Rich pickings

27 December 2013   Category: News, Asia, Global   By Maya Ando

The number of high net wealth individuals (HNWIs) and ultra-HNWIs in Asia has more than doubled in the last five years. And this wealthy slice of the population is expected to grow further still, powered by the underlying growth potential of the middle class, especially in emerging markets where people are growing their private wealth in lock-step with their burgeoning economies.

Thus, the region is well on its way to becoming home to the largest number of world-class wealthy families, principally those who have generated their fortunes via their own businesses over the past century.

And with experience, family offices in Asia have been improving their wealth management skills. At the same time, though, succession issues have become a key concern for family offices which aim to create long lasting family legacies.

These family offices activities have accelerated since the global financial crisis of a few years back, when they spiked in places like India, Indonesia, Thailand, and China in particular, which leads the list with the most billionaires (315). India too has seen a significant increase, with more than 10% of those listed in the Forbes 2013 report calling the country home. This poll claims there are 1,426 ultra-wealthy people worldwide, with an accumulated net worth of US$5.4 trillion.

RBC Wealth Management, a subsidiary of the Royal Bank of Canada, and Capgemini, a US-based financial technology solutions firm, noted in the Asia Pacific Wealth Report 2013, that the HNWI population in 2012 rose by 9.4%, reaching 3.68 million; their aggregate wealth meanwhile grew even more, by 12.2% to $12 trillion, having a notable impact on these record levels of global HNWI wealth.

By definition, HNWIs and ultra-HNWIs have investable assets (on an individual basis) of over US$1 million and $30 million respectively. In Asia, the optimum level of AUM for establishing a single-family office is similar to Europe, namely $235 million.

Another outgrowth of this expanded individual wealth has been the formation of new financial hubs, in part at least a consequence of the emergence of family offices formed by HNWIs and ultra-HNWIs.

It’s an exotic segment with a short history. There are now about 2,500 family offices operating globally, according to the Switzerland-based private bank UBS. And of these, perhaps 120 are based in Asia; nearly half believed to be Japanese- and Australian-owned, according to the UBS/Campden Research Asia-Pacific Family Office Survey 2013. This report surveyed 25 single-family offices region-wide with assets ranging from $100 million to well over $1 billion each.

Despite their popularity in Europe and the United States, the family office concept is not yet well understood by many wealthy families in Asia. But it’s true to say that HNWIs are increasingly aware of the advantages in setting up such offices. Basically, they are defined as being privately owned by the family concerned, and as such managing the wealth of that family and making investments by allocating assets to various asset classes with a view to growing them with a kind of private equity fund. The difference with fund raising for family offices (as compared to a PE fund) is that their assets are solely generated via the family’s businesses.

RBC Wealth Management and Capgemini’s report notes that as much as 45.4% of the world’s HNWI growth came from Asia-Pacific between 2007and 2012. The previous period, between 2000 and 2007, likewise saw significant growth of 33.6%.

“Asia saw record highs in investable assets, specifically 4.9% of CAGR, between 2007 and 2012. And the region is forecast to become home to the largest percentage of HNWI by population and wealth as early as 2014,” predicts Eric Lascelles, chief economist at RBC Global Asset Management. He added that the accumulated investable HNWI asset trove topped a whopping $12 trillion last year. And even more amazingly, expectations are that this total will rise by a further $4 trillion within three years.

David Wilson, head of the strategic analysis group, market intelligence at Capgemini Financial Services, says 90% of HNWIs (ex-Japan) are confident in their ability to generate wealth in the near future. This may suggest that they have pre-set targets in setting their asset management plans. Interestingly, 47% of HNWIs in Asia Pacific prefer receiving family wealth advice over personal wealth advice; the latter group includes only 23% of survey participants, he said pointing out that Asia’s HNWIs are motivated in establishing family offices in direct response to their continuously growing assets.

Family offices footprint

Not surprisingly, a knock-on effect of this soaring HNWI agglomeration in Asia Pacific is the concomitant growth in family office activities. These are a relatively new industry, having a history of barely 100 years.

A high profile pioneer of the family office business, John D Rockefeller, established one of the first of these offices in 1882 when he invited professionals to organise his multiple businesses and manage his family’s growing investment needs.

Most of Asia’s family offices were formed over the past 20 years, by entrepreneurs like Li Ka-shing (Hong Kong), with $25.5 billion in net wealth; Mukesh Ambani (India), with $22.3 billion; and Robert Kuok (Malaysia), with $12.4 billion. All began as small street retailers. Given the emphasis in Asian cultures on clan values, the majority of these emergent family offices were linked to family businesses that attribute the growth of family assets to profits generated from shareholdings.

