (2018) modeled normally distributed talent with random events; luckiest moderately talented agents dominated success distributions. Mauboussin (2012) positions creative professions nearer luck than skill-dominant fields. Sinatra et al. (2020) found consistent randomness influence across careers, with timing of peak impacts unpredictable.

These cases reflect transience: Gates post-Microsoft shifted to philanthropy; Bezos stepped down as CEO in 2021; Winfrey ended her daily show in 2011, pivoting successfully.

Implications for Professionals

Individuals control desire through goal clarity and fear via exposure and reflection. Engineering luck entails deliberate networking and adaptability to trends.

Conclusion

The framework Success = (Desire − Fear)^Luck illuminates why similar talents yield divergent outcomes. Skill and effort construct the base, yet luck—through relational networks and temporal alignments—often determines magnitude. Pluchino et al. (2018) demonstrate that without fortunate events, even high talent plateaus; conversely, moderate talent amplified by luck reaches extremes.

This underscores humility: acknowledging luck tempers overconfidence in meritocracy, fostering gratitude and resilience. Gates, Bezos, and Winfrey each credit preparation meeting opportunity, yet external factors—birth era, access, connections—proved pivotal.

For professionals, implications are profound. Prioritize desire by aligning pursuits with intrinsic motivations; mitigate fear through incremental risks and support systems. Cultivate relationships broadly, as serendipitous ties often unlock doors. Monitor timing by staying informed on industry shifts, positioning for emerging waves.

Ultimately, while luck remains partially uncontrollable, maximizing return on it—through readiness and action—distinguishes sustained success. This balanced view encourages persistent effort without disillusionment, recognizing life’s compound nature where conviction, amplified by engineered fortune, yields fulfillment beyond mere achievement.

Bibliography

  • Brandt, R. L. (2011). One Click: Jeff Bezos and the Rise of Amazon.com. Portfolio/Penguin.
  • Fama, E. F., & French, K. R. (2010). Luck versus skill in the cross-section of mutual fund returns. The Journal of Finance, 65(5), 1915–1947.
  • Gladwell, M. (2008). Outliers: The Story of Success. Little, Brown and Company.
  • Isaacson, W. (2014). The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution. Simon & Schuster.
  • Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291.
  • Lewis, M. (2010). The Big Short: Inside the Doomsday Machine. W.W. Norton & Company.
  • Mauboussin, M. J. (2012). The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing. Harvard Business Review Press.
  • Pluchino, A., Biondo, A. E., & Rapisarda, A. (2018). Talent versus luck: The role of randomness in success and failure. Advances in Complex Systems, 21(03n04), 1850014.
  • Schroeder, A. (2008). The Snowball: Warren Buffett and the Business of Life. Bantam Books.
  • Sinatra, R., Wang, D., Deville, P., Song, C., & Barabási, A.-L. (2020). Quantifying the evolution of individual scientific impact. Proceedings of the National Academy of Sciences, 117(45), 27856–27863. (Note: Earlier citation referenced related work on randomness in careers.)
  • Zuckerman, G. (2010). The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History. Broadway Books.
  • Zuckerman, G. (2019). The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. Portfolio/Penguin.

About the Author

Marc J. Sharpe is a global investment executive and board member with a distinguished career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

What mathematical principles apply to long-term career and financial success?

The most powerful mathematical force in career and financial success is compounding — the exponential growth of skills, relationships, and capital over time. Just as investment returns compound, so do professional capabilities, reputation, and networks. Starting early, investing consistently, and avoiding catastrophic setbacks (the 'do not lose' principle) are the core mathematical drivers of long-term success.

How does compound growth apply to human capital development?

Human capital — skills, knowledge, and relationships — compounds in the same way as financial capital. An individual who consistently invests in their education, network, and expertise will see exponential rather than linear career growth over time. The key variables are the quality of the investments (high-quality learning and relationships), the compounding period (how long you stay in the game), and the avoidance of interruptions that reset the compound.

What is the mathematical relationship between risk and long-term wealth accumulation?

The mathematics of wealth accumulation shows that avoiding large losses is more important than maximizing gains. A 50% loss requires a 100% gain just to break even. This asymmetry means that risk management — particularly in the early stages of wealth accumulation — is as important as return generation. The optimal strategy is to take enough risk to grow, but not so much that a single setback eliminates the gains of many good years.

How does network theory apply to career success?

Network theory shows that the value of a network grows with the square of its members (Metcalfe's Law). More practically, research shows that most high-value opportunities — jobs, deals, introductions — come through 'weak ties' (acquaintances rather than close friends), because weak ties connect you to networks beyond your immediate circle. Systematically expanding and maintaining diverse networks has compounding career value.

Related Reading

Family Office Dynamics When Wealth Meets Strategy

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Authored by Karin Mugnaini and edited by Marc J. Sharpe, M.A., M.Phil., MBA

Executive Summary

Family offices operate at the intersection of wealth, governance, and legacy. In this environment, negotiation is not a discrete skill but an operating system—a disciplined, repeatable approach to decisions with generational consequences. Traditional, consensus-first models can falter when confronted with entrenched histories, power asymmetries, and identity-driven differences, leading to delays, vague compromises, or short-term harmony at the expense of long-term misery.

This whitepaper presents a structured negotiation framework tailored to single- and multi-family offices. Drawing on principles from high-stakes negotiation practice, it offers preparation methods, process design, and leadership behaviors that can transform friction into clarity. Here we map the negotiation landscape within family offices, explain why common approaches often underperform, and provide a practical playbook with real-world examples.

We also integrate insights from the broader literature and practice community. While formal research specific to family offices remains nascent, there is accumulating knowledge from family business governance and professional practice that illuminates how families negotiate complex, emotionally charged decisions. We synthesize these insights within a single narrative so leaders can apply them— thereby preserving relationships while achieving durable, strategic outcomes.

Introduction

Decisions within a family office often ripple across generations, shape governance standards, influence cohesion, and become part of a family’s story and legacy. While some family offices may only resemble sophisticated investment organizations, the context in which they negotiate is distinct: outcomes are rarely ‘just financial’ and frequently entail personal, reputational, and multi-generational dimensions.

This magnifies the stakes and complicates the process. Negotiation must balance measurable outcomes with deeply human considerations—recognition, fairness, dignity, and control being just a few among them. Decisions stretch well beyond quarterly horizons and determine stewardship models, intergenerational transitions, and how a family’s values are presented over time.

Therefore, the practical question is how families can make high‑quality decisions, with diverse stakeholders, often under considerable pressure, and in environments where multiple ‘right answers’ may exist. The structured approach outlined here offers a disciplined path that holds complexity without defaulting to avoidance or superficial agreement.

Understanding the Family Office Negotiation Landscape

Family offices vary widely in mandate, scale, and governance structure. Some solely emphasize investments and risk management; others integrate a much broader set of activities, including estate planning, philanthropy, lifestyle management, education for next‑generation members, and the stewardship of family identity. All must align decision‑making across personal, financial, and legacy priorities.

At a practical level, this dual role—financial stewardship alongside personal and legacy stewardship—creates a negotiation environment that is uniquely complex. Money intersects with meaning. Structures designed for efficiency must coexist with relationships defined by history. Formal decision rights meet informal influence. In this context, negotiation is a strategic leadership function rather than a series of one‑off tactics.

Stakeholders and Incentives

Stakeholders encompass family principals and wealth creators, next‑generation members, non‑family executives, trustees and fiduciaries, investment committees and advisory boards, operating company leadership, and a constellation of external professionals such as asset managers, wealth advisors, bankers, lawyers, tax advisors, auditors, and technology providers. Each brings distinct incentives, authority levels, and communication norms. Effective negotiation requires fluency across these differences. Soft skills matter as much as technical acumen: the capacity to listen, to separate substance from emotion, and to structure conversations so difficult topics can be addressed constructively is essential.

Common Negotiation Arenas

Negotiations in family offices occur routinely and often out of public view. Internally, leadership addresses compensation, budgeting, resource allocation, investment mandates, governance design, and succession or hiring decisions. Within the family, discussions span distribution and liquidity policies, ownership transitions, next‑generation roles and readiness, oversight of operating companies, philanthropic vision, and alignment of investment philosophy across generations. Externally, offices negotiate direct investment terms, manager selection and economics, co‑investment agreements, vendor and technology contracts, real estate transactions, and dispute resolution. Despite their variety, these negotiations share two characteristics: deeply human dynamics and typically long time horizons. Decisions are not only about price or terms; they concern identity, recognition, fairness, and the preservation of relationships that must endure well beyond a single transaction.

Why Traditional Approaches Often Fall Short

Consensus-first models and techniques focused primarily on mutual gains may have value in less difficult negotiations but can be insufficient in family offices where emotional history, ambiguous mandates, and asymmetric power interact. The desire to preserve harmony can lead to the avoidance of difficult topics, reliance on vague compromises, or decisions that placate in the short term but undermine long‑term strategy. Family office decisions frequently present multiple valid pathways. When there is no single ‘correct’ answer, attempts to force consensus can produce unstable outcomes. A structured approach addresses this by focusing on process clarity, disciplined preparation, assembling the optimal negotiation team, and deliberate choices among several acceptable end states—including agreement, deadlock, escalation, or non‑agreement when integrity requires it.

Principles from High‑Stakes Negotiation Practice

Negotiation methods developed for high‑pressure environments translate directly to family offices. They emphasize planning, behavioral awareness, and clarity under pressure. Four components are particularly useful: preparation, opening, leadership, and closing (the Schranner Concept®). The mindset advised in difficult situations is one of positivity with courage and the willingness to “play to win”. Splitting differences and seeking win-wins is not recommended, as such outcomes risk causing resentment or failures after the negotiation. Rather, applying a focus on embracing the conflict early on, clearly and with confidence, can better ensure long-term success once the parties have left the table.

1. Preparation: Map Interests, Behaviors, and Constraints

Preparation anchors effective negotiation. In a family office, it requires an expanded lens that accounts for personal, financial, and legacy interests; behavioral tendencies; decision rights and governance boundaries; emotional context; timing pressures; and internal alignment or misalignment. Preparation should culminate in a ‘demand list’—a structured articulation of what must be achieved, what is desirable, and what is unacceptable. Unlike a wish list, the demand list guides disciplined decision‑making and ensures that concessions and escalation pathways are planned rather than improvised.

2. Opening: Establish Structure, Roles, and Boundaries

The opening phase sets tone and process. Before substance is discussed, the parties should align on the agenda, roles, decision rights, and how the discussion will unfold. In family office contexts, where relationships run deep and emotions may be close to the surface, separating personal connection from negotiation time is essential. Compiling the strongest team is critical, as is identifying clear roles for each team member. In this context, the FBI model can be extremely helpful:

  • Decision Maker – not present at the negotiation but holding authority

  • Commander – observant, mostly silent, looking at the big picture

  • Negotiator – with the license to negotiate, active in the negotiation

  • Expert – mostly available on the sidelines for additional information and guidance

Explicit process agreements—what is in scope, how decisions will be recorded, when breaks will occur, how communication to each party’s internal teams will be handled—protect relationships and prevent unspoken expectations from derailing substance.

3. Leadership: Manage Friction, Emotion, and Complexity

In complex negotiations, friction is not an obstacle; it is a leadership responsibility. Process leaders maintain control, remain calm under pressure, and use friction strategically rather than avoiding it. Behavioral insight helps decode reactions and motivations. Deliberate pauses restore productivity when tension escalates. Neutral facilitation may be appropriate when role clarity is at risk. The aim is to channel conflict toward clarity and progress, not to eliminate it.

4. Closing: Choose Among Multiple Valid Outcomes

Closing does not always mean agreement. High‑quality outcomes include agreement (when interests align and commitments are clear), deadlock (a deliberate pause to gather information or recalibrate), escalation (used strategically when leverage needs to shift or additional authority is required), and non‑agreement (acceptable when it protects long‑term integrity). Recognizing the legitimacy of these outcomes reduces pressure to force consensus and prevents unstable or unclear decisions.

How Structured Negotiation Supports Family Office Goals

A structured process protects relationships without sacrificing clarity. Boundaries, agendas, and decision rights separate emotion from substance, enabling candid communication with minimal unintended harm. Durable decisions align personal, financial, and legacy interests. Structured negotiation brings these into the open rather than leaving them implicit, ensuring outcomes respect both quantitative goals and qualitative values.

Complexity can become an advantage. Tensions across generations, risk tolerances, and worldviews stimulate innovation when managed deliberately. Structured methods transform competing perspectives into productive friction that surfaces better options. Clear process design enhances governance and decision‑making efficiency. Agreements reached through disciplined negotiation are more likely to be actionable, auditable, and executable. And preparation and process control strengthen external positioning. Discipline reduces concession drift and maintains strategic focus with sophisticated counterparties.

A Practical Negotiation Playbook for Family Office Leaders

  1. Define the situation. Clarify the decision to be made, the stakeholders involved, relevant governance rules, timing constraints, and how the decision will be recorded.

  2. Identify the real conflict. Surface disagreements often mask deeper issues—fairness, identity, recognition, control, or legacy. Locating the real issue prevents repetitive debates over symptoms rather than causes.

  3. Develop the demand list. Document non‑negotiables, priorities, and unacceptable outcomes. Plan concessions and escalation paths in advance to protect against improvisation in high‑pressure moments.

  4. Build the strategy. Map potential concessions, anticipate emotional responses, define walk‑away points, and identify decision checkpoints. Consider which outcomes—agreement, deadlock, escalation, non‑agreement—would be acceptable under which conditions.

  5. Lead the negotiation. Maintain structure and role clarity. Separate emotion from process without dismissing it. Use friction constructively, and call deliberate pauses when tension is unproductive. Bring in neutral facilitation when appropriate.

  6. Close deliberately. Choose among the legitimate outcomes based on long‑term impact rather than short‑term comfort. Document commitments and follow‑up actions to ensure execution.

Negotiation in Practice: Real‑World Case Notes1

Case Note 1: Long‑Horizon Ownership Negotiation in Luxury Hospitality

Across more than two decades, the ownership of Four Seasons Hotels and Resorts illustrates how family offices negotiate complex control and governance questions in partnership with founders and strategic co‑owners. After taking the company private in 2007 with aligned partners and a court‑approved plan of arrangement, a Cascade Investment affiliate negotiated in 2021 to acquire a controlling stake at a US$10 billion enterprise value. The structure reaffirmed founder Isadore Sharp’s stake and preserved strategic direction—showcasing disciplined valuation framing, fairness processes, and governance continuity in sensitive control negotiations.

