Why Billionaire Families Stay Inside Their Circle of Competence
Built on Chapter 11 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
Over many years of working with billionaire families, one pattern has stood out to me. Only a small minority of them have consistently invested well across more than a few industries.
The families that kept their money almost always stuck to one, two, or three industries. They were comfortable saying no to everything else.
The circle of competence
Investors often call this staying inside your circle of competence. The idea is to invest only where you really understand how a business makes money, and to sit out the rest, even when everyone else is chasing a hot sector.
His point was never that the circle has to be big. It was that you have to stay inside it.
What it looks like in a family office
I once heard a very large family office walk through its approach. It had bought many businesses over the years and built up a large portfolio of patents.
They were fully vertically integrated in consumer products. They could come up with an idea, build a prototype, take it to market, get mass distribution, and then keep the product or sell it to a large conglomerate.
From the outside, some of their bets looked wild. They put money into companies with no revenue yet. But inside their niche, those bets did not feel risky to them. They had done it many times and knew every step.
That is the real benefit of a narrow focus. Risk depends on who is taking it. A deal that is reckless for a generalist can be a sensible bet for a family that has built ten companies just like it.
Why billionaires say no so often
I see the same habit in mining families, real estate families, and families that built one skill they can use in a few related industries. Moving into a new field would mean throwing out the method that made them wealthy.
When a family does expand, it is rare, and it usually takes an unusual deal. Even then, the new industry tends to sit right next to the old one.
How families get into direct deals
Most families start direct investing close to home. They buy a few competitors in the industry where they made their money, whether that is textiles, technology, or manufacturing.
Later many of them spread money into private equity funds, hedge funds, and long-only managers. Some get tired of the fees, the lack of transparency, and average returns. That pushes them back toward deals they can see and control.
In a blind-pool private equity fund, a family commits money and never approves a single company. The fund also works on a fixed clock of several years, while a family can often think in decades.
How to test a new industry before committing
If a family does want to step outside its circle, I suggest doing it slowly. Start with a minority stake next to an operator who already knows the space. Spend a year or two learning how deals are priced and where the bodies are buried.
Ask a blunt question before every out-of-circle deal: if this goes wrong, will we understand why? If the answer is no, the family is guessing. Guessing with a nine-figure balance sheet is how second and third generations lose what the first one built.
One more test I like is the phone test. Can the family name five people in the new industry it could call today for an honest opinion? Inside the circle, that list is long. Outside it, the list is usually empty, and that tells you a lot.
What to take from this
- Write down the one to three industries where your family has a real edge.
- Treat every deal outside them as a no unless it is exceptional.
- Use your know-how to take bets that only look risky to outsiders, because you have done them many times before.
- If you add an industry, pick one that borders what you already know.
Questions and answers
What is a circle of competence? An investor's term for the areas you understand well enough to invest with confidence.
How many industries do billionaire families invest in? In my experience, the families that keep their wealth usually focus on one to three.
Why do families move away from funds into direct deals? Fees, limited transparency, short time horizons, and in some cases average returns.
Does staying narrow mean taking less risk? Not always. It means taking risks you understand.