Setting return targets for a billionaire family portfolio

Built on Chapter 9 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.

A return target should reflect the job the portfolio is expected to perform and the risks the family agrees to accept. A desired result written in a policy does not make that result achievable. The office needs to explain the assumptions and the consequences if results disappoint.

Chapter 9 starts with differences in family priorities and risk appetite. I would use those differences to set the investment assignment before comparing proposed targets. A billionaire family should be able to connect the target to its own obligations.

Look at the loss position before the headline return

In my event discussions on deal terms, I caution that a manager's stated investment can be offset by fees collected from the transaction. Saying that the manager invested does not establish how much loss the manager actually bears.

I would make the return-target discussion include that calculation. Ask staff to show the sponsor's cash contribution alongside fees and the contractual loss order. A promised return means something different when the sponsor has already recovered its contribution. Counsel should check the documents behind the calculation.

Establish what the portfolio must support

List expected distributions and other uses of capital. Identify which obligations are binding and which spending choices could change. The investment team needs a clear account of the cash the owners expect the portfolio to provide.

Distinguish income received from changes in value. The family may need spendable cash while a substantial share of the return remains unrealized. A total-return objective should not conceal a mismatch between expected cash receipts and required payments.

Include the costs relevant to the evaluation. Explain whether the target is considered before or after manager fees and office expenses. Have qualified professionals assess the tax considerations separately for the relevant owners.

Define the target consistently

State the measurement period and the basis of calculation. A long-term expectation differs from a promise about the next reporting period. The family should understand the distinction before a difficult market tests the wording.

Clarify how cash flows affect performance measurement. Large contributions or withdrawals can change the meaning of a reported result. The responsible investment professionals should select a method suited to the mandate and explain it plainly.

Record whether the target relates to a particular portfolio or the broader family balance sheet. A retained business may sit outside the investment team's authority. Evaluation should match the assets and responsibilities actually assigned.

Examine what achieving it would require

Ask the team to describe the investment risks implied by the proposed target. Higher expected returns may involve more uncertainty or reduced access to capital. The family needs to decide whether those implications fit its obligations.

Use assumptions that can be examined. Identify the evidence supporting return expectations and the limitations of that evidence. A forecast should remain distinguishable from an observed result.

Test the proposal against the existing concentration. A family whose wealth already depends on one business may have less capacity to add similar exposure. The desired return should not be used to justify ignoring the starting balance sheet.

Show the consequences of a shortfall

Ask what would change if the portfolio earned less than expected while payments continued. The answer may involve reducing discretionary spending, revisiting the investment mandate, or using accessible reserves. Establish the decision route before it is needed.

Avoid responding to a shortfall by automatically increasing risk. The office should first understand the cause and the family's continuing capacity to bear loss or illiquidity. A disappointing result can expose an unrealistic target as well as weak implementation.

Explain uncertainty through scenarios the family can follow. Show the obligations affected and the assumptions that determine whether funding remains adequate. Do not present a modeled range as a guarantee of possible outcomes.

Agree on how the team will be evaluated

Use a consistent benchmark and relevant measures for the assignment. A portfolio designed to maintain substantial liquidity should be evaluated with that constraint visible. The family should still ask whether the team implemented the chosen approach competently.

Keep changes to measurement separate from changes to expectations. If the method must change, document the reason and preserve comparability where possible. Replacing an unfavorable measure after the result arrives weakens oversight.

Have the committee review results alongside policy compliance and cash availability. The target is part of the mandate; it is not the only evidence of whether the office is serving the family.

Revisit the inputs deliberately

A business sale or revised distribution policy can change what the managed portfolio needs to do. Establish which events trigger review and who can approve revised instructions. Give staff one identifiable current mandate.

Ask the family to explain the accepted trade-off in ordinary language. If people agree on a target but disagree about the risk attached to it, resolve that disagreement before new commitments are made.

What to take from this

Connect the target to spending and portfolio responsibilities.
Explain the risks implied by the expectation.
Agree on measurement before evaluating results.

This page is general information, not legal advice. Family governance documents and dispute processes should be reviewed by a qualified attorney.

Questions and answers

Is a target a guaranteed result? No. It is an objective supported by assumptions that need examination.

Should every family use the same target? The assignment depends on obligations, risk capacity, and the assets being managed.