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The office measures permanent capital loss rather than short-term price movement. Permanent loss is capital that does not come back.
The sources are overpaying for a business whose earnings then decline, leverage inside a structure, and being forced to sell into a falling market.
A single position is capped at 3% of the book. At that size, the loss of one position does not change the family's circumstances.
There are no borrowings against the book, so no lender holds a claim that can mature before a position does.
Every new position is tested against three scenarios at once: a deep equity bear market, a recession that halves the earnings of the businesses owned, and a freeze in credit markets. The position must survive all three without requiring a sale.
A holding that works in only two of the three is sized down or not taken.
A price fall with cash flows intact is a valuation matter.
A price fall with deteriorating economics is impairment, and the position is sold.
The reserve covers a minimum of twelve months of operating costs, committed capital calls and known obligations. It is reviewed quarterly.
The book participates less fully than it could in calm markets. This is recorded in the quarterly family document.
Questions received on this note.
In calm markets the book participates less fully than it could. In damaged markets it stays intact and invested. The office does not forecast which will apply.
For an owner with no redemption date and twelve months of liquidity, it is not. It becomes risk when it is converted into a realised loss: by a margin call, a redemption, or a sale made because the movement was uncomfortable.
By asking whether the cash flows underwritten are still being produced and whether the balance sheet can fund the business without new capital. A price fall with intact cash flows is temporary. A price fall with deteriorating economics is impairment, and the position is sold.
The office participates less than it could in speculative markets and holds cash instead of assets it has declined. Both are recorded in the quarterly family document.
These notes describe how one family office manages its own capital. They are general information only and are not personal financial advice.
Notes on capital preservation, stress testing and recovery from a loss.
