The Asset Outside the Mandate

A family that founded, and still controls, an industrial company meets its private bank every quarter. The review is thorough. It covers the €80 million the bank manages: allocation against the investment policy, performance against the benchmark, the fees. The company the family owns is worth somewhere between €200 million and €350 million to them, depending on who is asked. In the review it appears as a line copied from the last valuation, or not at all, because it is outside the mandate.

Nobody expects the bank to run the company. The problem is narrower. The portfolio is built as though the company did not exist, while for most founding families the company is the largest risk they carry. A portfolio built in isolation can end up repeating that risk instead of offsetting it, and every number in the quarterly review can be correct while it happens.

What follows looks at what an operating company does to the rest of a family's wealth, what a wealth manager can realistically know about it, and what changes in the way the portfolio is built, monitored and documented when the largest asset sits outside the mandate.

A family with half its portfolio in dollars

The family below is hypothetical and every figure is illustrative. It lives in the euro area. The two founders and their three children own 70% of an industrial company that sells about two thirds of its output abroad, invoiced in US dollars. Two private equity funds bought the remaining 30% five years ago.

The portfolio was built with care, inside a written investment policy.

Half of it is in dollar assets. The reasoning in the policy is a common one. The family's business, home and property are all in one economic region and one currency, so its liquid wealth should reach outside them, into the largest and deepest market, and the currency exposure that comes with it counts as diversification.

For a family whose wealth came from salaries, a domestic business or local real estate, that reasoning holds. For this family it rests on an assumption nobody has checked: that a European company is a euro asset.

Looking through the company

Look-through usually means opening a fund and adding its holdings to the client's exposure by asset class, sector, region and currency, as described in our piece on look-through reporting. An operating company cannot be opened that way, and the wealth manager does not need to understand how it is run. Three things about it matter to the family's balance sheet.

All of it is in the annual accounts, the board materials, or a short conversation once a year with the company's finance director, who can also say which costs are paid in euros but priced in dollars. It is refreshed annually and when something material changes, such as an acquisition or a shift in export markets. It needs no model of the business, no daily price and no access to the company's systems.

The direction of the exposure follows from simple arithmetic. The company takes in far more dollars than it spends, so its profit, and with it the dividend, rises when the euro weakens and falls when it strengthens. The dividends arrive in euros, but in effect they are a dollar income. The value of the stake is likely to move the same way, though less predictably. Read through, the family's main source of income is clearly long the dollar, and its largest asset very probably is too.

That changes how the investment policy reads. The dollar sleeve was meant to add a currency the family did not have. The company already gives the family several times more dollar exposure than the sleeve does. What the family has very little protection against is a stronger euro.

This kind of look-through should be clear about what it knows, and there are three levels to it. The currency mix of revenue and costs is observed: it comes from the accounts. The sensitivity of profit and dividends to the exchange rate is estimated from those figures with simple arithmetic, and is reasonably reliable over a year or two. The sensitivity of the stake's value is inferred, because it depends on multiples, debt, growth prospects and how a buyer would treat a currency move; a stronger euro does not reduce the value in the same proportion in every case. Each level should be shown with the confidence it deserves.

One currency move, two balance sheets

Suppose the euro strengthens so that every dollar amount is worth 10% less in euros, with volumes, dollar prices and euro costs unchanged. Strictly, that is a rise of about 11% in the euro's dollar price; the round figure keeps the arithmetic simple. The company's dollar revenue of €390m now converts into €351m, and its dollar costs of €150m into €135m. Operating profit falls from €108m to €84m, more than a fifth, because the margin is thin relative to the dollars passing through the business. The dividend and the value of the stake follow.

Assumptions: depreciation €24m; interest of 6% on €100m of dollar debt and 4% on €40m of euro debt; corporate tax 25%. The €203m treats the whole fall in EBITDA as permanent; the €245m in the table above assumes half of it is. All figures are hypothetical.

The family's dividend income falls by almost a third. The effect on value is larger and less certain. A buyer is unlikely to treat the whole loss of profit as permanent, because currencies partly revert and companies adjust their prices and suppliers over time, so the €77m fall in the stake is a ceiling and a figure nearer €35m is at least as plausible. In the portfolio, the dollar sleeve loses €4m, 5% of the portfolio, and nothing else is directly affected.

In total the family's wealth falls by between €39m and €81m, a tenth to a fifth of it, on a moderate currency move. That is a loss of capital. The fall in dividends is a separate hit to income, to be read alongside it rather than added to it. The quarterly review would show the portfolio 5% lower on its currency exposure and treat that as the ordinary cost of diversification. That is true as far as it goes. The review is measuring the part of the family's wealth that moved least.

If the euro weakens instead, the stake and the dollar sleeve both gain, and the family does well twice. Its wealth is heavily positioned for the outcome in which the business prospers and has very little positioned for the one in which it struggles. Nothing in the investment policy, read on its own, would suggest that.

