A family office starts as an administrative convenience. One family, one pool of capital, a small team that keeps the records, watches the managers and prepares the reporting. Nobody describes it as a fund because it is not one. Then a cousin asks to come in, or a long-standing business partner does, or the second generation wants its own compartment, and at some point on that path the arrangement stops being private wealth and becomes collective investment management, which is licensed activity across the European Union.
The line is drawn by Directive 2011/61/EU on alternative investment fund managers, and it is drawn in language that has almost nothing to do with what an arrangement is called. What follows is that text read directly, because this is the article a professional reader will use to decide whether a licence is required, and a paraphrase from memory is not good enough for that purpose.
The definition that decides everything
Article 4(1)(a) of the directive defines an alternative investment fund as a collective investment undertaking, including its investment compartments, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and which does not require authorization as a UCITS.
Four elements in point (i) of that definition do the work. Capital is raised. There are a number of investors. There is a defined investment policy. The investment is for the benefit of those investors. Legal form is absent from the definition, and so is asset class, and so is the label on the documents. A company, a limited partnership, a trust arrangement or a purely contractual structure can each satisfy it, and article 2(2) says so expressly: it is of no significance whether the fund is open-ended or closed-ended, or whether it is constituted under the law of contract, under trust law, under statute or has any other legal form.
An alternative investment fund manager is then defined in article 4(1)(b) as a legal person whose regular business is managing one or more such funds. Article 4(1)(w) says what managing means: performing at least one of the two investment management functions in point 1 of Annex I, portfolio management or risk management. Performing either of them for a vehicle that meets the definition, as a regular business, is enough to bring a legal person inside the regime.
What the family office carve-out actually says
Recital 7 of the directive as adopted is the provision every family office cites, and it is narrower than its reputation. It states that investment undertakings such as family office vehicles which invest the private wealth of investors without raising external capital should not be considered alternative investment funds.
The operative condition is the absence of external capital, not the presence of a family. A vehicle that invests the private wealth of one family and takes in nothing from outside it falls outside the definition, on the reading recital 7 gives it, because no capital has been raised. The moment capital comes in from someone outside that circle, the analysis restarts on the ordinary wording of article 4(1)(a), and the family character of the rest of the money is not a defence. ESMA’s guidelines on key concepts of the directive put it in their own terms: capital invested by a member of a pre-existing group, in an undertaking established exclusively to invest that group’s private wealth, is not likely to amount to raising capital, but a member of such a group investing alongside investors who are not members does not stop the criterion from being met, and all the investors should then enjoy full rights under the directive.
Two situations catch people out. The first is the trusted outsider: a former executive, a family adviser, a co-investor from a previous transaction, admitted on friendly terms into a vehicle that was previously purely internal. The second is generational drift. The same guidelines define a pre-existing group as family members whose group pre-dates the undertaking, although family members may join it afterwards, and who are the sole ultimate beneficiaries of whatever legal structure they use, and they define family members as the spouse of an individual, the person living with that individual in a committed intimate relationship in a joint household on a stable and continuous basis, relatives in direct line, siblings, uncles, aunts, first cousins and dependants. Relatives in direct line are included without any limit of degree, so a founder’s descendants remain family members of the founder. The list closes on the collateral side at first cousins, and because it is measured from an individual without saying which, it does not settle whether distant collateral branches still form one group. Neither situation is a marginal question of degree once external capital is in.
The group exemption, and what it does not cover
Article 3(1) provides a separate exemption. The directive does not apply to managers in so far as they manage funds whose only investors are the manager itself, or the parent undertakings or subsidiaries of the manager, or other subsidiaries of those parents, provided that none of those investors is itself an alternative investment fund.
This is a group exemption, not a family one. It works where the capital is the group’s own, held through a corporate chain, and it stops working where an individual family member invests personally alongside the group, or where a feeder vehicle in the chain is itself a fund. It is often the cleaner analysis for a family that holds its wealth through a holding company, precisely because it turns on ownership that can be evidenced from a share register rather than on the softer question of what counts as a family.
Article 2(3) adds a list of entities the directive does not apply to at all, including holding companies, occupational pension institutions, national central banks and employee participation or savings schemes. The holding company exclusion is the one most often stretched, and it should not be. Article 4(1)(o) defines a holding company as a company with shareholdings in one or more other companies whose commercial purpose is to carry out a business strategy through its subsidiaries, associated companies or participations in order to contribute to their long-term value, and which either operates on its own account with its shares admitted to trading on a regulated market in the Union, or was not established for the main purpose of generating returns for its investors by divesting its subsidiaries or associated companies, as evidenced in its annual report or other official documents. A vehicle that holds a portfolio of financial positions according to an investment policy is not made a holding company by being incorporated as one.
Below the threshold is not outside the regime
Article 3(2) sets the thresholds that dominate most conversations. A manager whose portfolios of funds have assets under management, including any assets acquired through the use of leverage, not exceeding 100 million euros in total falls into a lighter regime. So does a manager whose portfolios do not exceed 500 million euros in total where those funds are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each fund. Portfolios managed indirectly, through a company with which the manager is linked by common management or control or by a substantive direct or indirect holding, are counted in.
What the lighter regime requires is set out in article 3(3), and it is not nothing. The manager registers with the competent authority of its home member state, identifies itself and the funds it manages, provides information on their investment strategies, provides regular information on the main instruments traded and on principal exposures and most important concentrations so that systemic risk can be monitored, and notifies the authority when it ceases to meet the conditions. Member states are expressly permitted to impose stricter rules on this population.