Case Note 2: Taking a Listed Group Private to Reduce Strategic Friction

In 2023, the Rothschild family’s holding company announced a simplified tender offer to take Rothschild & Co private at a premium to market, coupled with ordinary and exceptional distributions. Independent board oversight, financing coordination and AMF engagement—together with a consortium of long‑horizon families—illustrate structured negotiation that reconciles minority‑holder economics with legacy control and confidentiality.

Case Note 3: Defensive Negotiation and Family Unity at Hermès

When a competitor accumulated a significant stake in Hermès in 2010, the sixth‑generation family responded with an integrated defense—tightening ownership through a family holding vehicle and reframing the dispute as a cultural and governance question. The counter‑strategy emphasized unity, narrative clarity and legal process, preserving independence and highlighting how control structures and time locks can reweigh bargaining power.

Case Note 4: Co‑Investment Rights and Side‑Letter Negotiations

As family offices expand direct and co‑investing, negotiation shifts to deal architecture. Side‑letter terms—information and reporting rights, most‑favored‑nation access, tailored fees, governance roles and opt‑outs—can materially reshape economics and influence. With evolving private‑fund rules on preferential treatment, disciplined preparation and enforceable drafting are essential to align protections with primary agreements.

Case Note 5: Purpose Trusts and Philanthropy—Patagonia’s Transition

In 2022, Patagonia’s founder and family transferred all voting shares to a purpose trust and 98% of non‑voting shares to the Holdfast Collective, structuring all non‑reinvested profits for environmental aims. The multi‑entity design balances governance continuity (via a controlling purpose trust) with philanthropic deployment (via a social‑welfare entity), demonstrating how families can negotiate ownership, purpose and political constraints while protecting values and long‑term intent.

Case Note 6: Foundation‑Owned Governance—IKEA/INGKA Structure

To secure longevity and charitable impact, Ingvar Kamprad established an independent foundation‑owned structure in which INGKA Foundation owns Ingka Group and funds the IKEA Foundation. Family participation is capped within boards, and assets are reserved solely for charitable purpose. The model highlights negotiation of governance across generations: independence from private benefit, clarity of decision rights, and a funding pipeline that aligns enterprise performance with philanthropic commitments.

State of Research and Theory

Formal academic study of family offices remains nascent compared with the extensive literature on family‑owned operating companies. Much of what exists focuses on governance, succession, and socio‑emotional wealth in family firms rather than the negotiation mechanics of family offices.

Empirical work is constrained by the privacy of family offices and the difficulty of accessing data when conflicts and decision processes are largely confidential.

What we do know: conceptual work and practitioner insight converge on several points—family offices are distinct organizational forms; conflict arises predictably around control, fairness, and legacy; and structured processes reduce the likelihood that disagreements escalate or ossify. While negotiated outcomes are often specific to context, process quality consistently correlates with durability and relationship health.

Where the gaps remain: rigorous, comparative evidence on how family offices negotiate across issues such as asset allocation mandates, co‑investment governance, inter‑generational transitions, and philanthropic strategy is limited. Standardized frameworks that integrate power asymmetry, behavioral dynamics, and escalation design into practice are needed. This whitepaper contributes a practical synthesis aligned to those needs.

Examples of Structured Principles at Work

Succession planning often surfaces identity and legacy concerns alongside technical readiness. Structured preparation, including a shared demand list and explicit role definitions, creates clarity where emotion previously dominated. A staged transition plan with governance checkpoints can align expectations, protect continuity, and provide the next generation with meaningful responsibility well before formal handover.

Family and non‑family executive dynamics can suffer when decision rights and performance expectations are ambiguous. Controlled openings that separate personal connection from negotiation time, coupled with explicit mandates and measurable objectives, reduce pressure on both sides. When friction arises, neutral facilitation and deliberate pauses can re‑center the discussion on structure rather than personality.

Negotiating with external investment partners requires discipline commensurate with counterparty sophistication. Behavioral analysis of incentives—economics, reporting obligations, fundraising cycles—prevents concession drift. Pre‑planned escalation pathways, such as involving the investment committee or adjusting mandate scope, preserve leverage without jeopardizing long‑term relationships.

Aligning investment philosophy across generations demands a forum where risk tolerance and worldview differences can be translated into policy. By articulating shared objectives—return, resilience, and impact—and agreeing on governance mechanisms such as allocation bands, veto rights, and rebalancing rules, families can reconcile divergent preferences without eroding trust.

Distribution and liquidity policies bring fairness and recognition to the surface. A transparent framework that links policy to objectives—sustainability, education support, or entrepreneurial capital—reduces ad hoc concessions. Documented rules and review cadences build predictability while allowing for exceptional cases handled through defined processes.

Mini Case Study: Governance Tensions and Negotiation Leverage in a Family Office-Backed Growth Company2

Background

A Northern European growth company (“the Company”) had a fragmented ownership structure typical of family office–backed ventures. A family investment vehicle (“Family Office A”) held roughly one-third of the shares, alongside a strategic investment firm (“Investor B”), a large financial institution, and several smaller shareholders.

The Company’s CEO had close family ties to Family Office A, adding both trust and complexity to governance dynamics. Over several years, most shareholders supported injecting additional capital to accelerate expansion into new European markets. Investor B, however, favored a more conservative strategy focused on cost optimization rather than growth investment.

This strategic divergence led to prolonged board tensions lasting nearly three years, reflecting a common challenge in family-office ecosystems: balancing long-term entrepreneurial ambition with differing risk appetites among co-investors.

Negotiation Dynamics

In late 2025, Investor B approached a senior figure connected to Family Office A with an unsolicited offer to sell a significant minority stake at a premium valuation. The initial acceptance was considered on a private basis, outside a broader shareholder process.

Soon after, internal leadership within Family Office A raised governance concerns, arguing that the opportunity should be offered to all shareholders to ensure fairness and avoid potential conflicts of interest. This internal challenge prompted a reassessment of the transaction structure—highlighting how intra-family governance can be as decisive as external negotiation.

Negotiations intensified when Investor B threatened to seek the removal of the Company’s CEO and claimed to have shareholder backing. At the same time, Investor B signaled a willingness to divest a large portion of its holdings.

After a series of structured negotiations led by the next-generation leadership of Family Office A, a revised agreement emerged:

A substantial equity block was sold to Family Office A at a lower per-share price than initially proposed.

  • The opportunity to participate was extended to all shareholders, though none elected to purchase.

  • The transaction was completed shortly thereafter, consolidating Family Office A’s ownership position.

Aftermath and Strategic Implications

Following the transaction, Family Office A initiated a board restructuring to align governance with a renewed growth strategy. The CEO remained in place, and the Company began preparing for accelerated expansion.

Retrospectively, it appeared that Investor B may have faced liquidity pressures elsewhere in its portfolio, potentially influencing its willingness to sell at a discounted valuation. Recognizing and responding to counterparties’ broader financial constraints proved to be a decisive negotiating advantage.

Key Lessons for Family Offices

  1. Governance discipline matters internally as much as externally.

  2. Family dynamics and leadership structures can shape negotiation outcomes and reputational risk.

  3. Strategic misalignment among co-investors can create both friction and opportunity.

  4. Fair-process considerations—such as equal access to deal terms—are critical in multi-shareholder environments.

  5. Understanding counterparties’ broader financial pressures can provide leverage but must be balanced with long-term relationship considerations.

  6. Ownership consolidation often precedes governance reform and strategic repositioning.

Where to Build Skills

A growing ecosystem of executive education and professional programs supports leaders who want to embed structured negotiation and governance into their offices. Across Europe and the United States, compact certifications, executive formats and seminar‑style courses blend theory with case discussion, while professional associations focused on family enterprise complement these offerings with research, community, and practitioner standards.

Open Questions for Practice

  1. How do different family offices structure negotiations for assets, governance, and generational transition, and what methodologies correlate with stable outcomes over five to ten years?

  2. What behavioral and psychological routines—pre‑briefs, debriefs, red‑team reviews—most effectively reduce unproductive conflict?

  3. Do offices with formal negotiation protocols outperform informal offices on execution and cohesion?

  4. Which elements of methodology—process design, mediation, demand lists—travel best across cultural contexts?

  5. What type of technology is used in the pre-, during- and post-negotiation process in the family office, and how does technology help or challenge the journey?

Conclusion

In family offices, negotiation is inseparable from leadership. It converts complexity into clarity, aligns diverse interests, and protects relationships that must last for decades and sometimes generations. By adopting structured principles—preparation, clear openings, process leadership, and deliberate closings—families can make decisions that are both compassionate and rigorous. The result is durable agreements that advance long‑term vision and governance maturity. As wealth meets strategy, negotiation excellence becomes a core element of stewardship. Families who invest in disciplined process design and behavioral insight are better equipped to navigate the inevitable tensions of generational wealth, turning friction into advantage rather than liability.

About the Authors

Karin Mugnaini is a Senior Advisor for the N-Conference and other strategic events at Schranner Consulting AG, a global organization specializing in difficult and complex negotiations. With offices in Zurich, New York City, Hong Kong, and Dubai, the Schranner Negotiation Institute advises business and government leaders in more than 40 countries. Its methodology, the Schranner Concept®, is used by numerous Fortune 500 companies. Prior to joining the Schranner Negotiation Institute and Schranner Consulting AG, Karin built a career in strategy and business development across North America, Asia, and Europe in publishing, licensing, entertainment, luxury, and executive education. At Schranner Consulting AG, she supports the development and delivery of high-level events focused on excellence in negotiation and leadership under pressure. Karin holds an MBA from Georgetown University and a BA in Political Science from Smith College and is fluent in five languages.

Marc J. Sharpe is a senior investment leader with more than twenty‑five years in family office, private equity, and venture capital. Known for strategic insight, governance expertise, and the ability to foster innovation and value creation, he has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. Marc is the Founder and Chairman of The Family Office Association, a global peer network of single‑family offices that has become a trusted forum for collaboration, market insight, and proprietary deal flow. He also teaches an MBA class on ‘The Entrepreneurial Family Office’ as an Adjunct Professor at Rice University and Southern Methodist University. He holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

References

  • Cascade Investment / Four Seasons Hotels & Resorts press releases: Sept 8, 2021. Four Seasons Press Room; PR Newswire (US$10B EV; founder stake).

  • Rothschild & Co / Concordia simplified tender offer filings: Feb–June 2023. Company and AMF postings (pricing, distributions, squeeze‑out intent).

  • Hermès vs. LVMH defense and subsequent legal proceedings: The Fashion Law; AInvest analyses (2010–2025).

  • SEC Private Fund Advisers rules and preferential treatment discussion (side letters): SEC resource page; DarrowEverett LLP analysis (2023–2024).

  • Patagonia ownership transition: Patagonia statement: ‘Earth is our only shareholder’ (Sept 14, 2022); CNBC coverage (Sept 14, 2022).

  • INGKA (IKEA) governance and foundation structure: INGKA Foundation Governance; Stichting INGKA Foundation (Wikipedia overview).

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community provides educational information and a forum to exchange ideas of mutual interest. TFOA does not participate in the offer, sale, or distribution of any securities, nor does it provide investment advice. The material in this whitepaper is provided for informational purposes only and should not be construed as a recommendation to buy or sell any security or to retain the services of any investment adviser or other professional. Nothing herein constitutes legal, accounting, tax, or investment advice, and no information in this document should be relied upon as such. References to organizations, products, services, or individuals do not constitute or imply any warranty, endorsement, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you make based on information provided by TFOA or its contributors are your sole responsibility. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Families should consult their advisers and consider their unique circumstances before making any investment or governance decisions. The TFOA name, logo, and all related product and service names, designs, and slogans are trademarks or service marks of The Family Office Association. All other trademarks referenced herein are the property of their respective owners. All intellectual property rights of TFOA or its contributors remain their property and may be protected by applicable laws; no rights are transferred to you by virtue of this publication. Information presented in this whitepaper has been obtained from sources believed to be reliable; however, TFOA and the authors do not guarantee its accuracy or completeness. The material is prepared solely for general informational purposes and is not intended as user-specific advice.

Notes

  1. These case notes are compiled from public sources.↩︎

  2. This case study is compiled from private sources. All identities have been preserved to respect confidentiality.↩︎

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

What are the most common sources of conflict in a family office?

Common sources of conflict include disagreements over investment strategy, unequal distributions among family members, disputes about who should have decision-making authority, tensions between working and non-working family members, and succession disputes when a founding principal retires or passes. Proactive governance structures are the most effective prevention.

How does wealth affect family dynamics?

Significant wealth introduces unique pressures on family relationships — it can create entitlement, reduce motivation, distort personal relationships, and generate conflict over control and inheritance. Families that navigate these pressures successfully typically invest in family education, establish clear values and expectations, and build governance structures that channel conflict productively.

What is the relationship between family dynamics and family office performance?

Family offices where principals are aligned, governance is clear, and conflict is managed constructively consistently outperform those where family dynamics are dysfunctional. Staff morale, investment discipline, and long-term planning all suffer when the family system is in conflict. The health of the family system is inseparable from the health of the family office.

How can a family office manage succession planning for the principal?

Succession planning for the family principal should begin well before the transition — identifying a successor (family member or professional CEO), documenting the principal's decision-making framework and relationships, gradually transferring authority, and establishing governance structures that can function without the founder's direct involvement.

Related Reading

GPU-Based Infrastructure: A New Frontier for Family Office Investing — TFOA whitepaper.

GPU-Based Infrastructure – A New Frontier for Family Office Investing

/in /by

Authored by Nikolay Filichkin & Warren Hosseinion and edited by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

This whitepaper examines GPU (graphics processing unit)-based infrastructure as an emerging asset class for family offices, driven by the AI (artificial intelligence) boom since 2023. It outlines the economics of compute – measured in FLOPS (floating-point operations per second) – highlighting how networked GPUs generate predictable cash flows through training (capital-intensive model building) and inference (recurring real-time applications). Opportunities include structured financing for neocloud operators, yielding net internal rates of return (IRRs) in the mid-teens to mid-twenties over 3–5 years, secured by hard assets with low public market correlation. Key considerations include capital expenditures dominated by hardware, operating expenses led by power and cooling, and depreciation cycles that extend useful life beyond typical accounting periods. Risks span utilization variability and technology obsolescence, yet secondary markets support meaningful residual values. As AI capital expenditures scale significantly, family offices can access diversified yields comparable to mid-market private credit.

