Tuesday, August 8, 2017

Rise of Asian family offices

(Source: The Business Times) Asia has been leading the way of wealth creation in recent years. According to the latest UBS Billionaires Report 2016, around 85 per cent of Asia’s billionaires are first-generation and we will witness one of the largest wealth transfers over the next 20 years. Worldwide, fewer than 500 people are expected to hand over more than US$2.1 trillion to their heirs, the equivalent of India’s GDP (gross domestic product) in 2015.

As Asian families of substantial wealth grow in size and complexity, succession planning becomes increasingly important in achieving business and wealth continuity. Hence, a growing number of Asia’s wealthiest families are considering setting up family offices (FO), to serve as their focal point to navigate and coordinate family and wealth management matters in a centralized and consistent way. Beyond the general assumption that a family office would purely be set up to manage the family’s financial assets, other drivers such as facilitation of intergenerational family communication, next-generation development and philanthropy are top motivators. This coincides with the findings of the latest UBS Global Family Office (GFO) Report 2016 where succession of control from one generation to the next was mentioned as the most important objective in setting up a family office. Some family office setups in Asia may be driven and initiated by a generational transition when a young generation family member (often Western educated) takes an active role in the management of the family affairs outside of the family’s operating businesses.

For families which already have an informal “family office”, we see an increasing trend of professionalization of these structures as the second and third generations assume roles of leadership in family wealth management. As at 2016, implementing a succession plan was cited as the single most important governance priority of Asian family offices, followed by the creation of a sustainable family communication plan and the implementation of a risk management framework around the FO assets. These priorities should not come as a surprise as we expect 75 per cent of Asia-Pacific based family offces to undergo a generational transition within the next 15 years.

Avoiding pitfalls
Prior to setting up a family office, families are often interested to find out more about certain key areas. These include benefits that the family office setup will bring to the family principals, avoiding pitfalls when setting up a family office, running a family office professionally yet cost efficiently, and maintaining alignment between the family principals and the family office executives.
To assist families in their family office setup journey, UBS and Cambridge Institute for Family Enterprise recently published the Family Office Compass, a state-of-the-art toolkit, which provides a hands-on process from strategic considerations around the design of the family office to important implementation stages, including structuring, governance and operational considerations. 

Size and cost structure
The wealth threshold that can sustain a family office depends on a variety of factors, including the scope of services offered by the family office to its principals (the family), the type and complexity of assets under management (AUM), the number of professionals needed to provide the services, the number of principals served, and so on. For some family offices, a threshold of US$100 million in AUM may make sense, while for others, the threshold might be much higher. In 2016, on average, an Asia-based family office was managing US$492 million for the principal family running it.
As a general rule of thumb, when deciding on the size of a family office, one should always run a cost analysis and evaluate the viability on a relative basis. In 2016, Asia-based family offices were among the most expensive globally with average operating costs of 115 basis points (bps) of invested assets versus 98 bps globally (92 bps for North America and 101 bps for Europe). 

Investment allocation
At UBS, most of the family offices that we encounter in the Asia-Pacific are focused on investments for one or a limited number of principals, usually with strong links between the principals (family members, close friends). For Asian family offices, private equity is becoming increasingly important in the portfolios as they look to benefit from the illiquidity premium associated with this asset class coupled with their longer-term time horizon. Real estate continues to be a key component of family office portfolios as it continues to provide attractive long-term real returns derived from both income and capital growth. Interestingly, we see diversification away from home markets in Asia and towards more professional money managers as family offices hire more veteran financial professionals. Singapore-based family offices hold 26 per cent of their portfolio in assets such as direct venture capital, private equity as well as co-investing, compared to the average Asia-Pacific family office (23 per cent) and 14 per cent for other regions. 

Impact investing
Even more so than other regions, the UBS Global Family Office 2016 found that impact investing is gaining real traction in the Asia-Pacific with almost two thirds of families in the region active in this area. The younger generation places an increasing importance on social returns rather than purely focusing on financial returns. They are beginning to engage in more strategic, innovative and goal-oriented models to sustainably solve the social and environmental issues that they care about. In Singapore, there has been a rising interest in impact investing with 43 per cent of family offices already active in the field or likely to be active in the future.

We expect this shift from traditional donation based philanthropy towards investment-based models focusing on achieving long-term social impact to further gain in significance, in connection with the generational transitions of family office principals and the professionalization of family offices in the region.

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