(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.