Executive Summary

Family offices allocating capital to private credit and real assets are increasingly encountering structured financing opportunities secured by revenue-generating graphics processing units (GPUs). These transactions can offer mid-teens to mid-twenties net IRRs with 3–5-year duration, low correlation to public markets, and hard-asset collateral. This whitepaper maps the underlying economics, risk factors, and structuring considerations in light of the explosive growth of this formerly niche strategy due to the recent boom in Artificial Intelligence (AI) and Large Language Models (LLMs) since 2023.

The New Infrastructure Frontier

Artificial intelligence is the defining technological force of this decade, driving unprecedented demand for one fundamental input: compute. Compute refers to the essential hardware (GPUs, TPUs, CPUs, memory) and the processing power needed for training models and running AI tasks, measured primarily in FLOPS (Floating-Point Operations Per Second), indicating trillions or quadrillions of math calculations per second, showing how much raw power is available for complex AI workloads. It signifies the scale of resources for tasks like data processing, model training, and inference, determining model complexity and capability, with higher FLOPS equating to more powerful AI. Therefore, compute is the unseen energy behind everything from chatbots to autonomous vehicles. And the scale of the compute buildout is already visible in global capital expenditure forecasts, which project trillions of dollars flowing into AI-related data center infrastructure over the coming years.

Chart: AI data center capital spending scenarios, 2025-30

At the center of this transformation lies the graphics processing unit, or GPU. Once designed for rendering images and games, GPUs now function as the core hardware in machine learning infrastructure. When networked together in servers and racks across data centers, GPUs form the computational fabric that makes artificial intelligence possible.

Yet unlike other essential resources such as energy or real estate, compute has no mature financial infrastructure built around it. Investors can own equity in the companies that use compute or build data centers to host it, but there is still no standardized way to invest directly in the utilization of compute itself. This paper explores how GPUs are used, how their economics work, and why an emerging ecosystem of operators and financial innovators are turning compute into a transparent, yield-bearing asset class.

How GPUs Are Used Today

Every digital interaction today, from searching the web to generating an image with artificial intelligence, relies on compute. GPUs are uniquely efficient at generating compute because they can perform thousands of calculations simultaneously. In AI, that capability enables neural networks to learn, recognize patterns, and make predictions. In essence, GPUs transform electricity and data into ‘intelligence’.

When deployed at scale inside data centers, thousands of GPUs are linked together into clusters that operate as compute farms. Think of them as the digital equivalent of power plants. Just as a turbine converts fuel into energy, these GPU clusters convert electricity into computational power, which AI developers rent by the hour to train or run their AI models.

The efficiency of that conversion – i.e., how much the GPUs are utilized — determines both the productivity and profitability of a specific GPU cluster. Utilization rate is typically measured on a 0–100% scale, indicating how much of the available compute power is actively in use. A cluster running at 90% utilization is generating revenue nearly around the clock, while one sitting at 50% is leaving half its capacity idle. The closer operators can keep their systems to full utilization, the more consistent and predictable their cash flow becomes.

For investors, this means compute capacity is not a speculative asset but a productive one. When managed by credible operators and leased under transparent contracts, GPU infrastructure produces predictable, yield-bearing cash flows similar to energy infrastructure. The more efficiently the GPUs are deployed and maintained, the more consistent the returns.

Training vs. Inference

AI workloads generally fall into two categories: training and inference. Understanding their distinctions is critical to evaluating risk, return, and duration.

  • Training uses massive GPU clusters to build foundational models, similar to constructing an oil refinery. These workloads are capital-intensive and cyclical but yield high utilization for defined periods.
  • Inference happens after the model is built. It refers to the process of using that trained model to make predictions, generate content, or answer questions in real time. When someone types a question into ChatGPT, they’re triggering inference. These workloads are continuous, lower intensity, and generate recurring revenue similar to power purchase agreements or SaaS contracts.

For investors, both are relevant. Training offers high short-term yield opportunities tied to specific projects, while inference provides more stable, long-term income streams.

Training vs. Inference: Two Economies of Compute
Training Inference
Purpose Building and improving AI models Running deployed AI models in real time
Duration Long sessions (weeks/months) Continuous shorter tasks
Hardware intensity Highest Moderate
Revenue stability Project-based Subscription/usage-based

 

Data Center Hosts vs. Neocloud Operators

Diagram: data center hosts vs. neoclouds

To understand how GPUs are monetized, it’s important to distinguish between data center hosts and neocloud operators.

  • Data Center Hosts lease physical space, cooling, and power to tenants. They are essentially real estate and utility businesses and do not own the GPUs themselves.
  • Neocloud Operators represent a new class of companies that both own and operate GPUs, offering compute access directly to AI developers on demand.

These neoclouds are effectively the independent power producers of the AI age: capital-intensive, infrastructure-driven, and often seeking external financing to scale GPU clusters quickly. A potentially attractive GPU investment opportunity sits with small to medium-sized neocloud operators as these entities are too small to self-finance like hyperscalers, yet large enough to maintain stable utilization contracts with enterprise clients.

Size and Structure of Operators
Tier Example entities Typical characteristics
Tier 1 – Hyperscalers Microsoft, Amazon, Google Vertically integrated, own global infrastructure, limited external access
Tier 2 – Neocloud operators CoreWeave, Lambda, Crusoe, Volt High growth, capital-hungry, GPU-focused, multi-tenant
Tier 3 – Specialized operators Regional AI hosts, vertical cloud startups Targeted workloads (e.g., medical imaging, simulation), rely on leasing or financing

For investors evaluating compute exposure, Tier 2 and Tier 3 operators present a combination of return potential and risk diversification. These companies have strong, sustained demand for GPU capacity from AI developers but lack the low-cost financing available to large hyperscalers. That funding gap creates opportunity: family office investors who provide capital for GPUs can capture higher returns, secured by tangible assets and underpinned by contracted revenue from active GPU usage.

What Drives Capex and Why It’s Changing

We are in the midst of one of the largest capital buildouts in modern history. Technology investment, particularly in AI infrastructure, has reached a scale comparable to the most significant public works projects of the past century. AI-related Capex, including GPUs and data centers, already rivals the peak infrastructure spending related to electricity, broadband, and the interstate highway system.

Chart: peak spending as a percentage of US GDP for major infrastructure projects, including tech capex

The key drivers of capital expenditure for GPU infrastructure varies widely depending on hardware generation, power density, and facility readiness. Most of the total cost comes from the GPUs assembled into servers, while the remainder covers networking, cooling, and power delivery systems needed to keep them operating efficiently. In some cases, where there are specific software requirements to service a customer, the software can be included in capex as well.

  • Hardware Costs: High-performance GPU servers remain the largest expense. Pricing depends on supply availability and lead time, with newer models commanding a premium until supply catches up.
  • Generation Cycles: New GPUs release roughly every 18–24 months, increasing compute density and efficiency—but requiring periodic reinvestment.
  • Facility Readiness: Retrofitting existing centers vs. building greenfield sites changes capex profiles dramatically.
  • Interest Rates & Financing Costs: As with any capital-intensive industry, macro conditions impact expansion pace.

A notable trend is the rise in asset-light financing. Instead of operators purchasing GPUs outright, structured leases enable rapid scaling without balance-sheet strain, converting capex into manageable operating costs.

The Cost of Keeping Compute Online

Operating expenses (OpEx) represent the ongoing cash costs required to keep GPU infrastructure running. For most operators, power is the dominant expense, as modern GPU racks can draw 20–40 kilowatts each which is comparable to the load of an entire suburban home. These expenses define the baseline cost structure of a GPU cluster and directly influence the utilization required for sustainable profitability. A typical cash OpEx profile includes:

  • Power & Cooling (25–40%) – Electricity and cooling are the largest operating costs. Total expense depends on local energy pricing, power contracts, and the facility’s Power Usage Effectiveness (PUE), which measures how efficiently electricity is converted into usable compute.
  • Maintenance & Repairs (5–10%) – This includes hardware servicing, component failures, and ongoing software updates. Because GPU clusters operate continuously, routine maintenance is essential to sustaining uptime and predictable performance.
  • SG&A + Network Operations (10–15%) – Staffing, monitoring, connectivity, and bandwidth contribute to the operational overhead required to maintain reliable, secure, and responsive compute capacity.
  • Other Operating Costs (4–8%) – Insurance, colocation fees, cross-connects, spare parts inventory, and site-specific operational needs. The range varies based on facility type and deployment model.

Chart: projected power growth per frontier AI training run, megawatts (log scale)

Location remains one of the most significant determinants of OpEx. Many operators co-locate near regions with low-cost or renewable energy sources, such as hydroelectric, nuclear, geothermal, or flare-gas recovery sites, to reduce electricity costs and improve sustainability profiles. Others deploy containerized or modular micro–data centers to access cheaper power and accelerate deployment timelines without relying on traditional data center infrastructure.

In practice, data-center capacity in the United States is not spread evenly. It concentrates in a handful of metro areas and corridors where power availability, land costs, and network connectivity are most favorable. Large numbers of facilities are grouped around a few key hubs rather than being evenly distributed across the country. That concentration reflects deliberate siting decisions designed to manage OpEx and ensure long-term access to reliable power and fiber.

How Compute Generates Cash Flow

Revenue in GPU operations stems from leasing compute hours to customers such as AI startups, research institutions, or enterprise clients. These contracts can take several forms:

  1. Fixed-Term Contracts: Multi-month or multi-year agreements that provide stable, predictable cash flows.
  2. On-Demand: Pay-as-you-go pricing, like traditional cloud services.
  3. Spot Market: Cost-effective option for AI companies offering unused capacity for short periods of time. These can be interrupted with short notice (typically a few minutes) to prioritize on-demand & contracted terms.
  4. Revenue-Share Models: Operators earn a portion of the client’s revenue that depends on compute usage.

Pricing for high-performance GPUs varies widely depending on contract length, supply conditions, and the level of service provided. Rates tend to be higher for dedicated clusters or premium support and lower for shared or short-term access. In practice, an operator’s revenue depends on the following factors:

  1. Services: Bare-metal, or software services on top? The best operators with the most valuable contracts offer more than bare-metal hardware. They offer software services to service their customers and a particular market niche.
  2. Utilization: The percentage of time GPUs are actively rented or in use.
  3. Unit Pricing: The effective hourly rate achieved across different clients and workloads.
  4. Contract Quality: The creditworthiness and reliability of offtake counterparties.

When these factors are managed well, GPU infrastructure behaves like a productive asset—generating recurring, measurable cash flow. Disciplined GPU management and high-quality contracts can make revenue streams from compute infrastructure resemble those of traditional income-generating assets such as energy projects or equipment leasing.

Asset Life Cycles & Depreciation

GPU depreciation behaves very differently from traditional IT hardware. Rather than becoming obsolete when new chips are released, GPUs transition through multiple workload phases and retain meaningful value over long periods. For investors, this creates predictable collateral behavior and durable cash-flow profiles whereby GPUs behave more like income-producing infrastructure than short-lived IT equipment.

  • Book Value Depreciation (Accounting) – Under GAAP/IFRS, GPU servers are depreciated over 5–6 years using straight-line depreciation (≈16–20% annually). While this defines how the asset appears on financial statements, it does not reflect real market value or economic life, which typically extends beyond the accounting horizon.
  • Economic Depreciation (Real Useful Life) – In practice, GPUs remain revenue-producing for 6–8+ years as workloads cascade and because inference requirements grow more slowly than training, older GPUs continue to serve valuable roles well beyond their book life.
    • Years 0–3: Frontier training and high-performance workloads
    • Years 4–7+: Inference, fine-tuning, research, rendering, batch jobs, enterprise AI
  • Market Depreciation (Resale Value Behavior) – Global demand for compute, backward-compatible software (CUDA), and deep secondary markets all support slower, smoother value decline compared to typical IT hardware. Most data-center GPUs retain 45–65% of their value at Year 3 and 25–35% at Year 5.

The Emerging Yield Curve of Compute

While returns vary by structure, GPU-based investments exhibit characteristics familiar to family offices investors who are accustomed to asset-backed credit or equipment leasing.

  • Gross Yields: 25–60% annually, depending on utilization and cost of capital.
  • Net Yields: 15–30% after OpEx and depreciation. GPU yields of 15-30% represent a significant premium over the ~10-11% returns usually available in private credit markets.
  • Duration: Typical investment horizons of 3–5 years, aligned with GPU upgrade cycles.
  • Residual Value: Older GPUs are often redeployed from training to inference workloads, extending useful life and maintaining residual resale value.

Importantly, compute yields are not directly correlated to equity or bond markets. Instead, they follow technology-specific cycles tied to AI adoption and hardware lifecycles. For family offices seeking differentiated yield exposure, this emerging asset class offers diversification anchored in tangible infrastructure. Therefore, a well-structured GPU portfolio should be able to achieve stable returns comparable to mid-market private credit, with the added upside of technology appreciation during high-demand cycles.

Chart: compute vs. traditional credit market yields and the private credit yield premium

Key Risks for Family Offices Investing in GPUs

Investing in GPUs carries risks that family offices should evaluate, including but not limited to operator execution, utilization, and technology cycles. Returns depend on GPUs being deployed with disciplined up-time and consistently high utilization, supported by reliable customers and stable access to power. Variability in workload demand or increases in energy costs can influence margins, which is why underwriting operator capability and site selection remain essential.

Depreciation also plays a role. GPUs retain meaningful utility across multiple workload tiers, but newer generations can shorten the economic life of older hardware if not structured thoughtfully. Clear contract terms, realistic depreciation assumptions, and diversified exposure across operators and regions can help to mitigate this dynamic.

Overall, the risks resemble those found in other private credit and infrastructure opportunities: counterparty quality, operating discipline, depreciation management, and cost control. With careful diligence, compute can function as a transparent, asset-backed exposure to the underlying growth of AI.

