Practical Capital 2025

Global change continues apace thanks to artificial intelligence (AI) and its repercussions. Some are fearful of the new technology’s potential, and others are excited about the opportunities it offers. Many have drawn comparisons with the industrial revolution as the use of machinery potentially replaces human labour once again.

But like it or loath it, AI is coming to a workplace near you. Those fearful of its risks could miss out on its benefits. The key is to integrate the technology into your business, but do so safely, with the right controls in place which are regularly reviewed. These are the challenges we consider in our first article: managing the risks of AI.

Our second piece reflects on the possibilities and challenges of establishing a family’s investment function. Outsourcing varies according to a family’s desired level of involvement with their investment activities, and their existing expertise. Customising investment practice to suit the family is crucial for achieving long-term success. ‘How to build your own family investment function’ explores these variables and options in detail.

We’ve noticed private equity start to pick up again after a tough period for the sector. In our third piece, we’ve thought about the opportunities brought by the slowdown, and how today’s investors may now be able to access the quality funds they’ve historically been shut out of. In tough times, quality will out.

We hope you find this issue of Practical Capital interesting, engaging and above all, useful.

Artificial intelligence (AI) is changing the world, but there are serious risks associated with this powerful technology. A lack of understanding of how to manage these risks can lead to a reluctance among businesses to incorporate AI into their operations. These reticent businesses are missing out on the potentially enormous opportunities afforded by the new technology.

With careful thought and planning, the risks related to AI can be incorporated into existing risk management controls. This allows businesses the opportunity to use the technology safely.

Imagine AI as a super employee. This member of staff is extremely fast and knowledgeable, producing detailed reports in seconds. They don’t need sleep and are happy to work 24 hours a day, seven days a week. They also come at a reasonable price for their potential level of output.

However, this employee sometimes makes things up. Their responses can be opaque as they struggle to explain how they arrived at their solutions. Their audit trail is questionable and hard to find. They are careless with the data shared with them, potentially leaving it scattered all over the internet. Plus, their output can be very biased.

Would you employ that candidate? Well – you might, but you’d want some controls around their output and functioning. AI-related risks are substantial and complex, so the controls around them are crucial to the technology’s success. Strong AI controls and risk management systems enable businesses to use AI while staying safe.

If a firm’s existing risk management framework is strong and thorough, it should be able to incorporate any new technology or system, including AI. Managing the risks associated with AI should not require a whole new risk framework.

A business’s priority should be to identify any AI-related risks. You can’t manage what you don’t understand. Some of the risks are typical of any new product or service, but there are additional risks specific to AI including bias, discrimination, data privacy, lack of accountability, inaccurate outputs, unethical use and loss of control. For example, AI tools can exhibit bias due to the historical data that’s been used to train the tool in the first place, or the underlying algorithms are programmed with choices made by development teams that may lack diversity. There are also risks to adopting AI incorrectly, and risks to not adopting it at all.

Once you’ve identified all the AI risks, you can start implementing the relevant controls. AI controls share the same preventative, detective and corrective characteristics as other controls, but there are nuances which are specific to AI. For example, AI controls should have a greater focus on prevention and very early detection as AI risk can move through a business very quickly. Picking the risk up at inception is crucial to stopping the rapid spread.

Furthermore, as AI is automated, there should be a greater proportion of automated controls in place. AI operates considerably faster than humans, so human surveillance can’t keep up with AI risks as they develop. Controls need to be automated instead, using AI to control AI, but always with human oversight too.

As these automated controls are typically built into a code or programme, they are not obviously easy to identify, making them hard to measure and monitor. Ask, are these automated controls known and identified? And do they have an owner? A control which is not owned is not a control.

Design effectiveness and testing are the next considerations. The greatest focus for design effectiveness is to ensure the control is designed to be able to do what it’s supposed to do. This should be considered when the control model is being developed, as part of the process of design and implementation. Effectiveness should then be measured at the user-testing stage. After that, any type of update should be incorporated as per change management guidelines.