Building the portfolio around the company

Currency is the clearest case. The same reasoning applies, more loosely, to the company's sector and its export markets: a portfolio that adds holdings tied to them adds to an exposure the family already has. The principle is familiar from the way planners treat human capital. Someone whose salary depends on an industry should be careful about concentrating their savings in it. A founding family's company is the same argument with larger numbers and less liquidity.

That does not mean selling the dollar sleeve. US markets offer companies and sectors that Europe does not, and that access may well be worth keeping. Part of the sleeve can be held with the currency hedged back to euros, which keeps the markets and drops the duplicated currency. Hedging has a cost that depends on the interest-rate differential, so it is a decision for the investment committee with the numbers in front of it. And because the company's figures are annual estimates, they belong in the ranges of the investment policy and in the combined exposure report, marked as estimated, not in an optimiser as if they were market data.

Founders often resist this conclusion, and not without reason. They know their industry better than any adviser, they may expect years of growth ahead, and reducing exposure to it can feel like betting against their own work. Some are reluctant to share the company's figures with a bank at all. An adviser who presents the combined exposure as a correction will usually lose that argument. One who presents it as information, and leaves the family to decide how much of the overlap to keep, is more likely to be heard, and has a record that the question was put.

In many founding families the company's finance director also manages the family's investments. It might seem that this settles the matter, since one person knows how much of the company's income is in dollars and decides the family's dollar sleeve. In practice the two are usually decided in separate books and separate meetings, and nothing forces one into the other. Everything that connects them sits with that one person, and the reasoning behind past decisions leaves when they do.

A value with a range attached

In most consolidated reports the company is one number, and someone chose it. It may be the price of the last minority transaction, a valuation prepared for the shareholders' agreement or a tax filing, the book value of equity, or a figure the founder once mentioned. Each was produced for a different purpose and leans in a different direction: a valuation for tax purposes has reasons to come out low, and a transaction price reflects one buyer at one moment.

For the family's company the range is wide even with good information. At four to six times EBITDA of €108m, less €140m of net debt, the family's stake is worth between €204m and €356m. The distance between the two ends is almost twice the whole investment portfolio, and it moves the company's share of family wealth between 63% and 75%. Any limit or concentration test expressed as a share of total wealth inherits that uncertainty. Reports should show the range, the method and the date, rather than a single figure that implies a precision nobody has.

A value updated once a year also shows almost no volatility. Placed in a risk report at its appraised value, the company looks like the calmest asset the family owns, when the calm reflects how it is measured rather than how it behaves. Its risk is better described by scenarios like the one above, and by what is known about single companies in general.

That evidence is not comforting. Studying 64,000 global stocks from 1991 to 2020, Bessembinder found that most of them, 55.2% in the US and 57.4% elsewhere, returned less than one-month US Treasury bills (source). In J.P. Morgan's 2024 study of stocks that fell 70% from their peak without recovering, many looked sound at the top: 54% were profitable and 63% had net debt of no more than two times EBITDA (source). Those are listed companies, with prices and analysts. A private company has neither, so whatever early warning they give is missing too.

Dividends: the flow between company and family

For most founding families the company is also the main source of income. In the example the family receives about €20m a year in dividends and spends about €6m; the surplus is what feeds the investment portfolio. Because the company earns mostly in dollars, that income is in effect a dollar income, even though it is paid in euros, and it is the family's largest recurring exposure to the dollar. Three features of the flow matter to whoever manages the portfolio.

The family decides it. Payout is set by the board and the shareholders, largely the same people the bank advises, subject to any consent rights the private equity funds hold. For a founding family it is the main tool for diversifying: every euro distributed and invested elsewhere reduces the concentration without a sale, a buyer or a valuation dispute. The family can also hold the payout steady through a bad year, at the expense of the company's cash or borrowing, so the dividend is a decision as much as a result. Its tax treatment varies by country, changes more often than families expect, and depends on whether dividends are paid to individuals or to a family holding company.

It can reverse. A hard year can stop dividends and then bring a request in the other direction: the company needs capital to stay within its covenants or to get through a downturn, and the family is the shareholder of last resort. The founders may also have personally guaranteed the company's credit lines or pledged their shares, obligations that, as The Other Side of the Balance Sheet described, tend to become live when the guarantor is under most pressure.

For the portfolio, the consequence is concrete. Its liquidity has to be sized against the company's possible needs as well as the family's spending. In this family a bad year for the company is a strong-euro year, which is also when the dollar sleeve is down, so the most liquid assets would be sold at their weakest point to support the asset they were supposed to be independent of. A liquidity view that leaves the company out would rate this family as comfortable when it is not.

When the company is sold

When a founding family decides to sell, or is pushed into it, the timing is not always its own: the private equity funds' own exit horizon, and the rights they hold under the shareholders' agreement, may decide it. A sale rarely pays only in cash. The proceeds usually combine cash at closing, an amount held in escrow and released over several years, an earn-out that depends on results after closing, and sometimes equity rolled into the buyer. Each piece has its own timing and risk, and an earn-out depends on a company the family no longer controls. Recorded as one figure, the proceeds look far more liquid than they are.

