From the single-family to multi-family office, the species is maturing and diversifying rapidly. Once a wealth preservation tool of rich families for their offspring, now it is more commonly a vehicle for private equity investment and wealth accumulation. And the market is booming. Assets-under-management (AUM) grew from about $4 trillion in 2017 to $5.9 trillion last year, according to market research firm Campden Research. To be sure, family offices in China are still far from full-fledged. But that is not stopping them as limited partners from expanding their asset territory in work with general partners.
Surfing the Global Waves
Family offices aren’t a new idea. They were pioneered by the Rockefeller family in the late 19th century to preserve their wealth for future generations. And high-net-worth individuals around the world have made frequent use of them to ride out the 2020 financial storm.
UBS research into family offices has found that more than three-quarters of the world’s richest people have reported an increase in their already vast family fortunes, despite the economic shock caused by the pandemic. Of the 121 family offices included in the survey, 93 had met or exceeded their financial targets in the year to May 2020. They achieved this despite most countries in the world suffering their worst economic contractions in decades. Some 24 of the family offices in the survey managed private fortunes of more than $3bn.
The success of family offices owes much to asset allocation. Family offices with relatively large volumes may allocate more than 50% weight to private equity (PE), while the market average is about 20%. And alternative investment did become the asset class with the best financial performance. In the past 12 months, Chinese family offices achieved an 11% return on investment (ROI), and a large portion of the growth was contributed by the 19% ROI of direct investment and the 15% ROI of fund investment. And the large capital base makes the growth even more valuable.
The Growth of the Family Office in Asia
Family offices are gaining popularity in Asia for several reasons. Firstly, increasing investable assets are demanding extra financial services. According to the Wealth-X’s Billionaire Census 2020, Asia’s billionaire population shot up by 12% to 758 individuals. Asia is now home to more than a quarter of the world’s 2,825 billionaires. In need of diversification, tax avoidance, and risk mitigation, family offices must often tailor the investment strategy. To land in Asia, the home to billionaire clients, will certainly help family offices to understand their objectives and dynamics.
Secondly, Asian countries such as Singapore in particular have issued several privilege policies for the family office:
· No inheritance or capital gains tax
· A wide range of investment incentives
· Well organized and well-governed jurisdiction
· 25 free-trade agreements (Bilateral and Regional)
All of those keep Singapore competitive, meaning it has become the most preferred location for establishing a family office.
Take a look at top billionaires’ choices. Raymond Thomas Dalio is a billionaire hedge fund manager and philanthropist who has served as co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, since 1985. He is currently setting up a family office in Singapore for his investment and philanthropy in Asia.
As the bull news continues to emerge from the Asian financial markets, another billionaire, Shu Ping (in the top spot for the second consecutive year in Singapore), has also settled a family office for her CNY 130 billion (USD 19.9 billion) assets. Shu Ping is the director and one of the founders of Haidilao, which is the most customer-friendly and probably most popular hot pot chain restaurant in China.
Does China Still Stand a Chance?
China’s local family offices started late compared with elsewhere. 67% of them were established in 2011-2016, and more than half were established in 2015 or 2016. So there is still a lot of room for growth.
According Haitou Global statistics, the number of family offices in China has doubled in ten years. In addition to super-rich entrepreneurs who need to set up family offices, other agencies have also dipped their toes in the water and begun to serve high-net-worth individuals. “If you don’t do family office business, you’ll miss an era,” says Gopher Asset.
An article from consulting company Guwenyun, titled “There Are More Family Offices Than Families in China”, concludes that, at present, family offices in China can be divided into the following categories:
1) Family office set up by the rich themselves in order to better manage their family wealth. These are the real family offices. The representatives are:
· Blue Pool Capital, established by Jack Ma and Cai Chongxin, mainly dealing with the billions of dollars of wealth brought in by Alibaba’s IPO. Blue Pool Capital has not only invested in a number of hedge funds, but also underlying firms in the fields of health care and online consumption, including Hua Medicine, Brii Biosciences, etc.
· Wu Capital (backed by the Wu family of Longfor Group), established by Wu Yajun. This has invested in Sequoia Capital China, Hillhouse Capital, Bluerun Ventures, Carlyle China, Source Code Capital, Vision Plus Capital, HighLight Capital, etc., besides establishing a fund of funds.
2) Family offices set up by large wealth management companies or law firms in order to better serve ultra-high-net-worth individuals and enhance customer stickiness with more customized and comprehensive wealth management solutions involving healthy life, tax planning, family trust, etc. Gopher Family Wealth Management Center, Hengtian Wealth Management and CreditEase all fall into this category.
3) Emerging boutique wealth managers established by outstanding talents who have spun-off from traditional financial institutions and wealth management companies. Having seen the disadvantages of large-scale institutions, these talents decide to spin-off and truly focus on the interests of customers to provide them with comprehensive wealth management services.
Despite its huge potential, China’s family wealth management market still struggles with weaknesses such as a lack of standards, an uneven level of management capabilities, and practical obstacles in actually carrying out wealth management. Hong Qiuwei, President of Forbes International Group, said that on the one hand, China’s high-net-worth individuals still lack a clear understanding, let alone systemic planning of family wealth management. On the other hand, Chinese wealth managers have no professional and systematic services yet, not to mention a mature family wealth management ecosystem.
Obviously, the family office in China is still in the process of maturing. But this does not prevent it, as a well-funded LP, from pushing its boundary of private equity investment in joint efforts with GPs.