That said, the notion of managing wealth for Asian family offices differs from the Western practice. The latter mostly seek to grow their wealth by utilizing a variety of funds operated by investment professionals rather than keeping their activities closely held among family members. Asia-Pacific family offices on the whole tend to have a large proportion of their assets tied up in core family business holdings and illiquid assets. In Asia, the single-family office is seen as the basic model, whereas in the US and Europe multi-family offices are also widely established.

Monica Tsui, managing director of Fung Investment Management Limited, says that family offices had a late start in Asia; so multi-family offices (MFOs) are less common. “MFOs operate very differently. In many cases, MFOs will simply manage a portion of other families’ money, but not the whole private investment programme”, she says, pointing to the major issue of confidentiality. “If you manage money for another family, and then lose it, it is very embarrassing if you meet them socially. Until these families or family offices become more institutional, such considerations are not going to go away,” she contends.

Asset allocation

Among asset allocations by Asian family offices, real estate is the biggest slice with 16% of total portfolios, a notable increase over last year’s 9%. The second largest was direct investments via private equity and venture capital with 15% again up considerably over the 4% reported in 2013, according to the UBS/Campden Research Survey. Cash or its equivalent stood at 14% plus. The equities portion in developed countries outpaced emerging markets with 14%. Retail, healthcare and energy are also among Asian family offices’ investment favourites, along with real estate and mining industries.

Liquid assets only make up 40% of their total wealth. However, the recent trend in Asian family offices is to seek higher-return investments, such as direct business acquisitions, large-size property assets and distressed assets in Europe. The allure of the latter was particularly enhanced after the GFC and subsequent eurozone sovereign debt crisis. Taken together, they’ve stimulated family office appetites for acquisitions with big discounts. Their approach is different than European family offices, which tend to take conservative approaches in wealth management. At the same time, though, risk management is a key area that family offices are strengthening in Asia, and their awareness of corporate governance is growing.

As regards target investment assets, family offices in general invest large amounts of money in real estate assets through direct investments. Benjamin Zhu at Omegacy Group says property is often the default investment for family offices. They tend to buy property and develop or re-develop it then sell it in a few years time, and the cycle turns.”

Despite his long experience in the property sphere, Mr. Zhu emphasises the importance of doing serious due diligence of target assets before acquisitions: “We may know Asia a lot better, i.e. know this particular mall is good or not. But with some of these assets you really have to read the contract closely to see if it really is a fantastically good mall, for instance; otherwise you may find you’ve locked all your rentals at a terrible rate for the next three years. In other words, you have to know your specifics and it’s a very different type of specialty. That’s why we need to know the details and we want to know the managers. And that’s why we always go and talk to each of the analysts, asking questions like why do you like that building? Or if Asia is good and the US is going down, how do you envision building your strategy? They will come up with their marketing stories, no question,” he says.

Asian family offices generally take a balanced approach when they come to invest. Cash holdings appear to be relatively higher profile than is the case with Western family offices. Japan’s HNWIs in particular tend to be heavily weighted toward cash holdings, with it making up 49.4% of their total asset allocations. Japan’s HNWIs do not trust outsiders to manage their wealth, instead preferring to put money in banks for nearly no yield.

Through their various asset allocations, UBS’s report claims that Asia’s family offices’ expect a return of 6.1% after fees and inflation. However, the actual overall return reported up until the end of September exceeded this at 9.1%.

Munish Dhall, executive director, global family office at UBS, told Asia Asset Management: “Asia’s family offices are no longer satisfied with simply holding shares in their own businesses. They’ve developed an increasing appetite for large-size direct investments in industries such as gas, oil, and hospitality, where they have deep knowledge. In closing target deals, UBS provides finances to family offices for leveraged investments. Mr. Dhall said that family offices tend to acquire assets in industries they are familiar with, and are experienced in.

About two years ago, UBS launched its Global Family Office offering worldwide to focus primarily on up to 250 of their largest institution-like or professional family office prospects, to provide the breadth of services across its wealth management and investment bank platforms. Mr. Dhall says that the average-size of family offices UBS works with is about US$1 billion in total assets.

Philanthropy

In the ultra-HNWIs community, there are family offices and individuals passionately involved in philanthropy via various activities such as charity auctions and fundraisers to which they contribute money to promote responsible wealth allocation. For instance, in May of this year, American actor Leonardo DiCaprio claimed he raised $38 million for a namesake global conservation fund through Christie’s. He sold 33 works of art. Apart from artwork, jewellery, and vineyards are also favourite assets for family offices and HNWIs.

Global family offices are also said to be increasing their commitments to socially responsible investments, aiming beyond capital returns to ensure that society itself is a significant beneficiary.

“Family offices’ are interesting investments in areas that have an impact on society. HNWI second generations especially tend to take on small philanthropic projects. So we are introducing a lengthening list of appropriate financial projects to address that need. Responding to the demand, we’ve set up an impact investing fund”, says UBS’s Mr. Dhall.

