What was once reserved primarily by families in the Americas and Europe, the single family office concept is continuing to experience strong growth among Asia’s business elite. As a result of substantial private wealth being created over the past three decades, newly ultra-affluent families in Asia are now dealing with many of the same issues as their predecessors – the ongoing quest of maintaining and growing their excess capital and business interests.
While the Americas and Europe have the largest amount of family offices, approximately 3,200 and 1,100 respectively, the elite families in Asia have the chance to possibly grow even faster than their peers in the West did in a similar period. In fact, the number of family offices in Asia, according to Michael Prahl of INSEAD, “will more than double to about 420 over the next eight years” as the levels of wealthy individuals and families enlarge.
In terms of regional preference, the majority of family offices in Asia are located in Singapore and Hong Kong, and home to more than 75% of the family offices established in the region over the last decade alone. These dominions continue to provide a tax-efficient environment governed by advantageous laws for wealthy individuals: typically, North Asian families favor Hong Kong and South Asian families favor Singapore. Moreover, some South Asian families are also being attracted to Dubai’s financial hub and its preferential tax zones, which also continues to bode well as a recipient for North African, Middle Eastern and even Russian family fortunes.
Regarding investment portfolios among family offices in Asia, there are some similarities and differences from those found in Europe and the Americas, both in terms of geographic and asset allocation. Similarly, both groups of family offices show a distinct home country bias, as family offices in the FT Spring / Summer survey responded to allocating roughly 60% of their portfolios to investment in Asia, and offices at an earlier-stage allocating between 90% and 100% of their assets to Asia. Similarly, the US-and-European-dominated global family office industry allocates nearly 80% of assets to investment opportunities in North America and the United Kingdom/Europe. However, as Asia accounts for a smaller percentage of global debt and equity, the risk associated with their geographical concentration is significantly more pronounced for family offices in Asia. As a result, a top priority for external investment professionals working with the families continue to suggest more diversification of assets and allocating more to opportunities in developed economies over time.
In terms of asset allocation among Asian family offices, there is also a significant difference among the broader global family office industry. For example, there is a clear preference for real estate with allocations averaging nearly 30% and some as high as 70% of family office assets, compared with about 10% in the industry as a whole. Also, with allocations to private equity investment, of which direct and co-investment is a sizable component, it is markedly higher in Asian family office portfolios than the broader global family office industry, at roughly 18% (versus 11%). This divergence will likely change as Asian family offices become more prevalent and institutionalized like their peers.
Another key factor of direct investment activity by Asian family offices is focusing on industries where the family’s wealth was originally created, allowing them to leverage their experience and network in terms of sourcing and vetting credible opportunities. Of course, this also holds true for a majority of wealthy families globally. However, since most Asian family offices are predominantly controlled by the first-or-second generation of entrepreneurs, as compared to some family offices outside Asia on their fourth generation and beyond from the original wealth creator, allocation in terms of the family’s overall wealth is still dominated by their respective core business industry.
Overall, these are just a few of the evolving practices of the growing family office market in Asia. While they are currently behind in the number of family offices and related services amongst the Americas and Europe, when you combine their business acumen, desire for incorporating best practices, and the projected growth rates of the ultra-affluent, it’s quite possible our Asian counterparts will eventually dominate the family office space.
David M. Kraemer is the Founder and Managing Member of 10 || 2 Capital Partners, LLC.
References: Family Offices in Asia: The Evolution of the Family Office Market. University of St. Gallen. [2, 3] Family Office Research: Spring/Summer 2015. Financial Times.