Conclusion

Compute is the most fundamental resource of the modern era. It is the raw power that transforms information into intelligence. For family offices and institutional investors, understanding its economics is the first step toward participating in a market expected to surpass $7 trillion in capital expenditure by 2030. As GPUs evolve from technical equipment to structured financial assets, investors who engage early can position themselves at the foundation of the next generational infrastructure cycle. Innovation in financial architecture will define the sustainability of the AI revolution and family offices are ideally positioned as a source of flexible and patient capital to support the next industrial revolution in the intelligence economy.

Bibliography

 

About the Authors

Nikolay Filichkin is a business development and partnerships executive with deep experience across enterprise technology and high-growth operating environments. As Chief Business Officer of Compute Labs, Mr. Filichkin leads strategic partnerships and capital deployment initiatives to support the firm’s mission to build the capital markets for compute. Prior to joining Compute Labs, Mr. Filichkin held senior roles at Xsolla, where he led cross-border acquisitions, launched new product lines, and built go-to-market functions that supported the company’s global expansion. His background spans strategic sales, M&A execution, and operational scale-up across both early-stage and growth-stage organizations. Mr. Filichkin is recognized for fostering durable partnerships and guiding complex initiatives from inception to revenue realization. Contact: nick@computelabs.ai

Warren Hosseinion is a capital markets and growth professional with experience spanning public-market M&A, investor relations, marketing, and corporate development across AI infrastructure, biotechnology, and emerging technology sectors. As Head of Capital Markets and Growth at Compute Labs, Mr. Hosseinion oversees investor relations, fundraising strategy, and market positioning as the firm develops structured investment products for the compute asset class. Mr. Hosseinion brings previous experience as Vice President of M&A at Voyager Acquisition Corp. (NASDAQ: VACH), where focused on deal sourcing, transaction execution and due diligence. He also brings experience as Chief Operating Officer of Vesicor Therapeutics, helping guide their go-public strategy and daily operations. Contact: warren@computelabs.ai

Marc J. Sharpe is a global investment executive and board member with a distinguished career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

This material is for educational purposes only and is not investment, legal, accounting, or tax advice. It does not constitute an offer to buy or sell any security or digital asset, or a solicitation to engage in any investment strategy. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Families should consult their advisers and consider their unique circumstances before making any investment decisions.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

What is GPU-based infrastructure as an investment for family offices?

GPU-based infrastructure refers to investments in the physical computing capacity that powers artificial intelligence — including data centers, GPU clusters, and the energy and cooling systems that support them. As demand for AI compute grows exponentially, families with patient capital are investing directly in these assets or through specialized funds focused on AI infrastructure.

Why are family offices interested in GPU infrastructure investments?

The AI compute market is experiencing structural demand growth that shows few signs of slowing, driven by the training and inference requirements of large language models and AI applications. GPU infrastructure investments offer the characteristics family offices value: hard assets, contractual revenue streams (through compute leases), and exposure to a secular growth trend.

What are the risks of investing in GPU infrastructure?

Key risks include rapid technological obsolescence (GPU generations turn over quickly, potentially stranding investments in older hardware), high capital intensity, energy cost sensitivity, concentration in a small number of chip suppliers, regulatory risk around AI, and the cyclicality of data center demand. Due diligence should focus on contract duration, counterparty quality, and hardware refresh economics.

How can family offices access GPU infrastructure investments?

Access routes include: direct ownership of GPU clusters leased to AI companies or cloud providers, LP investment in specialized data center or AI infrastructure funds, co-investment alongside operating partners with technical expertise, and equity investment in companies that own or operate GPU infrastructure. Most family offices access this asset class through fund relationships rather than direct ownership.

Related Reading

Bitcoin as a Strategic Asset for Family Offices

/in /by

Authored by Glenn Cameron, CFA, FMVA and edited by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

Family offices seek to preserve purchasing power, prudently grow capital, and reflect family values across generations. Traditional portfolios—heavy in equities, bonds, private markets, and real estate—face structural pressure from persistent inflation, high public debt and net‑interest burdens, rising cross‑asset correlations, and liquidity traps in illiquid alternatives. This whitepaper explores how a measured Bitcoin allocation can complement a family’s core portfolio by adding a programmable scarcity hedge, a low‑correlation return stream, and long‑term growth optionality. It also provides practical guidance on sizing, phasing, custody, governance, and liquidity planning to integrate Bitcoin in line with a conservative family‑office mandate.

Executive Summary

  • The evolving macro environment has weakened traditional diversification: cash and bonds struggle against inflation and provide less diversification, while equities, credit, and real estate have become more correlated in times of stress.
  • Bitcoin’s core attributes—finite supply, decentralization, and independence from fiat monetary policy—map to three family‑office objectives: preserve purchasing power, diversify real risks, and retain growth optionality.
  • A modest 1–5% sleeve can improve portfolio resilience without dominating governance or liquidity. Historically, Bitcoin’s correlations to equities and bonds have been low, while long‑run CAGRs have been high (with significant volatility).
  • Implementation should emphasize phased entry (i.e. dollar cost averaging), policy‑based rebalancing, institutional‑grade custody—preferably multi‑institution, multi‑signature—and a total‑return approach to generate cash when needed.
  • Values alignment is also possible given credible narratives around financial inclusion, human‑rights resilience, and supporting the energy transition.

1) The family‑office mandate—and why the old toolkit is strained today

The family office mandate spans more than annual returns: protect real wealth, fund multi‑decade commitments, and transmit values and governance to the next generation. That mandate is harder in an era of persistent fiscal deficits, rising debt‑to‑GDP, and growing federal debt net‑interest costs that can pressure fiat purchasing power over time.

At the portfolio level, five structural weaknesses are increasingly visible:

1) inflation erosion benefits in cash and bonds.

2) liquidity traps in private equity and real estate.

3) higher stock–bond correlation that undermines 60/40 defenses.

4) elevated valuations in risk assets; and

5) intense competition for quality deals.

Traditional ‘diversification’ often adds instruments that share the same underlying risks.

2) Why Bitcoin? Three strategic roles

A) Preservation: a programmatic hedge against monetary debasement

Bitcoin’s monetary policy is fixed in decentralized code practically impossible to alter, supply is asymptotically capped at 21 million, and issuance is transparently reduced over time. This removes discretionary dilution risk. In a world where deficits are structural and balance‑sheet expansion is a recurring tool, exposure to an asset with rule‑based scarcity can help protect intergenerational purchasing power.

In practice, Bitcoin is probably best understood as a modern complement to gold and quality real assets. It is not a panacea: drawdowns can be severe, and short term price behavior is volatile. But over long horizons, its scarcity mechanism makes it a credible hedge against currency debasement—especially when sized prudently within a diversified portfolio.

Exhibit 1. Macro context: USA – Total Federal Outlays and Revenues

Exhibit 1 chart

Source: CBO’s February 2024 report The Budget and Economic Outlook: 2024 to 2034.

Exhibit 2. Macro context: USA- Federal Debt Held by the Public as a % of GDP

Exhibit 2 chart

Source: CBO’s February 2024 report The Budget and Economic Outlook: 2024 to 2034.

Exhibit 3. Bitcoin vs. 2Y inflation expectations (YoY)

Exhibit 3 chart

Source: Onramp Bitcoin, Federal Reserve Bank of St Louis, Investing.com

B) Diversification: low correlation when it counts

Diversification works only if return drivers differ. Bitcoin’s return stream is largely orthogonal to earnings cycles and interest‑rate policy because it is driven by protocol rules, network adoption, and liquidity cycles unique to the asset. Over multi‑year windows, correlations with broad equities and aggregate bonds have tended to hover near zero. For families already fully exposed to equity beta, credit, and real assets, “different’ matters more than ‘more.”

A 1–5% sleeve typically suffices to introduce this independent risk/return profile. The goal is not to chase every rally but to insert a genuine diversifier that can buffer the portfolio during synchronized sell‑offs in traditional assets. Paired with rules‑based rebalancing, even a small sleeve can contribute meaningfully to long-term portfolio resilience.

Exhibit 4. Correlation Matrix — Bitcoin & Major Asset Classes – Jun 30, 2020 – Jun 30, 2025

Exhibit 4 chart

Source: Data – Bloomberg; Calculations – Onramp Bitcoin

C) Growth optionality: asymmetric upside from a capped‑supply network

Families require growth to offset inflation and fund future obligations. Bitcoin’s long‑term return profile has been characterized by high compounding potential alongside high volatility. As adoption expands while supply remains capped, the asset exhibits asymmetric upside akin to owning a call option on a growing monetary network.

Capital efficiency is an additional benefit: to add a modest increment to expected real return, a small Bitcoin sleeve can substitute for much larger shifts in equities or bonds, preserving liquidity for other priorities. For many families, the asset also serves as a bridge to next‑gen engagement—digital‑native heirs intuitively understand its design and relevance.

Exhibit 5. CAGR vs. traditional assets and allocation required for +1% expected real return

Exhibit 5 chart

3) Implementation without drama

Sizing and phasing

Target a 1–5% range of total assets, calibrated to spending needs and drawdown tolerance. Families with higher liquidity requirements or lower risk appetite should sit at the low end; others can scale by policy once governance and custody are battle‑tested. Phase entry using dollar‑cost averaging over several quarters to desensitize timing and build cultural comfort. Pair with a rebalancing band (e.g., ±100–200 bps) to harvest volatility mechanically.

Exhibit 6. Policy pathway: start at 1%, DCA to 3%, quarterly rebalancing bands, governance ‘gate’ for >5%

Exhibit 6 chart

Liquidity: a total‑return playbook

Bitcoin does not pay a coupon. Treat it as a total‑return sleeve. Monetize a small, rules‑based portion of gains during favorable windows—for example, trim when the sleeve exceeds its upper band—to fund distributions, capital calls, or new commitments. This converts appreciation into liquidity without dismantling the core exposure. Keep a written policy to avoid ad‑hoc decisions during volatility spikes.

Resilient Custody

Institutional‑grade custody is non‑negotiable. The emerging best practice is multi‑institution, multi‑signature custody (MIC). Keys are split across qualified custodians and/or trustees in distinct jurisdictions; transactions require 2‑of‑3 or 3‑of‑5 approvals; and insurance coverage is in place. MIC reduces single points of failure, strengthens legal resilience, and enforces dual‑control.

Decide up front:

  • Movement thresholds (e.g., board approval above defined amounts).
  • Jurisdiction strategy (custodians across complementary regulatory regimes).
  • Whitelisting and address‑control procedures for outbound transfers.

Exhibit 7. Example of Multi Institution Custody Scenario

Multi-institution custody example: Onramp, BitGo and CoinCover each hold one key to the client bitcoin vault; 2 of the 3 must approve a transaction.

Policy, compliance, and documentation

Add a Bitcoin mandate to the Investment Policy Statement (IPS): purpose (hedge/diversifier/growth), target range and phasing, rebalancing rules, liquidity plan, custody standards, valuation/pricing source, reporting cadence, and escalation criteria. Maintain live tax and regulatory checklists; rules evolve. Schedule quarterly reviews and an annual deep dive.

Sample IPS insertion (illustrative)

Purpose and role: Bitcoin is included as a strategic diversifier and potential hedge against monetary debasement, with long‑term growth optionality. Target allocation: 3% of total assets, with an allowed range of 2–5%. Phasing: Dollar‑cost average over at least four quarters to initial target. Rebalancing: Maintain within ±150 bps of target; trims above the upper band fund distributions or new commitments. Custody: Assets held with qualified custodians in a multi‑signature, multi‑institution structure, with insurance coverage. Compliance: All activity subject to legal and tax review; pricing from an approved source; quarterly reporting to the Investment Committee. Review: Annual deep dive and quarterly check‑ins; any move beyond 5% requires explicit IC approval.

4) Values and legacy: making the impact case credible

Many families integrate philanthropy and values into their investment approach. With careful framing, Bitcoin can reinforce—rather than conflict with—key priorities:

  • Financial inclusion: borderless access to savings and payments where banking is fragile; lower‑cost remittances in certain corridors.
  • Human rights: resilience to censorship and seizures under authoritarian regimes; ability to support at‑risk communities when traditional rails are restricted.
  • Energy transition: miners as flexible buyers of last resort for intermittent renewables; potential methane‑mitigation when collocated with flared‑gas sites.

Back the narrative with data and governance: disclose custody standards, report on energy‑use metrics where appropriate, and align philanthropic initiatives with measurable outcomes. Include next gen family members in oversight roles to strengthen continuity and engagement.

5) Key risks and practical mitigations

  • Price volatility: mitigate via small sizing, DCA entry, and rules‑based rebalancing bands.
  • Operational/custody risk: mitigate via MIC, segregation of duties, whitelists, and audited processes.
  • Liquidity risk: plan liquidity with a total‑return playbook; avoid forced selling during stress.
  • Reputational risk: align narrative with values; communicate policy and safeguards clearly to stakeholders.

6) Mini‑checklist for the IC pack

  • Mandate: Target band (e.g., 1–3%); escalation criteria to 5%.
  • Phasing: DCA schedule by quarter; volatility gates; pause conditions.
  • Rebalancing: banded policy with trims to fund distributions; avoid discretionary chasing.
  • Custody: MIC with 2‑of‑3; jurisdiction diversification; insurance requirements.
  • Operations: dual‑control workflows; address whitelists; cold‑storage standards; audit trail.
  • Compliance/Tax: counsel and CPA review; disclosures; board minutes and approvals.
  • Education: standing agenda item; next-gen participation

7) Methodology notes (for the investment committee)

Inflation expectations: When comparing Bitcoin behavior with inflation regimes, use survey‑based expectations and market‑based measures (e.g., breakeven inflation). Regime identification should avoid look‑ahead bias and should be robust to alternative windows (12–36 months).

Real‑return framing: When evaluating contribution to expected real return, anchor to a long‑term inflation assumption (e.g., 2%). Illustrations that compare allocations needed to add +1% real return should clarify that all results are sensitive to the horizon, regime definition, and the choice of proxies for each asset class.

Risk measurement: For drawdown analysis, use peak‑to‑trough declines on closing prices and report both depth and duration. For family‑office governance, emphasize scenario‑based stress (e.g., policy shock, liquidity crunch, sharp tightening) rather than relying solely on variance.

