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How Level 3 fair value, governance, and long-horizon planning shape multi-generational wealth decisions.
Understanding Level 3 fair value.
In many families, significant wealth originates with a firstgeneration entrepreneur or founder whose vision, risktaking, and longterm commitment created the initial capital base. Once this wealth transitions into a family office structure, the challenge shifts from building value to preserving it across generations.
Before exploring how family offices navigate legacy and liquidity, it is essential to clarify what “Level 3 valuations” mean in practice. Under IFRS 13 and ASC 820 accounting standards, Level 3 assets are investments whose fair value relies on unobservable inputs, precisely because no active market exists and no quoted prices are available. These valuations depend on models, forwardlooking assumptions, scenario analysis, and significant professional judgment. Private equity stakes, direct investments, real assets, intrafamily financing arrangements, and bespoke structures commonly fall into this category. In other words, Level 3 fair value is where complexity, illiquidity, and judgment meet — and where governance becomes paramount.
Why do so many family fortunes vanish within three generations?
According to a landmark study by the Williams Group, nearly 70% of wealthy families lose their wealth by the second generation, and a staggering 90%¹ by the third. This sobering reality is captured in the old saying, “Shirtsleeves to shirtsleeves in three generations.” It is a reminder that hardearned wealth can dissipate quickly without deliberate stewardship, rigorous governance, and shared purpose.
Family offices sit on the front lines of this challenge. Seeking both growth and continuity, they increasingly allocate capital to complex, illiquid holdings—private equity, direct investments, real assets, and bespoke family financing arrangements—where fair values depend on significant judgment. These holdings typically fall into Level 3 fair value, a category where inputs are unobservable, markets are thin or absent, and models, rather than quoted prices, drive valuation outcomes. To safeguard wealth for the next generations, family offices must be equipped with the right expertise, systems, and controls to monitor and validate these valuations continuously, whether for reporting, performance measurement, or transaction execution.
This article offers a practical blueprint to navigate Level 3 measurements for family offices: aligning long-term purpose with rigorous methodology, robust controls, audit-ready evidence, and transparent communication across generations.
Intergenerational contracts: the rules of the game
Family offices face an objective with multiple dimensions: preserve and grow wealth while enabling timely liquidity for next-generation needs, portfolio rebalancing, and usually philanthropic commitments.
To reach this objective, decisions are shaped by intergenerational contracts, the formal and informal agreements and arrangements within a family that define how wealth, responsibilities, and decision-making are shared and transferred between generations:
- Formal agreements include trust deeds, shareholder agreements, family constitutions, limited partnership agreements, buy-sell clauses, carry and ratchet mechanics, put and call options, redemption features, performance hurdles, and tag or drag rights.
- Informal arrangements are shaped by family charters, established norms, philanthropic priorities, and anticipated succession paths.
The importance of integrating Level 3 fair value methodology to manage legacy and liquidity
When it comes to valuation, it is essential to analyze the economic substance of the Intergenerational contracts; identifying who bears risk, who holds optionality, and how value is allocated across tranches and generations. Governance rights may justify premiums or discounts for control or influence, while distribution policies and capital call obligations have a direct impact on liquidity and the timing of valuations.
In addition, and unlike institutional managers, many family offices pursue explicit nonfinancial goals such as stewardship, reputation, valuesbased investing, and impact. They may tolerate illiquidity and embrace patientcapital horizons. They also manage complex intrafamily economics: coinvestments, carried interests, preferred returns, buysell rights, and performance hurdles. These dynamics and design features are not mere legal fine print; they are economic levers that give rise to valuation challenges, especially for Level 3 assets, where pricing is model-based and sensitive to assumptions, scenarios, and time horizons.
These structural and purposedriven dynamics directly influence how fair value must be determined in practice, reinforcing the need for robust methodologies.
Under IFRS 13 / ASC 820 principles, Level 3 fair value measurements rely on unobservable inputs—company-specific cash flows, private transaction multiples, bespoke capital structures, contingent terms—and typically require income approaches (DCF, probability-weighted expected returns, real options), market approaches (comparable company/transaction analysis with significant adjustments), and cost approaches (replacement or reproduction cost for specialized assets).
For family offices, three implications follow:
- model transparency and governance matter as much as numerical precision; opaque assumptions invite disputes and audit friction.
- intergenerational design features—waterfalls, control rights, redemption mechanics—can materially affect value allocation among tranches and generations.
- fair value reflects marketparticipant assumptions today, which may diverge from the family’s internal, longterm view of intrinsic value.
A long-horizon perspective is essential: scenario planning (base, downside, strategic upside paths), duration & path-dependency, capital structure endurance, and purpose alignment. Practical move: integrate a Purpose Overlay into model assumptions e.g., reduced probability of certain exits, adjusted holding periods, or modified reinvestment strategies.
In short, for family offices, Level 3 valuations sit at the intersection of legacy and liquidity. The right approach is governance-rich, purpose-aligned, and audit-ready. By embedding intergenerational contracts into valuation models, adopting long-horizon scenario analysis, and strengthening controls, families can make informed decisions—preserving continuity while enabling the necessary flexibility.
Conclusion
While many family fortunes begin with the vision, drive, and risk-taking of a self-made founder, preserving that wealth across generations requires a very different approach. The entrepreneurial spirit that builds an empire is often fueled by bold decisions. However, sustaining and growing that legacy demands methodical planning, diligent oversight, and disciplined governance. Family offices must move beyond the instincts of the founder and embrace structured processes, transparent valuations, and clear intergenerational agreements. Combining these with the original entrepreneurial energy gives families the best chance to defy the proverb, transforming “shirtsleeves to shirtsleeves” into a story of resilience, stewardship, and enduring prosperity for the generations to come.
Summary
In many families, significant wealth originates with a first generation entrepreneur or founder whose vision, risktaking, and longterm commitment created the initial capital base. Once this wealth transitions into a family office structure, the challenge shifts from building value to preserving it across generations.