A business needs a dedicated member of staff to define their AI strategy, and that person owns the risks too. The lead might be the CTO, the CIO, the Chief Product Officer or the Data Officer. This will depend on the nature of the business. Although cross collaboration is key; everyone is a risk manager. It’s up to the lead to make sure all staff understand the risks of AI.

Controls should then be reviewed regularly and challenged, including audit and detection to assess whether the AI controls are meeting their objectives. This structured control management system needs to be ongoing, not just once a quarter or once a month. Businesses need real-time risk management with a focus on prevention and early detection.

AI is here to stay, and businesses that fail to embrace it are taking a major strategic risk. But AI without robust risk and controls management also brings risk.

Firms need to put in place an internal control system so they can take advantage of the opportunities offered by AI, without getting themselves into trouble. Risk and control ownership are crucial to the technology’s success. It’s crucial to remember that controls are not limiters, they’re actually enablers.

CapGen is taking several steps to safely integrate AI into the firm’s internal processes and procedures. We want to encourage our colleagues to be creative with AI and use it to improve efficiencies, but crucially, this must be done safely and in a way which keeps the firm protected, always mitigating risk.

There is no such thing as a standard family office. They are all tailored to meet the specific needs and aspirations of the family they serve, making them as idiosyncratic as that particular family.

However, there are several decisions which every family office will have to make, one of which is how to manage the family’s investments. Any family office will need to decide which parts of the investment universe they want to concentrate on and then outsource the rest. This is a decision as unique as the family and will vary according to their desired level of involvement in any investment structuring and decision-making.

An investment function should be responsible for managing all the non-operating business investments of the family. The family must decide on the scope of the investment function, the objectives for the assets and the level of interest and expertise that family members and current staff demonstrate. They will have to decide how involved they do or do not want to be with their day-to-day investment activities.

Best practice will vary according to the needs of the family, and customising these practices to suit the family is crucial for achieving long-term success.

When it comes to establishing an investment function, the most defining consideration is the relative level of involvement versus outsourcing (which move inversely to one another).

At the most involved/least outsourced point is a family who want to be involved in all investment activities so may choose to create a fully in-house investment office.

Some families would like oversight of their investment function but want no direct involvement in investment activities. These families may choose to be led by an appointed investment committee.

At the least involved/most outsourced point is a family which would like no direct involvement in investment activities, so fully outsource them to third-party investment managers.

There are important considerations for every scenario, which we will explore in this article.

• Decide which parts of the investment universe you want to concentrate on and outsource the rest. Tailor your services and ensure alignment for every component.
• Engage with your family and ensure everyone understands exactly what the investment function is designed to be, who the stakeholders are, and the costs associated with it. Educate your family members and employees while fostering collaboration.
• Preserve wealth and ensure a smooth succession plan is in place for intergenerational wealth and responsibilities.
• Manage risks and stay compliant with all relevant laws, regulations and ethical standards.

• Don't be reactive. Carefully and slowly identify potential risks and opportunities. There is a balance to strike between proactively following market trends and applying sound judgement to any decision.
• Don't neglect professional advice from legal, tax and investment professionals.
• Don't underestimate cyber risks and data privacy. Many companies have lost good reputations due to data leaks and lawsuits resulting from insufficient security practices.

Whatever a family office decides about managing their investment activities, what remains consistent is the requirement for a predefined strategy against which the investment function can be objectively evaluated. The more detailed, clear, and dynamic this strategy is, and the more self-aware and honest the family is about the purpose, the more likely it is to achieve favourable outcomes.

It is therefore important for the family to be clear and consistent on strategy, and this is often best achieved with clear direction from the Board. Families should have a clear identity and the confidence to stick with their objectives. This sense of assurance will translate into a clear message to any outsourced provider on what that family is looking to achieve.

After a difficult few years, there have been signs that the tide might be starting to turn for private equity. We’ve seen transaction activity pick up slightly and a surge in enthusiasm, not just from equity market investors. We’ve also noticed dry powder (capital which has been committed by investors but has not yet called down and spent on assets and businesses) beginning to fall for the first time in a while. There was a consensus view of decent growth in the US, with expectations for a pickup in the M&A and IPO cycle, unlocking markets. Investors were feeling more positive, so it seemed likely that activity would continue to pick up.