Back testing hygiene: Use transparent data sources, specify windows, and put confidence bands around point estimates. Where possible, show robustness checks (e.g., multiple start dates for DCA, alternative rebalance bands).

8) FAQs for principals and trustees

Short answers you can use in Investment Committee packs and trustee briefings:

  • “Isn’t Bitcoin too volatile?” — The sleeve is intentionally small (1–5%) and phased in. Volatility at the sleeve level can be an asset when rebalancing is systematic, because it realizes gains without relying on market timing.
  • “Why not just buy a crypto fund or ETF?” — Pooled vehicles can be appropriate, but direct ownership plus institutional custody (or a separately managed account with qualified custodians) gives greater control over counterparties, geography, and security policies.
  • “What about taxes?” — Tax treatment varies by jurisdiction. Maintain a transaction log and pricing source and obtain tax advice before implementing rebalancing or income‑generation overlays.
  • “Can we earn yield on Bitcoin?” —A conservative family office can treat Bitcoin as a total‑return asset and generate liquidity via policy‑based trims instead.

Conclusion

In an era of fiscal imbalances and correlated traditional assets, Bitcoin has a role as a strategic complement for family offices aiming to preserve purchasing power, diversify risks, and capture growth optionality. Its fixed supply, decentralized governance, and independence from fiat policies position it as a hedge against monetary debasement, with historical correlations to equities and bonds near zero over multi-year periods1. A modest 1-5% allocation can enhance portfolio resilience—historically delivering high compound annual growth rates (CAGRs) while allowing systematic rebalancing to harvest volatility—without overwhelming liquidity or governance. Implementation requires dollar-cost averaging (DCA) for phased entry, multi-institution, multi-signature custody to mitigate operational risks, and integration into the Investment Policy Statement (IPS) with clear rebalancing bands and liquidity plans. Key risks like price volatility and custody failures are addressable through small sizing, rules-based processes, and audited controls. Overall, a prudent Bitcoin sleeve aligns with intergenerational mandates, offering asymmetric upside in a capped-supply network amid structural macro pressures, provided families consult advisers for tailored execution.

Notes

  1. As shown in the correlation matrix from June 2020 to June 2025 (Source: Bloomberg data via Onramp Bitcoin).↩︎

About The Authors

Glenn Cameron is Global Head of Onramp Institutional and Chief Investment Officer of Acropolis Treasury, where he works with family offices, institutions and corporate treasuries on Bitcoin strategy, governance and portfolio integration. He has more than two decades of experience in multi asset portfolio management and investment consulting across the US, UK, Europe, the Middle East and Africa. Prior to joining Onramp, Glenn was Senior Investment Consultant & Head of Digital Assets at Cartwright, where he led the advice behind the first British pension scheme allocation to Bitcoin, and before that he was a Portfolio Manager & Head of Asset Allocation at Sanlam Investments, managing multi asset and alternative investment portfolios. He has held earlier leadership roles in investment consulting and derivatives trading and holds the CFA and FMVA designations. Contact: glenn@onrampbitcoin.com

Onramp Institutional is the institutional advisory and solutions arm of Onramp, focused exclusively on Bitcoin for fiduciaries. The team works with boards, CIOs, treasurers and risk committees to build a defensible process around Bitcoin: executive and committee briefings, portfolio and liquidity modelling, wrapper and custody design (including multi institution custody vaults), and governance and audit documentation. Onramp operates alongside clients’ existing legal, tax and consulting relationships to help them evaluate, size and structure modest Bitcoin sleeves that are auditable, compliant and operationally robust for family offices and other long term allocators: www.onrampbitcoin.com

Marc J. Sharpe is a global investment executive and board member with a distinguished career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

This material is for educational purposes only and is not investment, legal, accounting, or tax advice. It does not constitute an offer to buy or sell any security or digital asset, or a solicitation to engage in any investment strategy. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Families should consult their advisers and consider their unique circumstances before making any investment decisions.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

Why are family offices considering Bitcoin as a strategic asset?

Family offices are attracted to Bitcoin for several reasons: its fixed supply cap (21 million coins) makes it a potential inflation hedge; its non-correlation to traditional asset classes offers portfolio diversification; its global liquidity provides accessibility; and its decentralized nature protects against sovereign or institutional counterparty risk.

What is the investment thesis for Bitcoin in a family office portfolio?

The core thesis is that Bitcoin functions as digital gold — a scarce, portable, censorship-resistant store of value with superior monetary properties. As institutional adoption increases and supply remains fixed, the argument holds that long-term demand will exceed available supply, supporting price appreciation over multi-year horizons consistent with family office time horizons.

How much should a family office allocate to Bitcoin?

There is no universal answer, but many financial models suggest that even a small allocation (1% to 3%) to Bitcoin can improve a traditional portfolio's risk-adjusted returns due to its low correlation and asymmetric return profile. Families with higher conviction and risk tolerance sometimes allocate 5% to 10%. The position size should reflect what the family can hold through 50%+ drawdowns without forced selling.

What are the tax implications of Bitcoin investing for family offices?

Bitcoin is treated as property for US federal tax purposes, meaning gains are subject to capital gains tax (long-term rates if held over one year). Family offices should work closely with tax counsel on structuring (e.g., holding within certain trust structures), timing of dispositions, and reporting requirements including FBAR and Form 8938 for foreign accounts.

Related Reading

Real Estate Royalties for Multi-Generational Families

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Authored by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

This whitepaper examines the investment opportunity for family offices to allocate capital to real estate royalties. Modern unsubordinated, triple-net, long-term ground leases separate land ownership from improvements, creating the senior-most real estate claim: contractual, inflation-protected income with no lessor operating burden and full reversion of improvements at maturity. Institutions from the Catholic Church to leading universities have compounded wealth through this structure for centuries with no realized losses. Recent standardization has made the asset class accessible at institutional scale via specialized vehicles. For multi-generational family offices, ground leases deliver equity-like returns at markedly lower volatility than core real estate, substantial estate-tax valuation discounts, full like-kind exchange eligibility, and negligible management intensity. A modest allocation to ground lease assets can strengthen after-tax, intergenerational capital preservation and is worth consideration for family offices with patient capital, especially those considering multigeneration estate plans.

Introduction

One of the distinct advantages family offices have over traditional institutional capital is the ability to invest patiently over long cycles, often generations. Family offices therefore benefit the most from investments that compound purchasing power over decades while preserving capital and imposing almost no operational burden on staff or principals. Modern ground leases deliver on all three of these requirements in a way that traditional real estate equity, private credit, and most fixed-income alternatives cannot.

In a ground lease, the landowner (formally the lessor or fee owner) retains outright ownership of the land while leasing it for a long term, almost always 99 years in institutional structures, to a tenant or lessee who constructs and owns the buildings and any improvements. The lessee pays rent on the land only and assumes full responsibility for property taxes, insurance, maintenance, and all operating costs under a triple-net (NNN) lease. At expiration, the lessee surrenders the improvements to the lessor in good condition and at no additional cost. This separation of land ownership from building ownership creates what are often referred to as “real estate royalties” (i.e., a senior, contractual, inflation-protected income stream plus a free, embedded option on decades of property appreciation).

Institutions as diverse as the Catholic Church, the British Crown, Harvard University, Yale University, and the University of Texas System have employed ground leases for hundreds of years to compound wealth with zero realized losses. And, since 2017, with the standardization of the modern unsubordinated, triple-net, 99-year ground lease, this asset class has become accessible on an institutional scale to private family office investors.

Historical Context and Provenance

Ground leases trace their origins to English common law and were imported to the American colonies. Early examples include Dutch patroonships in New York and ecclesiastical leases in Hawaii. In the twentieth century, universities and municipalities adopted the structure to monetize land without surrendering control. The University of California, Irvine, the University of Texas System, and the City of New York have collectively generated billions in present-value rent while retaining reversionary rights that will mature in the twenty-second and twenty-third centuries.

The modern institutional version differs materially from older subordinated or short-term leases. It is always unsubordinated — meaning the lessor’s land is not collateral for the lessee’s construction or permanent financing — and contains lender-protective provisions that make the leasehold estate fully financeable with commercial mortgage-backed securities (CMBS) or bank debt. These innovations eliminated the primary historical friction: leasehold lenders’ fear that the fee owner could wipe out their collateral in a tenant bankruptcy. With that risk removed, the asset class is increasingly being seen as an attractive alternative for long term family office investors.

Detailed Mechanics of the Institutional Ground Lease

A contemporary ground lease transaction typically begins with a developer or owner who controls a site but wishes to minimize deployed equity. The ground lease investor purchases the land (or funds it in a forward commitment) at 30–45% of total project cost and leases it back under the following core terms:

  • Term: 99 years (the longest term that avoids perpetual lease rules in most states).
  • Rent: Initial yield of 4.5–5.75% on land value, producing a blended project cap rate of approximately 6.5–8.0%.
  • Escalators: Either (a) fixed 2.0–2.5% annual compounding, or (b) periodic CPI lookbacks (usually every 10 years) with collars of 1.5–3.5% per period or 20–35% cumulative.
  • Triple-net: Lessee pays absolutely everything — property taxes, insurance, maintenance, capital expenditures.
  • Unsubordinated fee: Lessor’s land is senior to all leasehold debt.
  • Reversion: Improvements revert to lessor at maturity in good condition, with no payment to lessee.

The economics separate into two distinct value components for the lessor:

  • The income component: a growing, senior, contractual cash flow stream that resembles an inflation-linked bond issued by a real estate-secured credit tenant.
  • The reversionary or “Caret” component: the right to receive, at zero additional cost, all improvements existing at lease maturity.

Please refer to Appendix A for an explicit illustration of how ground lease economics work in practice.

Comprehensive Risk Assessment

Ground leases sit at the absolute top of the real estate capital stack. In tenant bankruptcy or leasehold foreclosure, the land survives intact and any leasehold lender must continue paying rent or forfeit the improvements. This structural seniority explains the zero-loss history. The principal risks of ground leases are well understood and can be systematically mitigated with the appropriate planning and structuring.

  • Tenant credit default is the most frequently cited concern. Managers address it through rigorous underwriting that requires either investment-grade credit or strong institutional sponsorship, coupled with minimum rent coverage ratios of 2.5–3.5 times.
  • Insufficient inflation protection is eliminated in institutional leases via periodic CPI lookbacks (typically every ten years with collars) or, in retail properties, percentage-rent participation clauses that explicitly preserve purchasing power.
  • Reversion risk—the theoretical possibility that improvements will be worthless at lease maturity in year 99—is effectively nonexistent. Conservative initial land allocations of 30–45% of total project cost, combined with the 99-year term and long-term real estate appreciation trends, ensure the reversionary interest retains substantial value.
  • Interest-rate duration risk represents the primary source of mark-to-market volatility. Macaulay duration approximates 50–60 years, making the asset class sensitive to rate movements.1 Contractual cash flows, however, remain completely unaffected by interim price fluctuations.
  • Liquidity varies by vehicle. Private fund holdings are inherently illiquid, though a secondary market continues to develop. Investors seeking daily liquidity can access a public REIT (Safehold), accepting equity-like volatility in exchange.
  • Relative to core real estate, ground leases deliver comparable expected nominal returns—8–10% unlevered—while exhibiting roughly 40–50% of the volatility, placing them in the upper-left quadrant of the risk-return spectrum.

Acquisition and Origination Strategies

Family offices access ground leases through four primary channels, listed below from most common to most bespoke:

  • Commingled private funds: These funds originate new leases and acquire existing ones at targeted net IRRs of 8–12%.
  • Club deals: Allows geographic, property-type, or escalator customization. Requires internal real estate staff in addition to trusted advisors.
  • Direct origination: This option is only for largest family offices and those with dedicated in-house real estate teams. Investments typically take 6–18 months from term sheet to funding and the process includes:
    • Identifying developers or owners seeking to recycle equity.
    • Negotiate land value (usually 30–45% of total project cost).
    • Execute simultaneous land purchase and 99-year lease (using institutional template).
    • Fund at closing or via forward commitment.
  • Public REIT: Safehold Inc. (NYSE: SAFE) is currently the only public pure-play ground lease company that trades in the public markets. It provides daily liquidity and exposure to a diversified national portfolio, albeit with equity market volatility and a significant discount to NAV.

Secondary acquisition of existing ground leases is growing. Universities, municipalities, and some family owners periodically monetize portions of their portfolios. These trades usually occur off market through intermediaries and specialist advisors.

Tax Considerations for U.S. Family Offices

Tax treatment is a major reason sophisticated family offices find ground leases attractive2. For the lessor (the family office investor):

  • Ground rent received is taxed as ordinary income (current federal rates up to 37% + 3.8% Net Investment Income Tax + state taxes).
  • No depreciation deduction is available on the land itself (land is non-depreciable), and the lessor owns no improvements during the term.
  • Property taxes, insurance, and operating expenses are paid by the lessee — fully tax-deductible to the lessee but never expensed by the lessor.
  • Interest expense on leverage secured by the leased fee is deductible against rent (subject to normal limitations).

At lease maturity or upon earlier sale:

  • Reversion of improvements: The IRS generally treats the receipt of improvements at maturity as nontaxable return of property if the lease qualifies as a true lease. The lessor takes a zero basis in the reverted improvements. If sold immediately, the entire proceeds are capital gain (20% federal + 3.8% NIIT + state). Many lessors hold or 1031 exchange the mature property3.
  • Sale of leased fee during term: Eligible for Section 1031 exchange into another ground lease or other real property, deferring capital gains tax indefinitely across generations. This is a powerful intergenerational planning tool.
  • Estate tax valuation: The IRS values a ground lease interest at the present value of remaining rents plus discounted reversion. Using IRS Section 7520 rates (4–6% currently), a newly originated 99-year lease is typically valued at 80–90% of invested capital for estate purposes, creating a built-in estate-tax discount. When held in intentionally defective grantor trusts or dynasty trusts in Delaware, Nevada, or South Dakota, the discounted value plus future appreciation can grow outside the taxable estate permanently.

Additional nuances:

  • Opportunity Zone ground leases can provide tax deferral on prior gains plus 10-year basis step-up.
  • Charitable remainder trusts (CRTs) can hold ground leases to generate high current income for principals while achieving charitable deductions.
  • GST-exempt dynasty trusts can own ground leases to compound for centuries without estate or GST tax at each generation.