Article 3(4) states the price of the lighter route. Sub-threshold managers do not benefit from any of the rights granted under the directive unless they opt in, and where they opt in the directive becomes applicable in its entirety. The marketing passport is a right under the directive. A registered manager therefore has no passport under this directive and raises money country by country under national rules, where those rules allow it at all, unless it qualifies for a separate EU label with a passport of its own. The European venture capital fund designation is one: Regulation (EU) No 345/2013 makes registration under its article 14 valid throughout the Union for the marketing of qualifying venture capital funds under the EuVECA designation by a registered manager that meets the conditions of its article 2(1), including managing portfolios of qualifying venture capital funds, and its article 6 limits the investors to whom those funds may be marketed.
Growing through the line
The threshold is not a permanent status. Article 3(3) requires member states to ensure that where the conditions in article 3(2) are no longer met, the manager applies for authorization within 30 calendar days under the ordinary procedures.
Thirty days is not enough time to build an authorized manager. Capital requirements, an organizational structure, risk management and valuation functions, delegation arrangements, a depositary appointment, remuneration policy and the reporting apparatus all have to exist before the application is credible, and none of them can be assembled in a month. The consequence of treating the threshold as a distant problem is a period of unauthorized activity, discovered at the point of a regulatory contact rather than chosen.
Growth is also not the only way through. Valuation movements count, leverage counts, and a single successful year in a concentrated portfolio can carry a manager across the line without a euro of new capital being raised. The mechanics sit in Delegated Regulation (EU) No 231/2013: article 2 values each fund’s assets, including those acquired through leverage, at least annually, article 3 requires the total to be monitored on an ongoing basis, and article 4 requires a manager whose total exceeds the threshold to notify its authority without delay and, unless the excess is temporary, to seek authorization within 30 calendar days. An excess likely to continue for more than three months is not temporary.
Discretionary management is a different licence
There is a second perimeter that is regularly confused with the first. Managing a portfolio for a client under a mandate is an investment service under the markets in financial instruments directive, where article 4(1)(8) defines portfolio management as managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments, and Annex I Section A lists it as a licensed activity.
That is a separate authorization from fund management, and one covers the other’s activity only where the directives provide for it. Article 6(4) of the alternative investment fund managers directive allows member states to authorize an external fund manager additionally to provide discretionary portfolio management and a set of other services listed there, among them the non-core services of investment advice, safe-keeping and administration of fund units, and reception and transmission of orders. Article 6(5) is the mirror: a manager cannot be authorized under that directive to provide only those services.
For a family office the practical question is whether it manages assets belonging to persons other than the entity that employs it. Running the founder’s own money through an in-house team is one thing. Running a sibling’s separate account, on a mandate, for a fee, is portfolio management for a client, and the fact that the client shares a surname does not remove the activity from the list. The exemption in article 2(1)(b) of the markets directive reaches only persons providing investment services exclusively for their parent undertakings, their subsidiaries or other subsidiaries of their parent undertakings, which is again a group test and not a family one.
What changes in 2026
The regime has just been revised. Directive (EU) 2024/927 of 13 March 2024 amends both the alternative investment fund managers directive and the UCITS directive, on delegation arrangements, liquidity risk management, supervisory reporting, depositary and custody services and loan origination by funds. Member states were required to adopt and publish the implementing measures by 16 April 2026 and to apply them from that date, with two exceptions applying from 16 April 2027: the amendments to article 24 of the alternative investment fund managers directive on reporting to competent authorities, and the new article 20a of the UCITS directive.
For a manager already inside the perimeter, the delegation and reporting changes are among the substantive ones. For a family office sitting just outside it, the significance is different. The amending directive does not touch article 3, so the thresholds, the registration duties and the thirty-day rule described above are unchanged; what has changed is the regime a manager enters on the day it crosses the line, and the registration duties remain the channel through which authorities see this population at all.
Designing to stay outside
Where a family genuinely wants to remain outside the regime, the design decisions are few and they are all taken early. Keep external capital out of the vehicle, and be precise about who is external. Where the wealth is held through a corporate chain and the managing entity sits inside that same chain, use the group exemption in article 3(1) and keep the ownership of every investor entity clean, because a single individual holding directly alongside the group defeats it. Do not expect the absence of a written investment policy to settle anything: ESMA’s guidelines list a policy set out in a document that becomes part of, or is referenced in, the rules or instruments of incorporation as one factor tending to indicate a defined investment policy, state that the absence of any one characteristic does not conclusively demonstrate that an undertaking falls outside the definition where its elements are otherwise established, and add that leaving full investment discretion to the manager should not be used to circumvent the directive.
Where the family does want to admit outside money, the decision to be regulated should be taken deliberately and in advance, with the threshold analysis run on projected values rather than current ones. The registered route under article 3(2) is a legitimate destination for a manager that will stay small and will not market across borders. It is a poor destination for one that intends to grow, because the day it crosses the line it has thirty days and an apparatus it has not built.
The question is not whether a family office is respectable. It is whether the arrangement, described in the words of article 4(1)(a) by someone with no interest in the answer, is a collective investment undertaking raising capital from a number of investors under a defined investment policy. That sentence is short enough to test a structure against before it is built, and expensive to apply for the first time after.
This article is informational and does not constitute investment, tax or legal advice. Asset management and investment advice are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.