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Family offices address challenges in safeguarding prosperity

Khairani Afifi Noordin
Khairani Afifi Noordin2/2/2023 10:53 PM GMT+08  • 8 min read
Family offices address challenges in safeguarding prosperity
Asia Pacific’s foothold as host to the world’s leading wealth hub will regain momentum in the next five years. Photo: Bloomberg
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Asia Pacific is poised to see a continually enlarged base of wealthy individuals. Already home to more billionaires than any other region, Asia Pacific remains one of the largest growing regions for wealth, expected to surpass Europe as the second-largest regional wealth hub by 2026.

Despite having slower growth in 2021, Asia Pacific’s foothold as host to the world’s leading wealth hub will regain momentum in the next five years, Knight Frank says in its Wealth Report 2022. As the wealth boom shifts east, the billionaire population of Asia Pacific will also rise faster at 36.7% compared to the global average of 33.7% during the next half a decade. By 2025, more than a third of the world’s billionaires will be from the region — a proportion that has continued to increase.

New Zealand, Singapore and mainland China are the three places expected to see the most significant proportional increase in their ultra-high-net-worth individuals (UHNWIs) populations at 270%, 268% and 256%, respectively, by 2026 from a decade earlier.

Source: Knight Frank

Singapore, in particular, is seeing a growing number of family offices being set up here. As recently as 2018, there were some 50 family offices. By the end of 2021, the number surged to 700, with the bulk of the new growth from mainland China. Industry players estimate that the number reached around 1,500 by the end of last year.

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This does not mean that wealthy families were not affected by the market downturn in recent years. Raffles Family Office (RFO) group CEO and co-founder Kwan Chi-Man says the family offices in the region were already wary of inflation posing a risk to financial markets back in 2021. Today, it is an even more significant concern, although the family offices have strategies to adapt to a high-inflation environment, he adds.

These strategies include increasing exposure to real estate, equities and commodities, and shortening the duration of their bond portfolios to reduce sensitivity to adverse interest rate movements. Meanwhile, strategies such as increasing exposure to inflation-protected securities or diversifying into cryptocurrency are not viable solutions.

Recognising that the authorities will deal with inflation through tighter monetary policy, rising interest rates rank second in the list of investors’ concerns, with geopolitical risks coming in third, according to The Asia-Pacific Family Office Report 2022, released by RFO with Campden Wealth on Nov 30 last year.

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The appeal of private equity

Complex macroeconomic fundamentals have raised the importance of adding diversification to portfolios, which may explain the growing preference for alternative investments. Within Asia Pacific, there is a significant focus on private equity as family offices venture further into the private markets in search of superior returns.

Credit Suisse’s global head of family office services, Thomas Ang, explains that single-family offices are a substantial source of capital for entrepreneurs. On average, each family office the firm surveyed in its Single Family Office Survey Report 2022, released on Sept 26 last year, was involved with seven private deals over the past two years.

Source: Credit Suisse

Globally, private equity remains the most popular asset class among family offices, but enthusiasm for private equity funds and venture capital is even greater among those in Asia Pacific, with 57% and 50%, respectively, looking to increase holdings, RFO and Campden find.

Such keen interest may stem from the fact that family wealth often comes from a privately-owned family business, says Ang. The families are familiar with private markets and their higher potential returns during volatile public markets, on top of having a longer time frame and opportunity to exert more control.

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Agreeing, Kwan adds that investing in private equity broadens the families to areas within the ecosystems of their core family business. He gives the example of a third-generation property development-derived family which invests in a sustainable food court concept company with the hope that it can be implemented into the family’s real estate portfolio once the concept takes off.

“The key thing to note is that these investments work beyond providing returns in monetary percentages. It also gives the family access to different parts of the business, effectively providing them with tools they can use to enhance the yield of their entire portfolio,” says Kwan.

Credit Suisse says that two-thirds of family offices use personal connections as a primary source, followed by working with private equity or venture capital funds. They like to invest in early-stage companies, with most participating in Series A and Series B funding. Their top three sectors are technology (notably in financial technology and biotechnology), IT and property.