In contrast, direct fee-simple real estate generates depreciation recapture at 25% on sale, annual phantom income if leveraged, and full fair-market-value inclusion in estates.

Conclusion

Ground leases represent the purest form of real estate ownership available in a leveraged world: perpetual land control, growing senior income, no operating burden, and a tax-efficient embedded call option on future development value. For multi-generational family offices navigating ‘higher-for-longer’ interest rates, fiscal uncertainty, and generational transfer planning, a strategic allocation to modern ground leases can materially improve portfolio durability, after-tax compounding, and sleep-at-night quality. In the current market environment, commercial real estate transaction volume has recovered from the 2023–2024 lows, yet all-in debt costs remain 6.5–8.0% for many property types. Developers and owners are increasingly using ground leases to reduce equity requirements from 30–35% to 15–20%, creating abundant supply for lessors. Institutional ownership of the $20+ trillion U.S. commercial real estate stock remains below 0.5%, indicating decades of runway for this unique real estate asset class.

Bibliography

  • Carr, Christopher. 2023. “An Argument for the More Widespread Use of Ground Leases in the United States: How to Align Pertinent Interests and Strategically Implement on an Impactful Scale.” Master’s thesis, Massachusetts Institute of Technology.
  • Group RMC. n.d. “Real Estate Royalties / Ground Leases: The Pearl of Real Estate.”
  • Kamdem, Ronald, Adam Kramer, Kelly E. Whelan, and Sarah Obaidi. 2023. “Safehold Inc. | North America: A New (Long) Lease on Land; Resume at OW, $33 PT.” Morgan Stanley, October 30.
  • Libou, Shaun. 2024. “Ground Level.” Raymond James / AFIRE Summit Issue 16.
  • Lorman Education Services. 2018. “Ground Lease Fundamentals – What Distinguishes a Ground Lease and Why.”
  • Mayne, Florence P. 2002. “Ground Leases: Basic Legal Issues.” Presented at the Association of University Real Estate Officials 22nd Annual Meeting, Austin, TX, September 24.
  • Safehold Inc. 2025. “Safehold Reports Third Quarter 2025 Results.”
  • Safehold Inc. 2025. “Q3 2025 Earnings Presentation.”

Appendix A

Consider a $100 million ground lease investment on a new multifamily project with a total combined property value (CPV) of $285.7 million. Land is allocated 35% of CPV ($100 million) and improvements 65% ($185.7 million).

Step 1 — Calculate initial annual rent.

  • Initial yield = 5.00%
  • Year 1 rent = 5.00% × $100 million = $5.00 million

Step 2 — Apply fixed escalator4.

  • Year 10 rent = $5.00 million × (1.02)^9 = $5.98 million
  • Year 30 rent = $5.00 million × (1.02)^29 = $9.08 million
  • Year 50 rent = $5.00 million × (1.02)^49 = $13.80 million
  • Year 99 rent = $5.00 million × (1.02)^98 = $34.76 million

Step 3 — Calculate cumulative undiscounted cash flow over the term. This is the future value of a growing annuity:

  • Cumulative cash = $5.00 million × [(1.02)^99 – 1] / 0.02 ≈ $1,803 million

Step 4 — Estimate reversion value assuming total property appreciates at a conservative 2.75% annually5.

  • Year 99 CPV = $285.7 million × (1.0275)^99 ≈ $1,420 million
  • Assuming land remains ~35% of CPV at maturity, land value ≈ $497 million.
  • Improvement reversion to lessor ≈ $923 million

Step 5 — Total undiscounted value created.

  • Cumulative rent is $1,803 million + reversion $923 million = $2,726 million on $100 million invested, or 27.3× money over 99 years.

Even discounting intermediate cash flows and reversion at a 6.25% required IRR (typical for the asset class today), the transaction still generates an unlevered IRR of approximately 8.1%. Adding conservative 55% non-recourse leverage at SOFR + 225 bps pushes levered IRR to 12–14% with ground-lease-to-value remaining below 45%.

Assumptions:

  • The above example uses modern, unsubordinated, 99-year, triple-net ground leases with institutional protections.
  • Long-term appreciation 2.75% nominal; CPI 2.0–3.0%; tax rates reflect current law as of November 2025.

Notes

  • Macaulay duration measures the weighted average time (in years) an investor must hold a fixed-income instrument to receive the present value of all future cash flows equal to its current price. Developed by Frederick Macaulay in 1938, it represents the economic maturity of a bond or similar cash flow stream rather than its legal maturity.↩︎
  • Specific tax advice is beyond the scope of this whitepaper, and we highly recommend consulting with an expert when it comes to tax related questions. No specific tax advice is provided in this whitepaper. Family-specific structures require qualified counsel.↩︎
  • A Section 1031 exchange, named for Internal Revenue Code (IRC) Section 1031, permits deferral of capital gains taxes on the sale of investment or business-use real property when proceeds are reinvested in like-kind replacement property of equal or greater value.↩︎
  • Assumes 2.00% annual fixed increases, compounded.↩︎
  • The long-term U.S. commercial real estate average per NCREIF.↩︎

About the Author

Marc J. Sharpe is a global investment executive and board member with a distinguished career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members, and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

How do family offices use real estate for multi-generational wealth?

Real estate is one of the most common anchor assets in multi-generational family portfolios because of its income generation, inflation protection, tangibility, and ability to be held indefinitely without forced exits. Family offices typically hold real estate through a combination of direct property ownership, private real estate funds, and occasionally REITs for liquidity.

What are royalty investments and why are family offices interested in them?

Royalty investments involve acquiring a right to receive a percentage of revenue from an asset — such as a mineral rights royalty, a music catalog royalty, or a pharmaceutical royalty — typically in perpetuity or for a defined period. They are attractive to family offices because they provide durable, passive income with low operational requirements and natural inflation linkage.

What types of royalties do family offices typically invest in?

The most common royalty categories for family office investors are: mineral rights royalties (oil, gas, and other subsurface resources), music and entertainment royalties, pharmaceutical royalties on drug sales, and franchise royalties. Each category has different risk profiles, duration characteristics, and due diligence requirements.

How should a family office structure real estate investments for multi-generational transfer?

Real estate held in a family office structure is most efficiently transferred through a combination of family limited partnerships (which allow for valuation discounts on minority interests), irrevocable trusts, and, in some cases, qualified opportunity zone investments. Estate planning counsel should be involved in structuring any real estate that is intended to pass to the next generation.

Related Reading

A Family Office Guide for Direct Investing via Independent Sponsors — TFOA whitepaper.

A Family Office Guide for Direct Investing via Independent Sponsors

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Authored by Marc J. Sharpe, M.A., M.Phil., MBA

Abstract

This whitepaper examines the growing trend of direct investing by family offices, particularly through partnerships with independent sponsors. As family offices seek to bypass the fee drag and limited control of traditional private equity funds, direct investing is increasingly being seen as a compelling alternative. We explore the mechanics of independent sponsor transactions, the pros and cons for family offices, some global trends, and key legal and governance considerations. Hopefully, by better understanding these dynamics, family offices will be able to make informed decisions to adjust their investment strategies and achieve their goals.

Introduction

The private equity landscape is seeing increasing involvement by family offices in direct investing. Several recent reports highlight this trend. For example, the North America Family Office Report (2024) by Campden Wealth and RBC suggests that 60% of family offices are involved in direct private equity investments, with many planning to increase their allocations. A recent survey by Bastiat Partners and Kharis Capital suggests half of family offices plan to undertake direct deals in the next two years. And, according to the Dentons Family Office Direct Investing Survey (2022), 63% of family offices engage in direct investments, with many others expressing interest in this approach. Lastly, a Citi Private Bank 2021 survey found that 76% of family offices had at least 10% of their portfolios in direct – signaling “a shift away from conventional methods” of commingled funds1.

Traditionally, family offices have relied on commingled funds, with blind-pool capital, managed by general partners, who charge annual management fees plus a carried interest – typically a 2% management fee, and 20% carried interest (“2 and 20”). However, dissatisfaction with these fees, for mediocre performing managers, coupled with a desire for greater control and alignment with investment objectives, has led many family offices to explore direct investing.

Direct investing allows family offices to invest directly in private companies, often in collaboration with independent sponsors — typically experienced dealmakers who source and structure transactions without a pre-existing fund. This model usually provides family offices with the opportunity to participate in investments on more favorable terms, with enhanced control over decision-making processes and the potential for higher returns.

This whitepaper aims to provide a comprehensive overview of direct investing through independent sponsors, highlighting its advantages, operational mechanics, and strategic considerations for family offices.

Evolution of Private Equity Models

The history of private equity can be traced to 1901, when J.P. Morgan—the man, not the institution—purchased Carnegie Steel Co. from Andrew Carnegie and Henry Phipps for $480 million. More recently, the private equity blind pool model pioneered by KKR, among others, in the mid-1970s has dominated the industry. In this model, limited partners (LPs) commit capital to blind-pool funds managed by general partners (GPs), who charge a management fee (typically 2% of committed capital) and carried interest (usually 20% of profits), typically above a preferred return hurdle. This structure provided LPs with access to private markets but came with limitations, including significant fees, a lack of control over investment decisions, and potential misalignment of interests. Family offices are increasingly turning to direct investing due to their growing scale and expertise, a preference for greater oversight and privacy in their investments, and frustrations with the traditional fund model’s lack of alignment. Conventional private equity funds often prioritize quick exits or fundraising objectives that conflict with the long-term goals of family capital. Through direct investments, whether independently or in collaboration with others, families can choose their target companies and actively manage their involvement. The rise of direct investing reflects a broader trend towards professionalization within the family office space, with private equity remaining a favored asset class (PwC, 2024).

Thus, motivated by the desire to reduce fees, gain more control, and invest in sectors aligned with their expertise, many family offices are choosing to invest directly in private companies. This shift is facilitated by the emergence of independent sponsors, who offer a flexible, deal-by-deal approach to private equity investing.

Independent Sponsors: Definition and Operation

Independent sponsors, also known as ‘fund-less sponsors’, are individuals or small teams with extensive experience in private equity or investment banking. Unlike traditional GPs, they do not manage a dedicated fund; instead, they identify investment opportunities, negotiate deals, and then raise capital from investors on a per-deal basis. The process typically involves the following steps:

  1. Deal Sourcing: Independent sponsors leverage their networks and industry knowledge to identify potential acquisition targets.
  2. Due Diligence and Negotiation: Upon identifying a target, the sponsor conducts preliminary due diligence and negotiates a Letter of Intent (LOI) with the seller.
  3. Capital Raising: After signing the LOI, the sponsor has a specified period to raise the necessary capital from investors, such as family offices, to complete the transaction.
  4. Closing and Management: If capital is successfully raised, the deal closes, and the sponsor, along with the investors, takes ownership of the company. The sponsor often plays an active role in overseeing the investment, such as serving on the board, while the company’s management team handles day-to-day operations.

The independent sponsor does not typically take an executive role in the acquired company – unlike a search fund entrepreneur – but rather oversees the investment as a board member. The company’s existing management is typically retained and often augmented with new talent to help grow the business.

Compensation for independent sponsors is structured to align their interests with those of the capital providers. Common components include:

  • Monitoring Fees: Typically, 3% to 5% of the company’s EBITDA, paid quarterly, to compensate the sponsor for ongoing management and oversight. This contrasts with traditional private equity funds, where management fees are charged to the fund regardless of portfolio company performance.
  • Carried Interest: A share of the equity gains, ranging from 10% to 30%, often tiered based on performance thresholds. This ensures that the sponsor benefits only after investors achieve a certain return.

This performance-based compensation model contrasts with the traditional “2 and 20” structure of private equity funds, where fees are charged on committed capital regardless of deployment. The independent sponsor model ties fees directly to the success of each deal, fostering a strong alignment with investors. Consider a simplified example: An independent sponsor sources a $50M enterprise value deal funded with $25M equity and $25M debt. A family office provides 100% of the equity, and the sponsor earns a 2% closing fee ($1.0M), rolling half into the deal. The independent sponsor also receives a $250K annual monitoring fee. After 5 years, the company sells for $100M. The family office receives its original $25M back, an 8% compound, preferred return (~$11.7M), and 80% of the remaining profits ($30.6M). The sponsor earns approximately $7.7M in carried interest, bringing their total to around $9.5M across fees and carry. A significant majority of the sponsor’s upside is closely tied to the deal’s performance—aligning interests closely with investor.2

According to McGuireWoods, the majority of independent sponsor deals take place in the lower middle market, with approximately three-quarters of transactions involving companies valued up to $75 million. Notably, over two-thirds of these deals involve firms with enterprise values below $50 million, a segment often bypassed by larger private equity players. These smaller enterprises, typically family- or founder-led with EBITDA under $10 million, pose unique challenges in due diligence and operations that major funds tend to sidestep. Independent sponsors who tackle the demanding tasks of identifying and enhancing these businesses can achieve substantial returns in a market segment that traditional private equity has largely ignored.

Evidence suggests that independent sponsors are increasingly involved in larger transactions. Holland & Knight reports that a growing number of these sponsors are handling middle-market deals, with company valuations typically between $100 million and $500 million. This trend highlights the growing sophistication of the independent sponsor framework and heightened trust from funding sources. For example, Global Endowment Management secured more than $450 million to finance independent sponsor-led deals, signaling robust institutional support for these larger-scale investments.3

This trend is further supported by the increasing number of independent sponsors in the USA, estimated at around 1,300, many of whom are leveraging their deal-by-deal track records to transition into traditional fund structures. The Wall Street Journal notes that Coalesce Capital secured $900M for its first fund and Agellus Capital raised $400M after securing an anchor investor early in the process. As independent sponsors continue to demonstrate their ability to source and close larger transactions, the model is steadily moving into the mainstream of middle market private equity.4

Potential Benefits for Family Offices

Independent sponsor transactions are commonly financed through networks comprising family offices, high-net-worth individuals, and dedicated investment funds. Current data indicates that family offices represent the primary source of capital for these deals.5

Direct investing through independent sponsors offers several key benefits to family offices:

  • Cost Efficiency: By avoiding the management fees and carried interest of traditional funds, family offices can retain more of the investment returns. This is particularly appealing given the high perceived costs associated with the traditional model, although these costs, while not borne directly, do still come out of the return to the investor.
  • Control and Flexibility: Family offices have more influence over investment decisions, including the selection of sectors, holding periods, and exit strategies. This allows them to align investments with their expertise and long-term goals.
  • Alignment of Interests: The partnership model ensures that the sponsor’s incentives are closely aligned with those of the family office, as both parties share in the success of the investment. Where the alignment is strongest is the management fee charged to the portfolio company based on performance rather than charged to LPs based on commitments.
  • Access to Niche Opportunities: Independent sponsors often focus on specific industries or deal sizes, providing family offices with access to unique investment opportunities that may not be available through traditional funds.