Much of the useful planning has to happen before an offer fixes the price: how the family holds the stake, what passes to the next generation, where the family is resident for tax. That is only possible if the adviser has been following the company all along. After the sale the family's position inverts, from a fifth liquid to most of it, and the questions become how fast to invest, how much to hold back against escrow and earn-out outcomes, and how to replace the dividends as income. An adviser who has carried the company in the family's combined view for years is in a position to raise these questions early. One who learns of the sale from the wire transfer is not.

The adviser's own position

Suitability rules generally ask advisers to understand the client's financial situation before recommending anything. In the EU, MiFID II requires firms giving investment advice or managing portfolios to obtain information about the client's financial situation, and other regimes have comparable requirements, though their scope varies by jurisdiction and by service. For a founder, that situation is mostly the company. Meeting the standard does not require managing the company. It does mean recording it, recording its main exposures at the level described above, and recording how the portfolio was built in relation to them.

Advice about the company needs the same care. A recommendation to hedge part of the dollar sleeve, or to raise the payout, concerns an asset outside the mandate. Years later, after a large currency move or a bad year for the business, someone may ask what was known at the time. A note in the CRM is weak evidence. A recommendation linked to the figures it relied on, each with a source and a date, is strong, and it costs little to record at the time and a great deal to reconstruct afterwards.

The fee raises its own question. A firm that charges on assets under management earns more if the family sells the company and brings the proceeds in, and nothing for advising them to diversify slowly through dividends. Clients understand that incentive. An advisory fee on total wealth, or a fixed retainer, reduces that particular conflict, though it creates others of its own; what matters is that the basis is a deliberate choice written into the agreement. The same applies when the wealth manager belongs to a banking group that lends to the company or hopes to advise on its sale: information barriers limit what the private banking team can use, and the family is entitled to know about the group's interest in the timing of a sale.

How Pivolt brings the company into the picture

The company stays outside most reviews for a structural reason. Portfolio systems are built on custodian feeds, and a private company has no custodian, no feed and no daily price, so it enters as a typed value or not at all. The CRM knows it as a note, the planning tool as a lump sum, and the company's own figures live in board packs. Each holds a fragment. Pivolt was built to bring those fragments into one consolidated view.

The company sits next to everything else. Pivolt consolidates custodian data with private assets such as private equity, real estate and direct holdings, kept with their valuations, and maps the ownership structures through which a family holds them. The stake can therefore appear in the same view as the bank portfolio, the real estate and the cash, held through the family's entities and recorded with its valuation and the date and basis of that valuation, instead of being left out of the review.

The family's currency position, in one view. Pivolt analyses wealth across dimensions, currency among them, and looks through funds and structures to the underlying exposures. With the stake and the portfolio in the same consolidated view, the dollar sleeve is discussed against everything the family owns, not only against its own benchmark.

Scenarios test the portfolio against the move that hurts the company. Pivolt's scenario engine translates an event into market factors, currency among them, applies them position by position with visible assumptions, and carries the results into reviews, planning, suitability and rebalancing. Running a stronger-euro scenario on the portfolio shows what the dollar sleeve does in exactly the year the company's dividend falls, which is the comparison the quarterly review never made.

The decision becomes part of the mandate. Pivolt's rule engine checks hard and soft rules before and after trades. Once the family has decided how much dollar exposure it wants in the portfolio, given what the company already supplies, that decision can be written into the mandate as a limit and checked automatically, rather than living in meeting notes.

The review tells the whole story. Reports with AI-written narratives, and questions answered in plain language from reconciled data, let the adviser put the company and the portfolio in front of the family together, and keep the reasoning behind each recommendation where the next review can find it.

The approach deliberately stops short of some things: marking the company daily, connecting to its accounting systems, or treating annual estimates as if they were market prices. The aim is a view of the family's wealth that includes its largest asset at the precision the information supports, and no further.

Back to the quarterly review

Nothing in the review described at the start was wrong. The allocation matched the policy, performance was measured correctly, and the dollar sleeve did what it was designed to do. The design assumed the portfolio was the family's wealth when it was a fifth of it.

The change is small. One page at the front of the review, showing how much of the family's income and of the company's value moves with the dollar, the dividends expected, and the valuation range with its date, followed by a sentence on how the portfolio is positioned against them. For the family in the example, that page would have raised the question about the dollar sleeve years ago. Whether to change it is the family's decision. The page makes sure the question is asked.

Sources

• Hendrik Bessembinder et al., Do stocks outperform Treasury bills?, W. P. Carey School of Business, Arizona State University (global study of stocks, 1991–2020).
• J.P. Morgan, The Agony & the Ecstasy, Part IV, October 2024.
• All figures for the example family and company are hypothetical and were calculated for this article.