“I think what is interesting to note is that by textbook definition, single-family offices are supposed to look into capital preservation, which explains the literature drawing parallels between them and university endowments or sovereign wealth funds. In the US, endowment funds allocate about 36% into private equity, compared to Asia’s family offices’ allocation into alternative assets, including private equity at 17%.

“While there’s a lot of room to grow, this is a learning process for Asian families, given that the private equity sector in the Western countries is far more mature,” says Ang.

Commitment to crypto persists

In 2021, RFO and Campden reported that 19% of Asia Pacific family offices invested in cryptocurrency. In their 2022 report, the firms found that the figure had risen to 28%, although it did not account for more than 1% of the assets under management. Kwan says that the families may have been testing the water to familiarise themselves with the asset class without putting significant capital at risk.

Last year, however, was sobering for financial markets generally, and cryptocurrency in particular. Although the prices appear to be more supportive in recent weeks, the “crypto winter” has been long and cold, accompanied by scandals and collapses of industry heavyweights.

Kwan notes that confidence in cryptocurrency has fallen, with only 18% of family offices agreeing that cryptocurrency is a promising investment, compared to 53% in 2021. He adds that comments from family office executives have been more negative than positive.

Source: Raffles Family Office, Campden Wealth

However, 59% of family offices already invested in cryptocurrency are happy to continue holding their investments, while 25% actively want to increase their allocation, RFO and Campden find. This may stem from cryptocurrency being more rationally priced and recognition that every new asset class has experienced similar setbacks. Impediments to future investments include lack of regulation, volatility and limited understanding of the future potential of cryptocurrency.

UBS’s Global Family Office Report 2022 says many family offices are investing in distributed ledger technology (DLT, also known as blockchain) to learn instead of earn. They plan to invest more in DLT applications rather than cryptocurrencies like Bitcoin. Alert to the disruptive potential of blockchain, they are keen to understand the technology and its business applications.

Grabbing a slice of the pie

As family offices and the ultra-affluent continue to reside and grow their wealth in the region, there is also a notable pick-up in tempo among service providers. For example, global wealth management firm Leo Wealth recently announced the acquisition of Jarchin Capital, an independent fund manager offering investment management solutions to accredited investors in Singapore and Asia Pacific to take a larger slice of the pie.

The company says that opening a Singapore office is in response to the growing number of HNWIs in Southeast Asia and the wider Asia Pacific region, which is driving more demand for more personalised and all-inclusive cross-border wealth and tax capabilities.

Investment migration consultancy firm Henley & Partners observes that with an influx of Chinese UNHWIs moving to countries like Singapore, an estimated 10,000 HNWIs are expected to emigrate in 2022, leading to a total estimated outflow of around US$48 billion ($66.3 billion).

RFO and Campden observe that Singapore strongly appeals to the wealthy Chinese. With a large ethnic Chinese diaspora speaking the same language within the same time zone, Singapore is the most accessible and familiar place they can get outside mainland China. Meanwhile, professional advisers are known to have nudged their clients to switch custody from Hong Kong to Singapore too.

To top it off, the Singapore authorities have improved the competitive position of its asset management industry through the introduction of the variable capital company, a corporate structure applied to collective investment schemes. It adds that this structure benefits wealth managers seeking to service family offices with segregated client accounts.

Another firm which has set up shop in trying to tap the region’s UHNWI and family offices market is WRISE, a wealth enterprise founded by private banking veteran Derrick Tan who last held a position with Bank of Singapore as its Hong Kong branch’s chief executive and global market head of Greater China and North Asia. Through its proprietary wealth management system TREX, WRISE leverages technology to help UNHWIs grow their wealth.

Tan says that the growing number of UHNWI-backed family offices in recent years has led to increased management and maintenance costs, further aggravated by a lack of independent and experienced wealth management talents to meet demand. Additionally, the UNHWIs and their independent wealth managers rely heavily on banking systems for product ideas and suitability, often needing more transparency.

“What they need is a way to consolidate their total wealth to simplify wealth management, and hence WRISE was formed to bridge these gaps and to meet the needs of these UHNWIs,” says Tan.

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