Family offices on the rise in Asia

In Asia, there is an increasingly influential group of institutional investors who are showing themselves adept at embracing different asset classes. Wealthy families have been setting up family offices for many years and Asia has an acknowledged expertise as a region in the field of servicing family wealth. This trend is growing with a new generation of wealthy Asian professionals who are reaching the point where they want to have an investment infrastructure under them.

The number of high net-worth individuals (HNWI) in Asia-Pacific in 2010 had exceeded that of Europe, and is nearing that of North America, according to Capgemini and Merrill Lynch’s 2011 Asia-Pacific Wealth Report. The Asia-Pacific HNWI population grew 9.7%to 3.3million in 2010, with a total wealth of $10.8 trillion, according to the report.

“I do see more family offices being formed in Asia, specifically in Hong Kong and Singapore more than elsewhere,” says Richard C. Wilson, head of the 31,000-member Family Offices Group association. Globally, the majority of family offices are focused primarily on capital preservation, but those in Asia buck this trend.

“There is such a high concentration of first generation wealth in the region that many ultra-wealthy still have an appetite for further growth. The focus is really balanced between preserving a good amount of capital, but also putting some capital at risk for the hope of further growth,” Wilson says. The ultra-wealthy behind these family offices are almost always business owners, he says.

The growing interest in family offices in Asia reflects the increase in wealth and sophistication in the region, Katie Graves, an attorney at Withers in Hong Kong, tells IPA. “For many families in Asia, the family office is effectively a trusted family adviser operating out of the chairman’s office of the family business.”

Although there are a number of full service family offices in Asia providing services ranging from investment management to concierge services, the majority of Asian family offices focus on investment, Graves says.

For the ultra-wealthy individuals, opening an investment company is just part of a business model.  “They are business owners who have taken companies public, or they are past business owners who just sold a portion or all of their business to a private party and cashed out on their business they built up in the past,” says Wilson.

As they have made their fortunes investing, they are comfortable investing for themselves. Many of the investments in Asia are private equity, and the families also have good networks from which they can draw investment ideas and implement them. Generally in Asia, only the most confident and sophisticated families would feel comfortable opening their own offices because of the challenges involve in managing a private investment office.

Fung Investment Management Ltd. is the family office set up to manage the private investments of the families of brothers Victor Fung and William Fung, the major shareholders of Hong Kong-based Li & Fung Group. Founded in Guangzhou 1906, the group’s core businesses are engaged in trading, logistics, distribution and retailing, and total revenue in 2010 was over $18.5 billion.

The Fung family, as an example, still runs a very successful core business that is growing and is very profitable, and family members are thus less reliant on an existing pool of investment assets to support their living. “The core focus is still on the family business, how to grow the family business, whatever they invest in, they will look more at a strategic angle,” Fung Investment’s Managing Director Monica Tsui says. “Even the private investment programme would involve private equity deals that we do ourselves, and are done for strategic reasons that complement the family core business.”

Family members’ involvement in the family office is also dependent on how knowledgeable and sophisticated they are in finance and investment products. Even though Fung Investment only had one investor, the family, its private equity programme was set up “no different” from an outside firm, Tsui says.

“The office has a Cayman Island fund structure, a Cayman Island manager vehicle and an onshore investment advisory vehicle for our Asia programme, our Europe programme and our US programme separately, and we have teams on the ground in all these locations, and we have very clear strategic focus on what type of deals to look for,” she adds. “Selecting fund managers and doing deals yourself are totally different skill sets.”

Fung Investment also has a management fee structure to incentivise its in-house managers, she says. “Even though they are employees, we want to be able to set it up no different from an institution in order to attract talents. Decision-making is via an investment committee which comprise both family members and outside professionals.”

After the 2008 financial crisis, Fung Investment saw more opportunities emerging as deals became cheaper, Tsui says. The office reviewed its portfolio and because it holds its assets for the long-term and with a strategic angle, there wasn’t any need to do a fire-sale or reallocation, she says.

From time to time, Fung Investment does have to look into family members’ pet projects and offer the services to execute the projects on their behalf, and managing it for them, Tsui says. Funding for these projects is made by the family members themselves.

The wealthy Asian families are still in the first or second generation of wealth creation, with the focus on the family business, unlike their European or American counterparts where the family business may have been sold a couple of generations ago, Graves says. Traditionally, there has been a reluctance to bring in third-party professionals in Asia.

Still, some family offices do outsource some of their money to external managers. Typically, these families tend to have already sold their core business and would focus more on asset preservation and capital appreciation, Tsui says.”They will be more risk-adverse and they would require predictable liquidity annually to support their living.”

“They would be more inclined to invest in things like fixed income, listed equity, some real estate and just a small part in alternative assets. They would tend to invest more through outside managers. Generally we don’t invest in any third party funds because we have our own private equity managers. We do deals directly and we’re very focused in the sectors we invest in,” Tsui says. “A lot of times we want to cherry pick the deals because of our unique position.”

Given the specific needs of the ultra-wealthy in Asia and cultural differences between the Asian families and their counterparts in Europe and the US, there certainly isn’t a one standard approach or formula that be applied to meet the needs of family offices in the region. As wealth builds in Asia, especially in the fast-emerging markets, demand for succession-planning services can only rise.

“There is a lot of wealth being created in Vietnam, Thailand, Indonesia, Malaysia and places like China and India obviously. Many of those professionals only want their wealth managed by the best talent available, which is sometimes in cities outside of their home region,” Wilson says. “Many of the ultra wealthy are moving to Singapore.”