These benefits make direct investing an attractive option for family offices seeking to optimize their private equity portfolios. However, despite these advantages, direct investing is challenging for family offices, especially smaller ones. Doing direct deals requires capabilities in deal sourcing, due diligence, execution, and asset management that many family offices lack or are unwilling to build. Many family offices operate lean (a CIO and a few analysts) and cannot easily vet deals across various industries on tight timelines.

Global Trends in Direct Investing

The adoption of direct investing by family offices is a global phenomenon, with variations across different regions:6

Region # of SFO’s Key Trends
North America 3,180 83% engage in private equity, often through direct deals (Deloitte, 2024).
Europe 2,020 Cultural preference for direct ownership, leading to co-investments.
Asia-Pacific 2,290 Rapid growth, favoring growth equity and venture deals with local sponsors.
Middle East 290 Diversification from oil-based economies through direct investments.
  • North America: As the largest market for family offices, North America leads in direct investing, with significant assets under management (AUM) and a strong preference for private equity (Deloitte, 2024).
  • Europe: European family offices, driven by a cultural inclination towards direct ownership, increasingly participate in co-investments and partnerships with independent sponsors.
  • Asia-Pacific: The region is experiencing rapid growth in family offices, particularly in China, Hong Kong, and Singapore, where there is a focus on growth equity and venture deals, often in collaboration with local sponsors or conglomerates.
  • Middle East: Emerging wealth hubs like Dubai and Abu Dhabi are attracting family offices seeking to diversify through direct investments in various sectors.

These regional differences highlight the adaptability of the direct investing model to diverse market conditions and investment preferences.

Governance and Operational Considerations

Engaging in direct investing requires family offices to navigate complex legal, governance, and operational landscapes. Unlike a commingled fund where an LP is hands-off, here the family office and sponsor effectively become business partners in a single-company investment. Key considerations include:

  • Partnership Agreements: Clear agreements with independent sponsors regarding fees, interest, governance rights, and operational roles are essential to ensure alignment and prevent conflicts.
  • Due Diligence: Family offices must conduct thorough due diligence on both the investment opportunity and the independent sponsor’s track record, expertise, and reputation.
  • Regulatory Compliance: Compliance with regional regulations, such as securities laws and tax implications, is crucial to avoid legal pitfalls.
  • Risk Management: Direct investments entail higher risks due to concentrated exposure; robust risk management frameworks are necessary to monitor and mitigate potential downsides.

Securing an appropriate partner presents significant challenges. Independent sponsors frequently find it difficult to establish connections with family offices, which often maintain a discreet presence and avoid prominent networking gatherings. Connections are typically facilitated through trusted intermediaries such as private bankers, lawyers, or investment advisors familiar with a family’s investment preferences. Family offices, when considering partnerships with independent sponsors, often express concerns about: the sponsor’s dedication (fearing a lack of commitment during challenging times), additional funding requirements (where reluctance to provide further capital can lead to conflicting priorities), and governance issues (with families typically seeking significant influence, such as board representation or veto powers, when providing the majority of capital).

Economic Comparison

Comparing the economics of traditional funds and direct investing models reveals significant differences:

Aspect Traditional PE Funds Direct Investing with Independent Sponsors
Fees7 2% management + 20% carry Negotiated per deal, typically lower
Control Limited for LPs High, with influence over decisions
Flexibility Fixed fund terms, forced exits Flexible holding periods and exit strategies
Tax Alignment Potential for phantom income Tailored structures for better tax outcomes

Direct investing allows family offices to tailor tax structures and focus on single-asset exposure, enhancing after-tax returns. However, it’s worth noting that the lines are not black-and-white. Some large family offices continue to invest in top-tier PE funds for diversification, while also carving out a portion for directs. And some independent sponsors effectively operate like small funds (doing multiple deals in parallel and even raising “search funds” or pledges to cover their costs). Conversely, some PE funds now offer separately managed accounts or coinvest funds to single investors, blurring into the direct model.

Challenges and Risk Mitigation

While direct investing offers numerous advantages, it also presents challenges that family offices must navigate:

  • Finding the Right Partner: Identifying and vetting independent sponsors with appropriate expertise and track record is crucial.
  • Building Trust: Establishing trust with sponsors under tight deal timelines can be difficult; thorough due diligence and clear communication are essential.
  • Resource Intensity: Direct investing requires significant time and resources for deal sourcing, due diligence, and ongoing management, which may strain smaller family offices.
  • Concentration Risk: Investing directly in single assets increases concentration risk compared to diversified fund investments.

To mitigate these risks, family offices can:

  • Develop In-House Expertise: Build a team with the necessary skills or partner with experienced advisors.
  • Establish Clear Criteria: Define investment criteria and partner selection processes to ensure alignment with strategic goals.
  • Diversify Investments: Spread investments across multiple deals and sectors to manage risk.
  • Implement Robust Governance: Set up strong governance structures to monitor investments and sponsor performance.

Implications for Stakeholders

The rise of direct investing impacts various stakeholders in the private equity ecosystem:

  • Limited Partners (LPs): Traditional LPs may need to build in-house capabilities for direct investing or seek better terms from GPs.
  • General Partners (GPs): GPs face increased competition from independent sponsors and may need to adjust their fee structures or offer more co-investment opportunities.
  • Deal Intermediaries: Investment bankers and advisors benefit from an expanded buyer pool but must adapt to the unique requirements of family offices and independent sponsors.
  • Founders and Management Teams: They gain access to flexible, long-term capital from investors who are often more aligned with their strategic vision. While they may be forced to accept longer sale processes and exclusivity periods, and take some risk of failure of financing, the benefit is a wider pool of buyers and most importantly the ability to align better when they are rolling equity (which is typical at this stage).

Conclusion

Direct investing through partnerships with independent sponsors represents a paradigm shift in how family offices approach private equity. By offering greater control, cost efficiency, and alignment of interests, this model enables family offices to optimize their investment strategies and achieve superior outcomes. At the same time, the line between independent sponsors and traditional GPs is being blurred by the emergence of hybrid structures and flexible capital strategies. Many first-time fund managers are simultaneously raising debut funds while deploying capital through co-investment pools, SPVs, pledge funds, or even permanent capital vehicles. These models blend the flexibility and performance orientation of deal-by-deal investing with the scalability of fund platforms. For investors, they may offer a dual benefit of more efficient, performance-tied fee structures and better tax alignment by linking recognition to actual distributions. As a result, the rigid GP/LP paradigm is giving way to a broader spectrum of capital deployment models—ranging from blind pools to single-asset partnerships—with family offices often leading the charge in adopting and shaping these innovations. In conclusion, while challenges exist, careful planning and execution can help family offices navigate the complexities and reap the rewards of direct investing. As the number of family offices continues to grow globally, those that embrace direct investing should be well-positioned to achieve their financial objectives and preserve wealth for future generations.

 

Notes

  1. The range — from 60% to 76% — quoted in these surveys reflects the lack of standardization around definitions and nomenclature within the family office world but directionally suggests that family offices are allocating significant capital to direct private equity opportunities.↩︎
  2. See Appendix A for step-by-step calculations.↩︎
  3. Holland & Knight. (2023). Independent Sponsors: Market Trends and Industry Insights.↩︎
  4. WSJ, “Private Equity Managers Persevere In Pitching First-Time Funds”↩︎
  5. In a 2023 survey, 63% of independent sponsor deals involved family office capital – the highest of any source. Other top sources included mezzanine funds (often providing equity co-invest alongside debt; involved in ~50% of deals) and high-net-worth individuals (~47%) (tiff.org). Note: this data cites occurrences rather than dollar volume, which may be lower for family offices versus institutional investors.↩︎
  6. Campden Wealth/RBC North America Family Office Report 2024.↩︎
  7. Traditional PE Funds typically charge 2% management fee on committed capital, charged to the fund, plus 20% carried interest, plus monitoring fees (3-5% of EBITDA) charged to the portfolio company. Independent sponsor fees are negotiated per deal and typically include monitoring fees (3-5% of EBITDA) charged to the portfolio company, plus 10-30% carried interest.↩︎

About the Author

Marc J. Sharpe is a global investment executive and board member with a distinguished career spanning family office management, private equity, venture capital, and investment banking. Known for his strategic insight, deep expertise in family office governance, and ability to foster innovation and value creation, Mr. Sharpe has built and led investment platforms that deliver sustainable growth while navigating complex financial and operational challenges. His leadership style emphasizes integrity, continuous improvement, and long-term partnerships that generate significant stakeholder value. Mr. Sharpe is the Founder and Chairman of The Family Office Association, a premier global peer network of single-family offices. Since 2007, he has cultivated a community of senior family office executives and principals representing some of the world’s wealthiest families, promoting education, shared-best practices, and co-investment opportunities. Under his leadership, TFOA has become a trusted forum for collaboration, market insight, and proprietary investment deal flow on a global scale. He also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and Southern Methodist University. Mr. Sharpe holds an M.A. from Cambridge University, an M.Phil. from Oxford University, and an MBA from Harvard Business School. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families: www.tfoa.info

 

Appendix A

To calculate the preferred return and related financial outcomes for the given private equity deal example, let’s break it down step by step based on the provided information below.

Illustrative independent sponsor waterfall comparison: investor and sponsor proceeds under Waterfall A and Waterfall B at exit equity values from $40 million to $100 million.

Key Details:

  • Enterprise Value (EV): $50 million
  • Equity Contribution: $25 million (provided by the family office)
  • Debt: $25 million
  • Closing Fee: 2% of $50 million = $1.0 million (sponsor rolls half, $0.5 million, into the deal)
  • Monitoring Fee: $250,000 per year
  • Holding Period: 5 years
  • Exit Value: $100 million
  • Preferred return: 8% per year, compounding annually
  • Profit split: Family office receives 80% of remaining profits, sponsor receives 20% as carried interest

Step-by-Step Calculations:

#1. Preferred Return Calculation:

The preferred return is an 8% annual return, compounded annually, on the family office’s $25 million equity investment over 5 years using the formula: A = P * (1 + r) n – P

  • P = 25,000,000 (initial equity investment)
  • r = 0.08 (annual preferred return rate)
  • n = 5 (years)
  • Calculate (1.08)^5 = ~1.469328
  • Total amount including principal: 25,000,000 * 1.469328 = 36,733,200
  • Preferred return: 36,733,200 – 25,000,000 = 11,733,200

#2. Total Return to Family Office (Capital + Preferred Return):

Family office receives its initial $25 million equity back plus the preferred return: 25,000,000 + 11,733,200 = 36,733,200

#3. Exit Proceeds and Remaining Profits:

  • Exit Value: $100 million
  • Debt Repayment: $25 million
  • Equity Value at Exit: $100 million – $25 million = $75 million
  • Remaining Profits after family office receives capital + preferred return: 75,000,000 – 36,733,200 = 38,266,800

#4. Profit Split:

  • Family Office (80%): 38,266,800 * 0.8 = 30,613,440
  • Sponsor Carried Interest (20%): 38,266,800 * 0.2 = 7,653,360

#5. Sponsor’s Total Compensation:

  • Closing Fee: $1.0 million (half rolled into the deal, so cash received = $0.5 million)
  • Monitoring Fees: $250,000/year × 5 years = $1.25 million
  • Carried Interest: ~$7.65 million
  • Total Sponsor Compensation: 0.5 + 1.25 + 7.65 = 9.45

#6. Family Office Total Return:

  • Capital Returned: $25 million
  • Preferred Return: ~$11.73 million
  • Profit Share: ~$30.61 million
  • Total: 25 + 11.73 + 30.61 = 67.34

 

Bibliography

  • Deloitte. (2024). Global Family Office Report.
  • Dentons. (2022). Family Office Direct Investing Survey.
  • PwC. (2024). Global Family Office Deals Study.
  • UBS. (2024). Global Family Office Report.
  • Woolery & Co. (2025). Direct Investing and Independent Sponsors in Private Equity.

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Disclosures

The Family Office Association (“TFOA”) is a peer network of single family offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

This whitepaper is part of TFOA’s research library for single family offices. Browse more family office whitepapers and research or learn about membership in our single family office peer network.

Frequently Asked Questions

What is an independent sponsor in private equity?

An independent sponsor (also called a fundless sponsor) is a private equity professional or team that identifies, evaluates, and negotiates acquisitions without having committed capital in a formal fund. They bring deal flow, operational expertise, and transaction execution skills, then raise equity capital from investors (including family offices) on a deal-by-deal basis.

Why are independent sponsors attractive to family offices?

Independent sponsors offer family offices direct access to proprietary deal flow, aligned incentives (sponsors typically invest their own capital alongside family offices), transparent deal-by-deal economics, flexibility in deal structure, and relationships with operators who have deep sector expertise. They are an efficient way for family offices to access the lower middle market without building an internal deal team.

How are independent sponsors compensated?

Independent sponsors typically receive a deal fee at closing (1% to 3% of transaction value), ongoing management fees (1% to 2% of invested equity annually), and carried interest (typically 15% to 20% of profits above a preferred return). Compensation structures vary widely and are negotiated with equity investors on each deal.

What risks should family offices evaluate when working with independent sponsors?

Key risks include the sponsor's lack of a track record if newly formed, potential conflicts of interest (the sponsor's desire to close a deal versus the investor's need to pass on bad deals), limited operational capacity if the sponsor is managing multiple deals simultaneously, and deal-specific concentration risk. Thorough reference checks and a structured evaluation process are essential.

How should a family office structure its relationship with an independent sponsor?

The relationship should be formalized through a co-investment agreement that defines economic terms, information rights, consent rights for major decisions, exit rights, and how conflicts will be managed. Family offices that do regular business with the same sponsor should establish a framework agreement that governs future deals, reducing negotiation time on each transaction.