But since ‘Liberation Day’ uncertainty has dominated markets - and not just the public ones, as the recent share price performance of some of the largest, listed private equity managers shows. The possible threat of adverse impacts of tariff policies, as well as sticky inflation and higher for longer rates is a worry for the sector’s nascent recovery.

The low distributions suffered for the past couple of years have created another problem. It’s led to a concentration effect where investors have stuck to holdings they know and like. In effect, they’re staying with familiar quality names and not increasing their investments to all the funds they’ve done in the past. Excellent managers still raise capital very quickly, but picky investors mean mid-range funds have found fundraising hard.

In this uncertain environment, it’s crucial to be selective and to pick your managers carefully, focussing on quality rather than spreading your bets. There is also opportunity for a certain subset of investors to build a portfolio of funds they perhaps could not have accessed before.

The uncertainty of the past three years has seen the flow of capital through the system slowing, which means there are high-quality funds who are still struggling to raise new capital. This is where opportunity lies. Some top-quartile funds have historically been almost impossible to gain access to unless you have a longstanding relationship with them. But in today’s more challenging environment, even the top managers are starting to raise new capital and welcome new investors. For those who can identify exactly which funds they want to be in, and who can wait for these funds rather than needing to deploy large sums regardless of the opportunity, private equity looks rather attractive.

A pension fund, for instance, has large amounts of capital to deploy and needs to get it invested. This is a challenging environment for them because the opportunities are few and far between and not many managers have the capacity a pension fund requires. A private investor with time and experience on their side can wait and make highly selective decisions.

This is what we are advising our clients to do. As the sector is starting to pick up again, those seeking robust long-term returns should be moving towards concentrated quality, rather than spreading their chances across lesser quality managers. They need to identify the best names, including the smaller and more niche firms whose calibre shone through in the higher interest rate environment. There are opportunities for those with capital to deploy, if they have the knowledge and patience to wait for the best.

After two consecutive years of 25%+ returns for the S&P, some might be wondering why they would pay PE’s high fees and take all that risk? Those investing in the poorer quality funds would be right to question their approach, but the returns in the top quartile are pretty resilient, and still remarkable.

PE may have been in a bit of a tight spot, but the environment is changing, activity is picking up and there are opportunities for some. Diligent, quality-seeking investors can finally access the talented funds they’ve been long admiring. Having spent years knocking, today’s investors can finally get through a top-quartile door. In tough times, quality will out.

Capital Generation Partners LLP is authorised and regulated by the Financial Conduct Authority and is registered as an Investment Adviser by the US Securities and Exchange Commission.

This document does not constitute investment advice and does not constitute an offer to sell or a solicitation of an offer to purchase any security or any other investment or product. Nothing included in this document should be construed as an invitation or inducement to engage in investment activity.

All information and opinions expressed herein are current as of publication and are subject to change without notice. The information provided in this brochure does not constitute research or recommendations from Capital Generation Partners LLP. Capital Generation Partners LLP makes no representation or warranty as to the accuracy or completeness of the statements or any of the information contained in this brochure and any liability therefore, including in respect to direct or indirect loss is expressly disclaimed.

Advice is given and services are supplied by Capital Generation Partners LLP and its affiliates (“CapGen”) on the basis of our terms and conditions of business, which are available upon request. No liability is accepted, or responsibility assumed, in respect of persons who are not clients of CapGen, unless expressly agreed in writing.

Please note that the value of investments referred to in this brochure and their income may go down as well as up. If you choose to invest in any product referred to in this brochure, your capital will be at risk and you may lose some or all of your investment.

This document is not intended to be a financial promotion and is intended for professional clients only. This publication has been provided to you solely for your information and may not be copied, reproduced, further distributed to any other person or published, in whole or in part for any purpose. Any other person receiving this document should not rely upon its content.

This document is not intended to provide, and should not be relied on, for accounting, tax, legal or regulatory advice.