Last month, the lender launched – and closed – an impact investing private equity fund for SMEs in emerging and frontier markets. The volume was slightly in excess 50 million Swiss francs (US$54.53 million). UBS claims it is one of the largest impact funds in the sector funded by clients and private capital.

Amy Lo, Asia Pacific regional head of ultra high net worth (UHNW) at UBS Wealth Management, adds that the firm expects to see family office conceptual change initiated by the next generations in these family offices; i.e. that they will focus more on planning for the future to ensure the ongoing success of long-lasting family legacies. However, the idea of socially responsible investments is relatively new to Asian family offices, meaning more fund managers are required to further enhance the patient promotion of optimal ideas and business structures.

Singapore and Hong Kong

In Asia, Singapore and Hong Kong are the leading family office centres, mostly due to their geographical convenience in being adjacent to – and so easily accessible from – mega-emerging markets, such as China and the Southeast Asian region at large, which is where the most prominent financial growth has been seen, outside of India.

“Singapore is widely regarded as Asia’s premier wealth management centre. It is renowned for its political stability, sound legal system, strong financial regulation and the presence of many experienced private bankers and wealth managers, all of which add to Singapore’s allure for Family Offices, as this critical mass of professionals enable them to access the risk management, governance and investment expertise that they require”, said Anuj Kagalwala, financial services tax leader, Singapore, at PricewaterhouseCoopers. “Historically, private wealth planning structures involve the use of offshore jurisdictions. This has become less popular due to the increasing suspicion on the part of tax authorities that such offshore structures are not substantial, while the public’s general perception is that the use of offshore structures is motivated by a need to conceal something. These concerns have led to the increasing use of financial centres such as Singapore in private wealth planning,” he explains.

Historical background aside, attractive tax policies have also garnered the attention of global family offices in setting up operations in the Lion City.

Mr. Kagalwala said: “Singapore has a range of tax incentives that basically exempt the income derived from many types of investments a wealthy family is likely to invest in from tax. These incentives are selectively granted by the authorities and require substantial activity by the family office in Singapore. So with careful planning, it’s possible to establish investment structures in Singapore that meet the financial and non-financial needs of a wealthy family. As well, in terms of regulatory requirements, the management of family funds may in many instances be exempt from regulatory licensing.

“We have seen a growth in family offices in Singapore amidst the economic growth in Asia. Not only are Asian family offices setting up here, we are seeing growing interest from European and Middle Eastern family offices, whose numbers are likely to increase,” says Mr. Dhall.

Meanwhile in Hong Kong, not only Chinese families, but also European families are opening their family offices as a means to pave the way to the highest growth Asian economies of late.

Florence Yip, Asia Pacific asset management group tax leader at PricewaterhouseCoopers in Hong Kong, says: “Private equity, multi-strategies and funds-of-funds are the favourite asset classes of family offices. In February this year, the Hong Kong financial secretary proposed expanding tax exemptions for private equity funds, and that it is a good platform for family offices looking to set up in Hong Kong. For the past ten years, entrepreneurs in China, millionaires and billionaires have become more sophisticated about their wealth planning, being nurtured by interactions with financial advisors and bankers. So they understand the concept of operating family offices and as a consequence they may not need to rely so much on private banks. If they hire the right asset management team, it is easier for family offices to access investment expertise directly.”

She also notes that tax exemption is a major attraction for family offices. “It depends on that office’s structure and origin. They may not need to pay tax in Hong Kong assuming the investment meets the tax exemption criteria to be announced in due course.”

For sophisticated family offices, one common business structure Ms. Yip has seen is multiple-country offices.

“Sometimes, you need to have an investment team in place where the investment products are located. Or if not, a family office can invest in target products by long distance. Countries like China impose domestic tax for foreign acquirers or investors,” she says.

Legacy issues

With this rapid growth of new family offices in Asia, more of them are hiring financial specialists for their fund operations. UBS/ Campden’s survey notes that most family members appear to work formally in the family office as paid employees. They add that the average number of employees is more than six, according to 63% of the participants. Another 35% had no family members working in their office. Another finding was that there is a building trend toward identifying harder-edged issues related to investments and the efficient management of family wealth. And confidentiality is extremely important.

Ms. Yip at PwC explains: “There is an old Chinese saying that a family’s wealth often disappears by the third generation, the dynamics being wrapped up in problems in extended families, the founder’s strong attachment to his business and inappropriate office operations. A properly set up family office with investment professionals and good internal control and governance can ensure the family assets rollover or grow from generation to generation. Some families will design a trust structure to assure a good life for their children and let them take a role in charitable activities without being involved in actual investment operations.”

But sooner or later, most entrepreneurs need to have a clear picture of business succession. In Asia, the average age of successful entrepreneurs is estimated at about 50 years of age; so they are likely looking at another decade or so before reaching retirement. So while giving up one’s wealth may be hard, passing one’s wealth effectively to the next generation is a necessity if there is to be any long-lasting family legacy.