Related Reading

Private Debt Secondaries — TFOA whitepaper.

Private Debt Secondaries

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Private Debt Secondaries: Beyond GP/ LP Transactions into the World of Liquidity Management

By Marc J. Sharpe, M.A., M.Phil., MBA, John Bohill, Kenneth McLaughlin, and Orla Walsh

As one of the fastest-growing areas of the private markets, the attractiveness of private debt as an asset class is broadly recognized. Its’ defined duration, low volatility, and limited drawdown risk relative to other alternatives is often desirable, particularly when considered with empirically stable returns.1 As such, a natural evolution of a maturing primary market is developing volume in secondaries transactions.

Private debt secondaries (PDS) have prospered in recent years, providing liquidity to investors in a putatively illiquid asset class. Investment managers have responded—raising dedicated secondary funds and partnering with strategic players. In recent years, we have experienced the secondary market bloom from a nascent opaque market, focused initially on bilateral transactions and purchases of LP interests by private equity secondaries funds at steep discounts. Following Covid, the market transformed, and the associated dislocation has brought opportunities.

In 2022, substantial challenges in the liquid markets exacerbated the so-called denominator effect, leading institutional investors to be overweight several illiquid asset classes. Counterintuitively, the relatively strong performance of private debt meant that accepting a haircut on those valuations would require a comparatively modest markdown (particularly against devalued fixed income and equity holdings), and thus transactional volume arrived, reaching $17 billion in 2022 (more than 30x larger than 2012 levels), per Coller Capital.2 Savvy family offices and other institutions became buyers of performing direct lending LP interests at prices reflective of private equity returns.

Relative “Haircuts” When Markets Head South

Secondaries volumes in 2022 were down across all asset classes, except for private debt, where volumes increased by 30.3%.3 Investors utilized the secondary market for reasons varying from strategic redirection to rebalancing due to portfolio limitations and portfolio optimization. Investors sold private debt exposure because valuations remained stable relative to the public market (both debt and equity) and other private market asset classes.

Relative price 'haircuts' on private debt versus other asset classes during market downturns.

Figure 1 illustrates this point: The 2022 price decline in buyouts was more pronounced than in private debt. Notably, there is large price variance from the average prices listed below and the type of private debt strategy is influential to pricing; in 2022, senior lending funds priced in the low 90s, mezzanine strategies in the 80s and distressed/special sits in the high 70s. Compared with private equity discounts, which range from 15–25% during dislocations, private debt can offer an attractive alternative.

Discounts Matter, But Not as Much as One Would Think….

Price bands are important but insufficient to determine returns on their own. Consider that direct loans have an average economic life of 3 years (4 years in the current environment)4. Against a less liquid private equity portfolio, the distribution profile should be more condensed and predictable.

  • Thus, price may vary greatly depending on the stage in the fund term and corresponding drawn and undrawn commitments, its current yield and any expected refinancings in the portfolio.
  • In addition, historical loss rates must be considered and flexed for manager particulars such as concentration and industry exposure.
  • Finally, transaction dynamics come into play, including approved buyer lists, speed of execution and any “stapled” primary investment requests attached to a current manager fund. There may be an amount of book building by the broker due to varying demand for specific funds and available ticket sizes.

This profusion of factors affects bid-ask spreads, but ultimately pricing is only one variable. In short, discounts matter but not as much as you might think!

PDS Market Formation

With a plethora of opportunities and an advantageous supply-demand imbalance, dedicated PDS investors stepped into the market in 2022, armed with lower cost of capital, the ability to apply portfolio leverage (at the investing entity), transaction leverage (through deferred payments), and alternative views on loss rates and cashflow modeling. For these investors, capital at work is as important as IRR and TVPI. Therefore, their desired outcome differs from your stereotypical private equity secondary buyers. So do their target returns: Over 50% of buyers seek a net IRR/TVPI below 12.5%/1.5x.5 This market intervention is a positive secular change for existing private debt investors in need of liquidity.

Formation of the private debt secondaries market and the target return ranges sought by buyers.

The term private debt covers an array of vastly different sub-strategies, some of which are covered in Figure 2. The market is in fact more disparate, with many more sub-strategies. Having broad coverage and asset class expertise is required to cover the universe.

Vetting broadly diversified direct lending portfolios requires in-depth market data and views on repayment speeds and expected loss rates. Conversely, concentrated distressed portfolios require familiarity with each company and line-item equity-style underwriting. The ability to accurately forecast returns across multiple strategies allows secondary buyers to provide broader and encompassing liquidity solutions. Market coverage is paramount.

Financial Innovation and Bespoke Liquidity Management Techniques

The PDS market may be in its infancy but innovative financing solutions from the private equity market are already being implemented.

  • NAV-Financing is a broad term for financing underpinned by a diversified portfolio, which can contain private equity companies, real estate assets or even private debt funds. The portfolio’s NAV is used as collateral for the loan, generating liquidity for the GP or LP while retaining the future upside from the original portfolio exposure. Realizations in the underlying portfolio are used to fund the repayments of the NAV facility. This product is established in the private equity and real estate markets, but only recently adopted in the private debt secondary market as an alternative to secondary sales.
  • Collateralized Fund Obligations (CFOs) have similar goals to secondaries, i.e., to enhance liquidity for GPs and LPs. CFOs are securities that create leveraged exposure to a portfolio of fund investments through the issuance of an equity tranche and one or more debt tranches. Think: CLOs with funds replacing the underlying loans.

For sellers, structured solutions may be preferable to a secondary sale in order to generate liquidity. Investors can maintain exposure to private debt while generating interim liquidity to rebalance their portfolios. Secondary investors are attracted to this investment style, as it meets the desired returns with a relatively attractive risk profile. With private equity secondaries, buyers and sellers often have differing views on the future valuations and potential upside of the assets. Since upside is relatively limited for private debt, differences of opinion tend to be narrower and more focused on repayment speeds and loss rates. When both parties’ views on future valuations are aligned, the variance in pricing is much lower and a structured solution which accommodates both parties’ requirements is often optimal.

PDS—The Flywheel Effect

The 'flywheel effect' in private debt secondaries, where aligned buyer and seller valuations enable structured liquidity solutions.

In 2022, private debt represented only 4% of the total secondary market.6 As the asset class matures, we expect this share to expand. We suggest the continued growth and effectiveness of the private debt secondaries market will open private debt to a new investor cohort that previously had concerns about liquidity, term, or liability mismatches.

Conclusion

The private debt market is forecast to continue its growth due to its attractive yields throughout credit cycles, low volatility, limited drawdowns, and relatively high risk-adjusted returns. By that same token, volume in its secondary market is expected to increase. Family offices and institutional investors are supporting this growth in both the primary and secondary markets. We have observed LPs making tactical sales of relatively stable private debt portfolios, without exiting the private debt market entirely. We also observe several other important value drivers, in addition to discount emerging. Furthermore, activity has moved beyond traditional secondaries and into the more bespoke world of liquidity management through financial innovation.

By providing innovative liquidity solutions, Family offices and institutional investors are improving asset class accessibility to a new investor base. Now investors can confidently enter the private debt market and avail themselves of its illiquidity premium with the comfort that there will be liquidity if they seek to rebalance. Furthermore, due to the illiquidity of private debt and its corresponding valuations, investors can often transact at relatively attractive prices. As the PDS market matures, structured solutions will develop. Traditional secondary sales, while prevalent in the current market, may only cater to a certain investor group; investors in need of interim liquidity may prefer alternative financing solutions.

 

About the Authors

Marc J. Sharpe is the founder and Chairman of TFOA, an organization formed in 2007 to provide a forum for education and networking and to serve as a resource for single family office principals and professionals to share ideas and best practices, pool buying power, leverage talent and conduct due diligence. Mr. Sharpe also teaches an MBA class on “The Entrepreneurial Family Office” as an Adjunct Professor at Rice University and SMU Cox School of Business. Contact: marc@tfoa.me

About TFOA

The Family Office Association (“TFOA”) is a global peer network that serves as the world’s leading single family office community. Our group is for education, networking, selective co-investment, and a resource for single family offices to share ideas, deal flow and best practices. Members are not actively marketing products or services to other members and no contact information or email lists will ever be shared. Since our founding in 2007, TFOA has led the global single family office community by delivering world-class educational content, unique networking opportunities, and exceptional thought leadership to our highly curated network of the world’s largest and wealthiest families.

About StepStone

StepStone Group Inc. is a global private markets investment firm focused on providing customized investment solutions and advisory, data and administrative services to its clients. StepStone partners with its clients, including sovereign wealth funds, insurance companies, prominent endowments, foundations, family offices and private wealth clients, to develop and build private markets portfolios designed to meet their specific objectives across the private equity, infrastructure, private debt and real estate asset classes.

Notes

  1. StepStone Group. 2023. “Relative Attractiveness of Direct Lending: Liquidity, Volatility and Drawdowns.”↩︎
  2. Claire Coe Smith. 2023. “Private Debt Secondaries: Macro disruption generates momentum,” Private Debt Investor, 2 May.↩︎
  3. Setter Capital. 2022. “Volume Report FY 2022.”↩︎
  4. Cliffwater. 2023. “2022 Q4 Report on U.S. Direct Lending”↩︎
  5. Campbell Luytens. 2022. “Secondary Market Overview.”↩︎
  6. Campbell Luytens. 2022. “Secondary Market Overview.”↩︎

StepStone Disclosures

This document is for information purposes only and has been compiled with publicly available information. StepStone makes no guarantees of the accuracy of the information provided. This information is for the use of StepStone’s clients and contacts only. This report is only provided for informational purposes. This report may include information that is based, in part or in full, on assumptions, models and/or other analysis (not all of which may be described herein). StepStone makes no representation or warranty as to the reasonableness of such assumptions, models or analysis or the conclusions drawn. Any opinions expressed herein are current opinions as of the date hereof and are subject to change at any time. StepStone is not intending to provide investment, tax or other advice to you or any other party, and no information in this document is to be relied upon for the purpose of making or communicating investments or other decisions. Neither the information nor any opinion expressed in this report constitutes a solicitation, an offer, or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service.

Past performance is not a guarantee of future results. Actual results may vary.

On September 20, 2021, StepStone Group Inc. acquired Greenspring Associates, Inc. (“Greenspring”). Upon the completion of this acquisition, the management agreement of each Greenspring vehicle was assigned to StepStone Group LP. Each of StepStone Group LP, StepStone Group Real Assets LP, StepStone Group Real Estate LP and StepStone Group Private Wealth LLC is an investment adviser registered with the Securities and Exchange Commission (“SEC”). StepStone Group Europe LLP is authorized and regulated by the Financial Conduct Authority, firm reference number 551580. StepStone Group Europe Alternative Investments Limited (“SGEAIL”) is an SEC Registered Investment Advisor and an Alternative Investment Fund Manager authorized by the Central Bank of Ireland and Swiss Capital Alternative Investments AG (“SCAI”) is an SEC Exempt Reporting Adviser and is licensed in Switzerland as an Asset Manager for Collective Investment Schemes by the Swiss Financial Markets Authority FINMA. Such registrations do not imply a certain level of skill or training and no inference to the contrary should be made.

In relation to Switzerland only, this document may qualify as “advertising” in terms of Art. 68 of the Swiss Financial Services Act (FinSA). To the extent that financial instruments mentioned herein are offered to investors by SCAI, the prospectus/offering document and key information document (if applicable) of such financial instrument(s) can be obtained free of charge from SCAI or from the GP or investment manager of the relevant collective investment scheme(s). Further information about SCAI is available in the SCAI Information Booklet which is available from SCAI free of charge. Manager references herein are for illustrative purposes only and do not constitute investment recommendations.

Source:  StepStone Group LP. The information contained herein is © 2023 by StepStone Group LP.

 

Disclosures

TFOA is a peer network of Single Family Offices. Our community is intended to provide members with educational information and a forum in which to exchange information of mutual interest. TFOA does not participate in the offer, sale or distribution of any securities nor does it provide investment advice. Further, TFOA does not provide tax, legal or financial advice. Materials distributed by TFOA are provided for informational purposes only and shall not be construed to be a recommendation to buy or sell securities or a recommendation to retain the services of any investment adviser or other professional adviser. The identification or listing of products, services, links, or other information does not constitute or imply any warranty, endorsement, guaranty, sponsorship, affiliation, or recommendation by TFOA. Any investment decisions you may make based on any information provided by TFOA is your sole responsibility. The TFOA logo and all related product and service names, designs, and slogans are the trademarks or service marks of The Texas Family Office Association. All other product and service marks on materials provided by TFOA are the trademarks of their respective owners. All of the intellectual property rights of TFOA or its contributors remain the property of TFOA or such contributor, as the case may be, such rights may be protected by United States and international laws and none of such rights are transferred to you as a result of such material appearing on the TFOA web site. The information presented by TFOA has been obtained by TFOA from sources it believes are reliable. However, TFOA does not guarantee the accuracy or completeness of any such information. All such information has been prepared and provided solely for general informational purposes and is not intended as user specific advice.

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Frequently Asked Questions

What are private debt secondaries?

Private debt secondaries involve the purchase of existing positions in private credit funds or loan portfolios from sellers who wish to exit before the natural maturity or wind-down of the fund. Buyers typically acquire these positions at a discount to par or net asset value, creating an entry-point advantage over primary investors.

Why do family offices invest in private debt secondaries?

Family offices are attracted to private debt secondaries for their combination of yield, downside protection, and shorter duration than typical private equity secondaries. The discount to NAV provides a margin of safety, the assets are typically income-generating from day one, and portfolio diversification is built in since most positions represent stakes in large, diversified credit funds.

What return profile can investors expect from private debt secondaries?

Private debt secondaries typically target net returns in the 10% to 15% range, with a significant component coming from current income (interest payments from underlying loans) supplemented by the discount captured at purchase. The return profile is more predictable and less binary than private equity, with lower variance across economic cycles.

How liquid are private debt secondary investments?

Private debt secondaries are more liquid than private equity secondaries but still significantly less liquid than public markets. A typical position may have a holding period of two to five years, with partial liquidity as the underlying loans mature or are repaid. The secondary market for private credit is growing but remains less developed than the equity secondary market.

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